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Nuvo Research Inc. Annual Report 2012
Corporate Profile
Nuvo is a publicly traded, Canadian specialty pharmaceutical company, headquartered in
Mississauga, Ontario, Canada dedicated to building a portfolio of commercialized
pharmaceutical products. The Company’s Pain Group located in West Chester, Pennsylvania is
focused on the development and commercialization of topically delivered pain products
including three FDA approved products: Pennsaid®, Pliaglis® and Synera®. The Company’s
Immunology Group is developing WF10, for the treatment of immune related diseases from
its research and development facility in Leipzig, Germany.
Nuvo trades on the Toronto Stock Exchange under the symbol NRI.
Product Pipeline
Formulation
Development/
Preclinical
IND
Filed
Phase 1
Phase 2
Phase 3
Regulatory
Submission
Commercialization
PAIN GROUP
Pennsaid
(U.S., Canada, Europe)
Pennsaid 2%
OSTEOARTHRITIS – KNEE (Covidien-U.S., Paladin-Canada, Vianex-Greece, Italchimici-Italy)
OSTEOARTHRITIS
(Covidien-U.S., Paladin-Canada,
Central & South America, Israel, South Africa)
Pliaglis
(Approved Argentina,
U.S., Europe)
Synera
(U.S., Europe)
DERMAL ANESTHESIA – COSMETIC (Galderma-Worldwide)
DERMAL ANALGESIA – PREVENTION NEEDLE INSERTION PAIN (Nuvo-N. America, Eurocept-E.U. & China)
Synera
FOCAL ACUTE MUSCULOSKELETAL PAIN
NRI – ANA
ACUTE NEUROPATHIC PAIN
Topical Pain
Products
ACUTE PAIN
IMMUNOLOGY GROUP
WF10
IMMUNE MODULATION (ALLERGIC RHINITIS)
Table of contents
1 Letter to Shareholders
2 Pain Group
3 Immunology Group
4 Management’s Discussion and Analysis
58 Management’s Report
59 Independent Auditor’s Report
60 Consolidated Financial Statements
100 Corporate Information
100 Board of Directors and Executive Officers
Letter To Shareholders
Like many companies in and outside of the pharmaceuticals
industry, we are continually striving to diversify our revenue
stream and maximize the value of our products. Through
the acquisition of ZARS Pharma, Inc. in 2011, we acquired two
U.S. Food and Drug Administration (FDA) approved products –
Pliaglis® and Synera® – and a robust technology base with
strong intellectual property. This was an important and valuable
strategic transaction for Nuvo that moved the Company from
having only one FDA approved product, Pennsaid® to a diversified
portfolio of three FDA approved topical pain products. Below
is an update of the recent progress that we have made with each
of our main products.
PLIAGLIS
Pliaglis is a topical local anesthetic cream that uses Nuvo’s
proprietary Phase-Changing technology. It is applied to the skin
as a cream and forms a pliable layer when exposed to air that can
be easily peeled 20 to 30 minutes after application, anesthetising
the underlying skin. Pliaglis is indicated for use on intact skin in
adults to provide local analgesia for superficial aesthetic procedures,
such as dermal filler injection, pulsed dye laser therapy, facial
laser resurfacing and laser-assisted tattoo removal. In 2012,
regulatory approval of Pliaglis was secured in the U.S. and E.U.
Pliaglis was launched by our global marketing partner, Galderma
Pharma S.A. (Galderma) in the U.S. in March 2013 and in the
E.U. in April 2013, providing Nuvo with a new additional source
of royalty revenue going forward.
SYNERA
Synera is approved in the U.S. to provide local dermal analgesia
for superficial venous access and superficial dermatological
procedures, such as excision, electrodessication and shave biopsy
of skin lesions. Synera uses Nuvo’s proprietary Controlled Heat
Assisted Drug Deliver (CHADD™) technology. In early February
2012, we launched Synera in the U.S. with a small contract sales
force. When sales did not materialize as anticipated, we terminated
the sales force and refocused our resources on large national
accounts such as dialysis centers, infusion centers, home nursing
care and blood diagnostic laboratories. We are using our existing
internal Pain Group executive team to pursue these national
accounts. We have planned two pilot studies with national
accounts that are evaluating Synera for subsets of their patient
population. We believe the change in strategy regarding the sale
and marketing of Synera in the U.S. is showing promise and
could be an effective low cost strategy to significantly increase
sales for the existing indication.
We are also working on the design of a clinical program
with the goal of obtaining an expanded indication for Synera for
the treatment of acute musculoskeletal pain. We have had
interactions with, and feedback from, the FDA to understand the
required regulatory pathway for approval and have assembled a
group of external scientific leaders to assist with the design of the
clinical trials. If the program is successful, Synera would provide
clinicians and patients with a non-invasive treatment option for
managing acute musculoskeletal pain which we believe represents
a significant market opportunity. We do not have sufficient
financial resources to conduct these studies on our own and we
are actively seeking co-development partners that could contribute
to the development cost and participate in the marketing and
sale of Synera for the expanded indication throughout the U.S.
PENNSAID 2%
Pennsaid 2% is the follow-on product to Pennsaid, our
non-steroidal anti-inflammatory drug (NSAID) used to treat the
signs and symptoms of osteoarthritis of the knee. In July 2012,
our U.S. licensing partner, Mallinckrodt Inc. (Mallinckrodt),
the Pharmaceuticals business of Covidien, filed a new drug
application with the FDA for the U.S. approval of Pennsaid 2%.
While Mallinckrodt received a Complete Response Letter on
March 4, 2013, we believe that it now has a clearly defined lowrisk pathway to FDA approval of Pennsaid 2% in early 2014.
Mallinckrodt is developing a sales and marketing plan to
launch Pennsaid 2% shortly after FDA approval. Mallinckrodt
plans to discontinue promoting original Pennsaid to focus on
promoting Pennsaid 2% once it is approved. We continue to
believe that Pennsaid 2% has the potential to provide increased
revenues and a longer product life for the Pennsaid franchise
due to its unique two times per day metered dosing convenience
and two issued patents, that upon approval, can be listed in the
FDA’s Orange Book. Nuvo receives a double digit royalty from
the U.S. net sales of Pennsaid from Mallinckrodt that will continue
and be equally applicable to Pennsaid 2% when approved.
WF10™
In partnership with the University of Leipzig and the Fraunhofer
Institute in Leipzig, Germany and with funding provided by
the Development Bank of Saxony, our Immunology Group is
developing our immunology drug platform candidate WF10.
We believe that WF10 has the potential to be a game-changing
medical technology that can be used to effectively treat a broad
range of allergic, autoimmune and oncology conditions.
Original WF10 does not have the benefit of broad patent
protection. We have developed improved formulations for which
we have filed for patent protection and are currently conducting
preclinical studies to demonstrate that these improved WF10
formulations have similar safety and efficacy as original WF10.
Once these preclinical studies are complete, we plan to conduct
a series of proof of concept phase 2 clinical studies to demonstrate
WF10 efficacy in a number of indications and then initiate
outlicensing discussions with potential pharma partners.
2013 will be an exciting year for Nuvo, as we move closer
to profitability. The resubmission by Mallinckrodt of its
application for FDA approval of Pennsaid 2%, the Pliaglis
launches in the U.S and E.U. by Galderma and the anticipated
traction with Synera national accounts are all important events
for Nuvo and our shareholders that should enhance the value
of our Company.
We would like to thank all of our shareholders for their
continuing support, our management and employees for their
ongoing dedication to Nuvo and the Nuvo strategic plans and
to our Board of Directors for their advice and commitment.
Daniel Chicoine
John London
Chairman &
Co-Chief Executive Officer
President &
Co-Chief Executive Officer
Pain Group
The Pain Group’s President, Dr. Bradley Galer, MD is a
renowned pain neurologist and a former senior executive at the
pain specialty company Endo Pharmaceuticals (Endo). He was
instrumental in the clinical development and commercialization
of a number of Endo’s pain products in the U.S., including the
Lidoderm Patch – the most successful U.S. topical pain
product to-date, Opana and Percocet line-extensions. The Pain
Group Management Team has extensive experience in analgesic
drug development and commercialization, with prior experience
at Endo, Merck, Pfizer and Alpharma. The Pain Group is
headquartered in West Chester, Pennsylvania with a
manufacturing facility and research and development centre in
Varennes, Québec. The Group is focused on the development
and commercialization of branded topical medications for the
treatment of pain and building a portfolio of pain products.
PLIAGLIS ®
PENNSAID ®
SYNERA ®
The Company’s first topical pain product, Pennsaid, is approved
for the treatment of the signs and symptoms of osteoarthritis
(OA) of the knee. Pennsaid combines a transdermal carrier
(dimethyl sulfoxide, popularly known as DMSO) with the active
drug, diclofenac sodium, a non-steroidal anti-inflammatory drug
(NSAID) and delivers the active drug through the skin directly to
the site of pain. While conventional oral NSAIDs expose patients
to potentially serious systemic side effects due to higher systemic
blood levels of the NSAID, topical NSAIDs, such as Pennsaid,
act locally where applied and thus produce significantly lower
systemic blood levels of the NSAID. Nuvo’s clinical trials suggest
that some of the NSAID associated systemic side effects may
occur less frequently with topically applied Pennsaid, while
providing a similar degree of symptom relief.
Pennsaid is sold and marketed in the U.S. by Nuvo’s U.S.
licensing partner, Mallinckrodt Inc. (Mallinckrodt), the
Pharmaceuticals business of Covidien. Pennsaid is sold and
marketed in Canada by its licensee Paladin Labs Inc. (Paladin).
Pennsaid is also available in Greece, Italy and the United Kingdom.
Nuvo Manufacturing manufactures Pennsaid for all of its
partners globally.
Synera is a topical patch that combines lidocaine, tetracaine and
heat, using the Company’s proprietary “Controlled Heat Assisted
Drug Delivery” (CHADD™) technology. Synera is approved
(i) in the U.S. to provide local dermal analgesia for superficial
venous access and superficial dermatological procedures, such as
excision, electrodessication, and shave biopsy of skin lesions;
and (ii) in Europe for surface anaesthesia of normal intact skin in
connection with needle puncture in adults and children from
three years of age, as well as for cases of superficial surgical
procedures on normal intact skin in adults.
The Company launched Synera in the U.S. targeting
interventional pain doctors with a small contract sales force in
early 2012. In September 2012, the Company terminated its
agreement with its contract sales organization and refocused its
resources on large national accounts such as dialysis centers,
infusion centers, home nursing care and blood diagnostic
laboratories. Nuvo is encouraged by the response from the
National accounts and their ongoing studies with potential
customers that, if successful, could lead to Synera sales growth.
In May 2012, the Company successfully completed a licensing
and supply agreement with Paladin, granting it exclusive
Canadian rights to market and sell Synera upon regulatory
approval. The Company will receive a double digit royalty on net
sales of Synera in Canada.
Eurocept BV (Eurocept), a Dutch-based pharmaceutical
company has licensed the sales and marketing rights for Synera
(under the name Rapydan®) for: Western Europe, Russia and
most of its former Republics, Turkey, Israel and the People’s
Republic of China. Eurocept has responsibility for all
commercialization activities and costs, including marketing,
selling and medical education in the above countries. Under the
terms of the license agreement, the Company earns royalties on
the net sales of Rapydan and is eligible to receive sales
milestones.
The Company has successfully completed a study for the
purpose of supporting removal of the “not for home use”
condition currently on the U.S. label of Synera®. The Company
expects to file an supplemental New Drug Application (sNDA)
with the FDA to remove the “not for home use” condition from
the label in the first half of 2013. It is anticipated that the FDA
will take at least 4 months to review this application. Removal of
this restriction may increase usage by allowing patients to apply
Synera at home.
PENNSAID 2%
Pennsaid 2%, the follow-on product to original Pennsaid,
contains 2% diclofenac sodium compared to 1.5% for original
Pennsaid. It is more viscous than original Pennsaid, is supplied in
a metered dose pump bottle and is designed to be applied twice
each day as compared to four times a day for original Pennsaid.
In July 2012, Mallinckrodt filed a New Drug Application
(NDA) with the U.S. Food and Drug Administration (FDA) for
Pennsaid 2%. In March 2013, Mallinckrodt received a Complete
Response Letter (CRL) from the FDA following the review of
Mallinckrodt’s NDA for Pennsaid 2%. The FDA confirmed that
the only additional substantive requirement for approval is the
completion of a repeat pharmacokinetic (PK) study comparing
Pennsaid 2% to original Pennsaid. Mallinckrodt has indicated
that it expects to complete the study and submit the results to
the FDA in the third quarter of 2013 and anticipates receiving
a formal response from the FDA in the first quarter of 2014.
There can be no assurance that Pennsaid 2% will meet all FDA
requirements or that it will be approved for marketing by the FDA.
Nuvo believes that upon FDA approval, Pennsaid 2% will provide
significant patient advantages versus competitor products including
an improved dosing regimen and a metered dispensing device.
In addition to manufacturing Pennsaid, Nuvo will be
manufacturing the commercial supply of Pennsaid 2% at its
Varennes facility.
2 Nuvo Research Inc. Annual Report 2012
Pliaglis is a topical local anesthetic cream which uses the
Company’s proprietary Phase-Changing Topical Peel technology
and is approved and marketed in the U.S., E.U. and certain South
American countries. The Company has licensed worldwide
marketing rights for Pliaglis to Galderma Pharma, S.A. (Galderma),
a global pharmaceutical company specialized in dermatology.
Pliaglis is indicated for use on intact skin in adults to provide
local analgesia for superficial aesthetic procedures, such as
dermal filler injection, pulsed dye laser therapy, facial laser
resurfacing and laser-assisted tattoo removal.
In March 2013, Galderma launched Pliaglis in the U.S. and in
April 2013 in the E.U. Galderma is planning an expanded global
launch in Asia, Australia, Canada, South America and South Africa as
the product is approved in those countries over the next several years.
Immunology Group
The Immunology Group is led by its President, Dr. Henrich
Guntermann, MD, MSc. Dr. Guntermann has over 15 years of
experience in the life sciences industry. The Group is
headquartered in Germany and includes a manufacturing facility
in Wanzleben and an office in Leipzig that manages all research
and development (R&D) activities. The Group is focused on the
R&D of existing and reformulated versions of WF10™, a solution
of OXO-K993 containing stabilized chlorite ions. WF10 supports
the immune system by targeting certain types of cells, including
the macrophage, a white blood cell species that is key for the
regulation of normal and pathological immune function.
ADDITIONAL FUNDING FROM
THE DEVELOPMENT BANK OF SAXONY
In early 2010, the Company initiated a Phase 2 clinical trial to
evaluate WF10 as a treatment for moderate to severe allergic
rhinitis. The trial was a 60-subject randomized double-blind,
placebo-controlled, single-centre trial to assess the efficacy and
safety of a regimen of five daily WF10 infusions for the treatment
of patients with moderate to severe persistent allergic rhinitis.
The trial met its primary endpoint as measured by the change
in Total Nasal Symptom Score (TNSS) from baseline to
assessment after three weeks comparing the WF10 group with the
placebo group (p<0.001). The TNSS is a validated scale to
measure the aggregation of nasal symptoms associated with
allergic rhinitis. Also, the Total Ocular Symptom Score (TOSS)
was statistically significantly improved against placebo.
According to the Allergy & Asthma Medical Group & Research
Center, allergic rhinitis is an extremely common condition that
currently affects approximately 1.4 billion people globally.
A portion of the cost of the trial was funded by the
Development Bank of Saxony (SAB) under a 2009 three-year
funding commitment to support drug development projects
between the Company and the Fraunhofer Institute for Cell
Therapy and Immunology IZI in Leipzig, Germany. This
significant financial support facilitated the preclinical and clinical
development of WF10 as a potential treatment for allergic
rhinitis and rheumatoid arthritis. In July 2012, the SAB agreed
to provide the Company with additional funding for the further
development of its improved reformulated versions of WF10.
The SAB funding, which expires in July 2014, will be used to
support a number of preclinical studies focused on
demonstrating, the efficacy, safety and stability of the new
derivative formulations. These studies will continue to be
conducted by Nuvo in partnership with the University of Leipzig
and the Fraunhofer Institute.
PATENT UPDATE
In December 2012, the Company filed an international PCT
application and a U.S. patent application covering new derivative
formulations. In addition, in August 2012, the U.S. Patent and
Trademark Office issued a method of use patent covering
treatment of allergic rhinitis, allergic asthma and atopic dermatitis
with formulations that include WF10. This U.S. patent has an
expiry date of March 4, 2029.
DEVELOPMENT PLAN
Given the recently issued U.S. method of use patent referred to
immediately above, the Company is currently exploring
commercial potential and regulatory requirements in the U.S. for
the development and regulatory approval of a WF10-derivative
formulation in the field of airway diseases including allergic
rhinitis and allergic asthma.
In 2012, the Company conducted preclinical and chemistry,
manufacturing and controls (CMC) activities in an effort to better
understand stability, safety and efficacy of the new derivative
formulations relative to original WF10. The Company plans to
continue these studies in 2013 and hopes to advance in 2014 and
2015 to multiple proof of concept Phase 2 clinical studies in
different indications to confirm the platform technology
capability of the new formulations. If these studies are successful,
by 2015, the Company expects to be in a position to seek
outlicensing partners that could fund completion of development
and seek requisite regulatory approvals.
Nuvo Research Inc. Annual Report 2012 3
Management’s Discussion and Analysis (MD&A)
The following information should be read in
conjunction with the Nuvo Research Inc. (Nuvo or the
Company) audited Consolidated Financial Statements
and for the year ended December 31, 2012 which were
prepared in accordance with International Financial
Reporting Standards (IFRS) and filed on SEDAR on
March 27, 2013. Additional information relating to
the Company, including its Annual Information Form
(AIF), can be found on SEDAR at www.sedar.com.
All amounts in the MD&A, Consolidated Financial
Statements and related notes are expressed in Canadian
dollars, unless otherwise noted.
F O R WA R D - L O O K I N G S TAT E M E N T S
This MD&A contains forward-looking statements
that are subject to risks and uncertainties beyond
management’s control. Actual results could differ
materially from those expressed here. Risk factors are
discussed more fully in the Company’s AIF filed with
the securities commissions in each Canadian province.
Nuvo undertakes no obligation to revise forwardlooking statements in light of future events.
OVERVIEW
Background
Nuvo is a publicly traded, Canadian specialty
pharmaceutical company headquartered in
Mississauga, Ontario. The Company is dedicated to
building a portfolio of pharmaceutical products
through internal research and development (R&D) and
by in-licensing and acquisition, with a focus on the
treatment of pain and the development of its
immunology drug, WF10. The Company operates two
distinct business units, the Pain Group and the
Immunology Group. The Pain Group, located in West
Chester, Pennsylvania is focused on the development
and commercialization of topically delivered pain
products which include Pennsaid®, Pennsaid® 2%,
Synera® and Pliaglis®. The Immunology Group manages
the immune related assets and is focused on the
development of WF10, a compound for the treatment
of immune related diseases from its R&D facility in
Leipzig, Germany.
As of December 31, 2012, the Company and its
subsidiaries employed a total of 79 full-time employees
at its head office in Mississauga, Ontario, its
manufacturing and research facility in Varennes,
Québec, its Pain Group Offices in West Chester,
Pennsylvania and Salt Lake City, Utah, the OXO-K993
manufacturing facility in Wanzleben, Germany and its
R&D facility in Leipzig, Germany.
4 Nuvo
Nuvo Research
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Strategy
The Company’s long-term strategy is to build a
profitable company focused on the development and
commercialization of pharmaceutical products for
the treatment of pain and on the development of its
platform drug WF10, for the treatment of immune
related diseases.
Pain Group
The Pain Group is based in West Chester, Pennsylvania
and is focused on the research, development and
commercialization of the Company’s topically delivered
pain products including Pennsaid, Pennsaid 2%,
Synera and Pliaglis.
In May 2011, the Pain Group began a major
transformation when Nuvo acquired ZARS Pharma, Inc.
(ZARS) (see Significant Transactions – 2011 – ZARS
Acquisition). This transaction shifted the focus of the
Pain Group from early stage drug development to
later stage drug development and commercialization.
This transformational acquisition added two approved
products – Synera and Pliaglis, a pipeline of pain
products in various stages of development and two
important novel and proprietary drug delivery platforms.
The Pain Group is marketing Synera in the U.S.
targeting national accounts and hospitals – the first
product to be directly marketed by the Company in the
U.S. To market its other products, Pennsaid, Pennsaid
2% and Pliaglis and for Synera in other territories,
the Company relies on marketing, licensing and
distribution partners who have the required skill and
scale to effectively market each pharmaceutical product.
From its inception, the Pain Group has developed
topical drugs for the treatment of pain through the use
of molecular skin penetration enhancers (MPE™s) and
transdermal carriers, to topically deliver drugs into and
through the skin directly to the site of pain, such as
local soft tissue and peripheral nerve or transdermally
into the bloodstream with systemic activity, if
desirable. Unlike oral medications, the Company’s
topical products do not rely on bloodstream
circulation to reach affected parts of the body as they
offer site-specific treatment while limiting systemic
exposure to the active drug; thereby, reducing the
potential for systemic side effects, adverse events and
potential drug-drug interactions. The Pain Group’s
development focus is on the treatment of pain topically,
particularly in cases where changing the dosage form
of proven active drugs from oral to topical provides the
possibility of clinical benefit with reduced systemic
exposure and fewer systemic side effects.
With its broadened scope of products, knowledge and
capabilities, Nuvo believes it is well positioned to
acquire and develop new and existing drug product
candidates in the area of pain for topical delivery into
and through the skin and to commercialize these
pharmaceutical products. Nuvo has assembled a team
of scientists, clinicians, regulatory and commercial
experts, both internally and through its Advisory
Boards, who have significant expertise and experience
in all aspects of the pharmaceutical business from drug
development through commercialization, focused in
the area of pain.
With the acquisition of ZARS, the Company
significantly broadened its portfolio of development
stage products and proprietary platform technologies.
However, the focus of the Pain Group has shifted from
early stage development to later stage development and
commercialization for the near term. Nonetheless,
important chemistry, manufacturing and controls (CMC)
activities will continue for Nuvo’s pipeline products.
The Company will also continue to seek co-development
partners for products in its topical pain portfolio. In
addition to Pennsaid, Pennsaid 2%, Synera and Pliaglis,
Nuvo has a pipeline of topical pain medications for a
variety of pain conditions, including a novel Lidocaine
spray formulation (NRI-ANA) and other novel
formulations for the treatment of pain of inflammatory,
nociceptive and neuropathic origin. All of these pain
medications are being designed to treat the pain locally,
while limiting systemic exposure to the active drug;
thereby, reducing the potential for negative side effects,
adverse events and potential drug-drug interactions.
Pennsaid
Pennsaid, the Company’s first commercialized pain
product, is used to treat the signs and symptoms
associated with knee osteoarthritis (OA). OA is the
most common joint disease affecting middle-age and
older people. It is characterized by progressive damage
to the joint cartilage and causes changes in the
structures around the joint. These changes can include
fluid accumulation, bony overgrowth and loosening
and weakness of muscles and tendons, all of which
may limit movement and cause pain and swelling. The
drug combines the transdermal carrier (containing
dimethyl sulfoxide, popularly known as DMSO), with
diclofenac sodium, a leading non-steroidal antiinflammatory drug (NSAID) and delivers the active
drug through the skin directly to the site of
inflammation and pain. While, conventional oral
NSAIDs expose patients to potentially serious systemic
side effects, such as gastrointestinal bleeding and
cardiovascular risks, Nuvo’s clinical trials suggest that
some of these systemic side effects occur less frequently
with topically applied Pennsaid.
The American College of Rheumatology (ACR)
Subcommittee on OA Guidelines has approved and
issued updates to Clinical Practice Guidelines for the
treatment of OA, based on evidence and expert
consensus-based recommendations. These new OA
Guidelines, published in the April 2012 issue of the
medical journal Arthritis Care & Research,
conditionally recommend that healthcare providers
consider topical NSAIDs as one option for the
pharmacologic management of knee OA. The ACR
guidelines strongly recommend the use of oral or
topical NSAIDs or intra articular corticosteroid
injections in patients with an unsatisfactory clinical
response to acetaminophen. They also state oral
NSAIDs should not be prescribed in patients with
contraindications to oral NSAIDs, such as
cardiovascular risk factors, and that patients and
doctors should be aware of warnings and precautions
relating to oral NSAIDs. The ACR Guidelines
“strongly recommends the use of topical rather than
oral NSAIDs” in those patients aged 75 years or older.
In addition, the National Health Service in the United
Kingdom recommends first-line use of topical NSAIDs
ahead of oral NSAIDs.
In September 2012, the University of Oxford published
a thorough meta-analysis scientific review in the
Cochrane Database of Systematic Reviews focused on
“Topical NSAIDs for chronic musculoskeletal pain in
adults”. This review found that topical diclofenac is as
effective as oral diclofenac in knee and hand OA and
is likely a safer choice for elderly patients and others at
risk for gastrointestinal adverse effects. In addition,
the review compared different formulations of topical
NSAIDs and found that topical diclofenac solution
with DMSO (Pennsaid) demonstrated superior efficacy
as measured by the number of patients needed to get
one patient whose pain is reduced by 50% (known as
number needed to treat or NNT). Compared to topical
diclofenac gel (Voltaren Gel), topical diclofenac
solution with DMSO (Pennsaid) demonstrated an NNT
of 6.4 vs. 11 meaning you would need to treat
approximately 5 more patients with diclofenac gel to
get 1 with a 50% reduction in pain. These conclusions
were based on a review of all published and available
randomized, double-blind studies with placebo or
active comparators in which at least a single treatment
was a topical NSAID used to treat chronic pain caused
by OA and in which treatment lasted at least 2 weeks.
The analysis included data from 7,688 participants in
34 studies, 23 of which compared a topical NSAID
with placebo.
Pennsaid received U.S. Food and Drug Administration
(FDA) approval in November 2009 and was launched
by the Company’s U.S. licensee, Mallinckrodt, Inc.
Nuvo Research Inc. Annual Report 2012 5
Management’s Discussion and Analysis cont’d
(Mallinckrodt), the pharmaceuticals business of
Covidien plc, in April 2010. The FDA approval of
Pennsaid included the requirement that the Company
complete several post-marketing animal studies,
including a two-year dermal carcinogenicity study
(the Carc Study) and two DMSO based preclinical
studies, all of which are being conducted and paid for
by Mallinckrodt as they became Mallinckrodt’s
responsibility once the NDA for Pennsaid was formally
transferred by the Company to Mallinckrodt post FDA
approval as required pursuant to the terms of the U.S.
Licensing and Development Agreement (U.S. Licensing
Agreement). Mallinckrodt has completed the Carc
Study without any significant adverse finding and
submitted the results to the FDA in October 2012.
The two DMSO based studies, a Fertility and Early
Embryonic Development study and an evaluation of
Peri- and Postnatal Development in a single species
with DMSO, were both completed by Mallinckrodt in
2011 without any significant adverse findings and
submitted to the FDA.
Prior to FDA approval, the Company’s patents that
protected Pennsaid in the U.S. had expired. However,
upon FDA approval of Pennsaid in the U.S., the
product received a three-year period of marketing
exclusivity from the date of approval pursuant to a
1984 U.S. federal law, the Drug Price Competition
and Patent Term Restoration Act, informally known
as the “Hatch-Waxman Act”, and Code of Federal
Regulations (C.F.R.) 314.108(b)(4) which provide that
a product filed as a 505(b)(2) application and
supported by sponsor initiated clinical studies required
as a condition of approval is entitled to three years
of marketing exclusivity starting from the effective date
of approval. This period of marketing exclusivity
prohibited the sale of generic versions of Pennsaid in
the U.S. until November 4, 2012, three years from the
effective date of approval. As such market exclusivity
has now expired a generic version of Pennsaid can be
sold in the U.S., if such generic version is approved by
the FDA.
In July 2012, the U.S. Patent Office issued Patent
No. 8,217,078 relating to a method of using Pennsaid
(Pennsaid Patent) with an expiry date of July 10, 2029.
Mallinckrodt listed the Pennsaid Patent in the FDA’s
Orange Book. The Orange Book listing required any
Abbreviated New Drug Application (ANDA) applicant
seeking FDA approval for a generic version of
Pennsaid prior to expiration of the patent to notify
Nuvo and Mallinckrodt of its ANDA before it can
obtain FDA approval. Prior to the Orange Book
listing, there was no such requirement imposed on the
generic applicants.
6 Nuvo Research Inc. Annual Report 2012
Subsequent to the Orange Book listing, Nuvo and
Mallinckrodt received Paragraph IV certification
notices from three companies advising Nuvo and
Mallinckrodt that they each filed an ANDA with the
FDA seeking approval to market a generic version of
Pennsaid. One of the applicants has since withdrawn
from the process. Nuvo and Mallinckrodt filed a
patent infringement complaint with the courts against
the two generic companies, Apotex Inc. and Apotex
Corp. (together Apotex) and Lupin Ltd and Lupin
Pharmaceuticals (together Lupin). In January 2013,
Nuvo and Mallinckrodt entered into a settlement
agreement with Apotex respecting patent infringement
litigation brought by Nuvo and Mallinckrodt in
response to Apotex’s filing of an ANDA with the FDA
seeking approval to market a generic version of
Pennsaid (Apotex Settlement Agreement). Under the
terms of the Apotex Settlement Agreement, Nuvo and
Mallinckrodt granted a license to Apotex that permits
Apotex, upon approval of its ANDA by the FDA, to
launch its generic version of Pennsaid on a date that is
the earlier of 45 days after Mallinckrodt or Nuvo
makes a first commercial shipment of Pennsaid 2% in
the U.S. and April 1, 2014, or earlier under certain
circumstances. The complaint is pending against Lupin.
In February 2013, Nuvo and Mallinckrodt received a
fourth Paragraph IV certification notice from a
company advising Nuvo and Mallinckrodt that they
have filed an ANDA with the FDA seeking approval to
market a generic version of Pennsaid. The Pennsaid
Patent does not automatically prevent a generic version
of Pennsaid from being approved by the FDA or if
approved, from being sold in the U.S. However, it does
provide the Company with the opportunity to
commence legal action against the ANDA applicants
for patent infringement. A patent infringement
complaint has not been filed at this time against this
fourth company.
Pennsaid is approved for sale and has been marketed
under license and/or distribution agreements for many
years in Canada, Greece, Italy and the United
Kingdom. Vianex, the Company’s partner in Greece,
launched Pennsaid as a prescription-only product with
government reimbursement in Greece in 2007 and it
quickly became the market leader. During the first half
of 2010, the National Organization for Medicines in
Greece (NOMG) published a proposed list of drugs for
which it would no longer provide reimbursement and
Pennsaid was named on this list. This list, that
included all topical antirheumatics, became effective in
February 2011. In addition, Pennsaid was reclassified
as an over-the-counter (OTC) product in Greece.
Vianex revamped their sales and marketing plan and
relaunched the product into the Greek OTC market in
the second half of 2011.
The global OA prescription drug market is estimated
to have annual sales of approximately US$5 billion
and as a result, Pennsaid faces many competitors in all
of the markets in which it is sold, including generic
versions of Pennsaid in some markets. In the U.S., a
number of existing pharmaceutical products treat the
pain associated with OA. The many products available
to address this condition include: OTC oral
medications that are accessible without a doctor’s
prescription, such as acetaminophen (Tylenol®) and
low-dose NSAIDs such as ibuprofen (Advil®, Motrin®)
and naproxen (Aleve®); and prescription only
medications, including oral, full-dose NSAIDs, oral,
full dose NSAIDs combined with proton pump
inhibitors (PPI), topical NSAIDs, oral COX-2 selective
NSAIDs and oral opioid analgesics. In the U.S., topical
NSAIDs are one of the newest segments. The first
topical NSAID was approved in 2008 and since then,
the market has grown to include three products
including Pennsaid. It is estimated that in 2012, this
segment captured 4 million prescriptions and that the
size of the market exceeded US$500 million.
Pennsaid 2%
Pennsaid 2% is an improved version of Pennsaid that
contains 2% diclofenac sodium compared to 1.5%
for original Pennsaid. It is more viscous than Pennsaid,
is supplied in a metered dose pump bottle and was
studied in clinical trials using twice daily dosing
compared to four times a day for Pennsaid.
Under the terms of the U.S. Licensing Agreement,
Mallinckrodt assumed full responsibility for managing,
planning, executing and paying for all development
activities for Pennsaid 2%. Although Nuvo has four
of eight seats on the joint steering committee (Pennsaid
JSC), that was established as per the U.S. Licensing
Agreement with Mallinckrodt to monitor and provide
advice respecting the commercialization plans for
Pennsaid and the development of Pennsaid 2%, the
Company, with limited exceptions, no longer controls
the strategy or the execution of the clinical
development program for Pennsaid 2% or the
commercialization of Pennsaid and Pennsaid 2%.
Those responsibilities having been contractually
assumed by Mallinckrodt. The Company does have
approval rights with respect to any changes to the
development plan for Pennsaid 2%. Any such changes
require the unanimous approval of the Pennsaid JSC
of which the Company has equal representation.
Under the terms of the U.S. Licensing Agreement, the
parties negotiated and agreed to a development plan for
Pennsaid 2% (the Pennsaid 2% Development Plan).
The Pennsaid 2% Development Plan described specific
development activities to be conducted by Mallinckrodt
and timelines for the carrying out of those activities.
The Pennsaid 2% Development Plan included a Phase 2
clinical trial which if successful was to be followed
immediately by two Phase 3 pivotal clinical studies.
The Company estimates the cost of conducting the two
Phase 3 clinical trials to be approximately US$30 to
US$40 million.
The Phase 2 clinical study was successfully concluded
during the first half of 2011, but later than
contemplated by the Pennsaid 2% Development Plan.
In June 2011, Mallinckrodt provided the Company
with the Phase 2 clinical trial top-line results that
demonstrated that Pennsaid 2% met its primary
endpoint of reducing OA pain greater than a placebo
vehicle control with a p-value of 0.042. By September
2011, Mallinckrodt was significantly behind the
timelines set out in the Pennsaid 2% Development Plan
which had provided that the two Phase 3 pivotal
clinical studies were to have commenced no later than
February 2010. The date of Mallinckrodt’s
commencement of the Phase 3 clinical studies was very
important to the Company – so much so that the
Company had insisted that a specific termination
provision be included in the U.S. Licensing Agreement
that would allow the Company to terminate the U.S.
Licensing Agreement as it relates to Pennsaid 2% and
to a reversion of the U.S. marketing rights to Pennsaid
2% to the Company if the two Phase 3 studies were
not commenced within 20 months of the date of the
agreement. The U.S. Licensing Agreement was dated
June 15th, 2009 which means the Company had the
right to terminate the agreement if the two Phase 3
clinical studies are not initiated by February 15, 2011.
In September 2011, Mallinckrodt advised the Company
that it wished to pursue a Supplementary New Drug
Application (sNDA) regulatory approval pathway for
Pennsaid 2% supported by the data from the Phase 2
clinical study rather than a 505(b)(2) New Drug
Application (NDA) regulatory approval pathway
supported by two Phase 3 clinical studies as
contemplated by the Pennsaid 2% Development Plan.
Mallinckrodt advised the Company that it believed
data obtained through the Phase 2 clinical trial could
be used to support the sNDA and that conducting the
two Phase 3 clinical studies was not required.
Mallinckrodt further advised the Company that it
believed that a sNDA could be filed sooner with the
FDA than a NDA, that the FDA review would be
expected to be shorter with a sNDA and; therefore,
that Pennsaid 2% could be approved more quickly
than if Mallinckrodt followed the 505(b)(2) NDA
pathway. Mallinckrodt then formally requested that
the Company and its representatives on the Pennsaid
JSC consent to this change to the Pennsaid 2%
Nuvo Research Inc. Annual Report 2012 7
Management’s Discussion and Analysis cont’d
Development Plan. The Company declined to provide
its requested consent. The Company advised
Mallinckrodt that in its view the revised regulatory
pathway proposed by Mallinckrodt was riskier than
the pathway contemplated by the Pennsaid 2%
Development Plan, that the successful Phase 2 study
had never been designed or powered as a pivotal study
to support approval, that Nuvo would be deprived of
the benefit of the Phase 3 study data that, under the
terms of the U.S. Licensing Agreement, it was entitled
to use to support applications for regulatory approval
of Pennsaid 2% in territories outside of the U.S. and
that Mallinckrodt’s decision was being driven by its
failure to meet the timelines set out in the Pennsaid 2%
Development Plan and its desire to save the US$30-40
million cost of conducting the two Phase 3 clinical
studies that the Company had negotiated for as part of
the consideration for the grant of U.S. marketing rights
to Mallinckrodt. Notwithstanding that, Nuvo did not
provide its consent to the change in the Pennsaid 2%
Development Plan as requested by Mallinckrodt,
Mallinckrodt proceeded to file an sNDA supported by
the Phase 2 clinical study data without the benefit of
the data from two Phase 3 clinical studies. The
Company has continued to operationally support
Mallinckrodt in its efforts to obtain FDA approval for
Pennsaid 2%, but has specifically reserved its legal
rights pursuant to the U.S. Licensing Agreement
including its right to claim damages, to terminate the
U.S. Licensing Agreement for default by Mallinckrodt
and to terminate the U.S. Licensing Agreement as it
relates to Pennsaid 2% by the failure of Mallinckrodt
to commence two Phase 3 clinical studies within 20
months of the date of the U.S. Licensing Agreement.
Mallinckrodt submitted an sNDA for Pennsaid 2% to
the FDA in May 2012. Mallinckrodt advised the
Company that in July 2012, the FDA requested that
Mallinckrodt withdraw the sNDA and refile it as an
NDA. Mallinckrodt complied with the request and
resubmitted the application as an NDA on July 15,
2012. Mallinckrodt advised Nuvo that the FDA
accepted the NDA for Pennsaid 2% for review. The
FDA set a Prescription Drug User Fee Act (PDUFA)
date of March 4, 2013 for action on the submission.
Mallinckrodt received a Complete Response Letter
(CRL) to the NDA for Pennsaid 2% in which the FDA
confirmed the only substantive additional requirement
is the completion of a pharmacokinetic (PK) study
comparing Pennsaid 2% to original Pennsaid.
Mallinckrodt has indicated that it expects to complete
the study, submit the results and receive a formal
response from the FDA in late 2013 or early 2014.
However, there can be no assurance that Pennsaid 2%
will meet all FDA requirements or that it will be
approved for marketing by the FDA.
8 Nuvo Research Inc. Annual Report 2012
The entry of a generic version of Pennsaid into the U.S.
market before FDA approval and the commercial
launch of Pennsaid 2% could have a significant adverse
effect on Pennsaid and Pennsaid 2% sales and the
resulting level of royalties and milestone payments
earned by the Company. Under the terms of the Apotex
Settlement, Apotex is permitted upon approval of its
ANDA by the FDA, to launch its generic version of
Pennsaid on a date that is the earlier of 45 days after
Mallinckrodt or Nuvo makes a first commercial
shipment of Pennsaid 2% in the U.S. and April 1, 2014,
or earlier under certain circumstances. In addition to
Apotex, there are two other companies including Lupin
that have ANDA’s under review with the FDA for
Pennsaid for which the Company has filed a patent
infringement compliant against Lupin.
Pennsaid 2% is not currently approved for sale or
marketing in any jurisdiction, but it has been licensed
to Mallinckrodt in the U.S. and to Paladin Labs Inc.
(Paladin) for Canada, South Africa, Israel and Central
and South America.
Additional clinical and non-clinical studies, beyond
those being conducted by Mallinckrodt, may be
required to support applications for the regulatory
approval of Pennsaid 2% in the U.S. and other
jurisdictions in which the Company, or other licensees
and distributors, could potentially market the product.
The Company has been advised by regulatory
authorities in Canada and the United Kingdom that the
data from the Phase 2 study conducted by Mallinckrodt
is insufficient to support approval of Pennsaid 2% in
their respective jurisdictions and that additional clinical
studies will be required. In the U.S., Mallinckrodt is
responsible for implementing the development plan for
all clinical and non-clinical studies in support of FDA
approval. There can be no assurance that the current
trials and studies will be sufficient for regulatory
authorities in any jurisdiction or that all studies will
yield successful results or that the required regulatory
approvals will be obtained.
In September 2012, the U.S. Patent Office issued U.S.
Patent No. 8,252,838 relating to compositions and
methods of using Pennsaid 2% (Pennsaid 2% Patent).
The patent expires on April 21, 2028. Mallinckrodt has
taken the necessary steps to have the new patent listed
in the FDA Orange Book once Pennsaid 2% obtains
FDA approval.
Synera
Synera was added to Nuvo’s product portfolio through
the acquisition of ZARS (see Significant Transactions –
2011 – ZARS Acquisition). Synera is a topical patch
that combines lidocaine, tetracaine and heat, using
proprietary “Controlled Heat Assisted Drug Delivery”
(CHADD™) technology. The CHADD unit generates
gentle heating of the skin and in a well-controlled
clinical trial demonstrated that it contributes to the
efficacy of Synera.
Synera is approved in the U.S. to provide local dermal
analgesia for superficial venous access and superficial
dermatological procedures, such as excision,
electrodessication and shave biopsy of skin lesions.
Synera resembles a small adhesive bandage in
appearance and is applied to the skin 20 to 30 minutes
prior to painful medical procedures, such as venous
access, blood draws, needle injections and minor
dermatologic surgical procedures. In most European
countries, this topical patch is marketed under the
trade name Rapydan® and is approved for surface
anaesthesia of normal intact skin in connection with
needle punctures in adults and children from 3 years
of age and for use in cases of superficial surgical
procedures on normal intact skin in adults.
The FDA approval of Synera included the requirement
that the Company complete a post-marketing study
commitment for use on intact skin to provide local
dermal analgesia for superficial venous access and
superficial dermatological procedures such as excision,
electrodessication and shave biopsy of skin lesions
in pediatric patients ages 0 to 4 months. It is common
for the FDA to request the sponsors of an NDA to
determine how their product can be used safely in
children. The Company has not completed this
commitment due to difficulty in getting Institutional
Review Board (IRB) approvals, the IRB and/or Medical
Executive Committee expressions of serious scientific
and ethical concerns regarding the need for and the
conduct of the trial, limited investigator interest, limited
investigator access at any study site to the required
patient populations and the unsuitability of the current
patch size for this age group. In September 2011, the
Company requested a waiver from the FDA due to the
above mentioned issues. In November 2011, the
Company had a telephone conference with the FDA
regarding the waiver and on this call, the Company
agreed to provide the FDA with additional information
including the Company’s ability to produce a smaller
patch size for use in the neonatal age group. The
Company submitted this additional information to the
FDA in December 2012.
The Company has licensed the sales and marketing
rights to Eurocept International B.V. (Eurocept), a
Dutch-based pharmaceutical company, for Western
Europe, Russia and most of its former Republics,
Turkey, Israel and the People’s Republic of China.
Eurocept has responsibility for all commercialization
activities and costs, including marketing, selling and
medical education in the above countries. Under the
terms of the agreement, the Company earns royalties
on the net sales of Rapydan and is eligible to receive
sales milestones.
Nuvo holds the sales and marketing rights for Synera
in the U.S., Mexico, South America, Australia,
Africa and most regions in Asia, although of these
jurisdictions, it is only approved in the U.S. In
February 2012, the Company’s Pain Group launched
Synera in the U.S., targeting interventional pain
doctors with a small pain specialty contract sales force
managed by the Pain Group. In August 2012, the
Company refocused its resources on large national
accounts such as dialysis centers, infusion centers and
blood diagnostic laboratories. To execute this strategy,
the Company terminated its agreement with its
contract sales organization and will use its internal
Pain Group commercial team to focus on these
national accounts and the key interventional pain
doctors who use Synera. Synera is manufactured by a
third-party contract manufacturing organization
(CMO) in the U.S.
In May 2012, the Company entered into a license and
supply agreement granting Paladin exclusive Canadian
rights to market and sell Synera, upon regulatory
approval. Under the terms of the agreement, Nuvo
will receive a double digit royalty on net sales of
Synera in Canada and will supply Synera to Paladin
(see Significant Transactions – 2012 – Paladin). Synera
has not yet been approved by Canadian regulatory
authorities for marketing in Canada.
In July 2012, the U.S. Patent Office reinstated Patent
No. 6,465,709 providing patent coverage for Synera.
This patent is listed in the FDA’s Orange Book and
extends the patent expiration of the latest expiring
Synera Orange Book listed patent to July 7, 2020.
In September 2012, the Company successfully
completed a study to provide data to support an
application for the removal of the “not for home use”
condition currently on the U.S. label of Synera. The
Company expects to file a prior approval supplement
with the FDA requesting the removal of the “not for
home use” condition from the label in the first half of
2013. The Company expects the FDA to take at least
4 months to review and respond to this application.
The Company’s strategy is to expand the FDA
approved indication for Synera for use in acute
musculoskeletal pain syndromes such as tendinopathy
and shoulder impingement syndrome. Based on
communications with the FDA, the Company plans
Nuvo Research Inc. Annual Report 2012 9
Management’s Discussion and Analysis cont’d
to run a Phase 2/3 development program on two
distinct acute musculoskeletal pain conditions. It is
expected that this development program would take
approximately 3 years to complete before an
application for approval could be filed with the FDA
for U.S. approval. At this time, the Company does
not have sufficient financial resources to conduct
these studies on its own and is actively seeking
co-development partners for this expanded indication
that could contribute to the cost of the development
program and participate in the marketing and sale of
Synera for the expanded indication throughout the U.S.
Pliaglis
Pliaglis was added to Nuvo’s product portfolio through
the acquisition of ZARS (see Significant Transactions –
2011 – ZARS Acquisition). Pliaglis is a topical local
anaesthetic cream that provides safe and effective local
dermal anaesthesia on intact skin prior to superficial
dermatological procedures, such as dermal filler
injection, pulsed dye laser therapy, facial laser
resurfacing and laser-assisted tattoo removal. This
product consists of a proprietary formulation of
lidocaine and tetracaine that utilizes proprietary phasechanging topical cream Peel technology. The Peel
technology consists of a drug-containing cream which,
once applied to a patient’s skin, dries to form a
pliable layer that releases drug into the skin. Pliaglis
should be applied to intact skin for 20 to 30 minutes
prior to superficial dermatological procedures and
for 60 minutes prior to laser-assisted tattoo removal.
Following the application period, Pliaglis forms a
pliable layer that is easily removed from the skin
allowing the dermatological procedure to be performed
with minimal to no pain.
Galderma Pharma S.A. (Galderma), a global
pharmaceutical company specialized in dermatology,
holds the worldwide sales and marketing rights for
Pliaglis. Under the terms of the licensing agreement, the
Company earns royalties on the net sales of Pliaglis and
is eligible to receive milestone payments when certain
specified approvals are obtained and launches occur.
Pliaglis was initially approved by the FDA in June
2006, but was voluntarily removed from the U.S.
market by Galderma in 2008, due to manufacturing
issues at Galderma’s third-party contract manufacturer
(the Former CMO). In December 2011, Galderma
submitted an sNDA for Pliaglis and the FDA set a
PDUFA date of April 16, 2012. The sNDA addressed a
number of manufacturing issues, including the transfer
of manufacturing to Galderma. On April 16, 2012,
Galderma received the Complete Response Letter from
the FDA that outlined additional information the FDA
required before it would approve the sNDA for
10 Nuvo Research Inc. Annual Report 2012
Pliaglis. In May 2012, Galderma submitted additional
information that addressed the FDA’s issues. On
October 18, 2012, the FDA approved the sNDA.
Galderma launched the commercial marketing
and sale of Pliaglis in the U.S. in early March 2013
at the American Academy of Dermatology Conference
in Miami.
In Europe, the Marketing Authorization Application
(MAA) for Pliaglis that was prepared by ZARS, as per
its obligations under the terms of the licensing
agreement, was validated in July 2012. The MAA was
submitted using the decentralized procedure with
Germany as the Reference Member State and filed with
16 countries as Concerned Member States. On May 6,
2012, the Company received notice of a positive
opinion from the European decentralized procedure for
the approval of Pliaglis from the German Federal
Institute for Drugs and Medical Devices (BfArM). The
positive opinion required a post approval commitment,
the cost of which will be shared equally by Galderma
and Nuvo. The decentralized procedure has been
closed with a positive recommendation that Pliaglis is
approvable for the indication of producing local
dermal anesthesia on intact skin in adults prior to
superficial dermatological procedures. The regulatory
process has entered its final phase known as the
national licensing phase. During this phase, the
National Agencies in the individual countries will issue
the marketing licenses that allow Pliaglis to be
marketed in each country. Pursuant to Nuvo’s license
agreement with Galderma, Nuvo is entitled to receive
milestone payments totaling US$6.0 million when
certain specified launches occur or within a predefined
6-month period after marketing approval in three
different countries. As at December 31, 2012,
Galderma has received marketing licenses in 12 of the
16 countries, of which the first three entitled Nuvo
to US$6.0 million in total milestone payments which
have been received by the Company. The Company
expects that Galderma will launch the commercial
marketing and sale of Pliaglis in Europe in the second
quarter of 2013 at the Anti-Aging Medicine World
Congress & Medispa in Monaco.
Pliaglis is currently approved for sale and marketed in
Argentina. In September 2011, Galderma filed
additional marketing applications in Switzerland and
Brazil. In December 2011, Galderma filed a marketing
application in Canada and in February 2012, Health
Canada accepted this application. The Company
expects Galderma to file for marketing approval in
other countries around the world, including other
South American countries, select Asian countries,
South Africa and Australia.
Pipeline Expansion and Early Stage Drug Development
With the acquisition of ZARS, the Company
significantly broadened its portfolio of development
stage products and proprietary platform technologies.
However, the focus of the Pain Group has shifted from
early stage development to later stage development and
commercialization for the near term. Nonetheless,
important CMC activities will continue for Nuvo’s
pipeline products. The Company will also continue to
seek co-development partners for products in its
topical pain portfolio.
In addition to Pennsaid, Pennsaid 2%, Synera and
Pliaglis, Nuvo has a pipeline of topical pain
medications for a variety of pain conditions, including
NRI-ANA and formulations for the treatment of pain
of inflammatory, nociceptive and neuropathic origin.
All of these pain medications are being designed to
treat the pain locally, while limiting systemic exposure
to the active drug; thereby, reducing the potential for
negative side effects, adverse events and potential drugdrug interactions.
In addition to drug candidates developed internally, the
Company is actively seeking to continue the expansion
of its pipeline by acquiring or in-licensing commercial
and late stage pain assets to provide an even broader
and more balanced portfolio of products and additional
inflection points for prospective and current investors.
Although not currently in active development given
the Company’s focus on its topical pain products,
Nuvo’s past research in the field of dermatology has
been directed towards preclinical activities on a topical
antifungal drug candidate intended for use in treating
onychomycosis, a nail fungal infection that resides in
both the nail and the nail bed. In addition, with the
acquisition of ZARS, the portfolio of development
stage products now includes a topical steroid utilizing
the DuraPeel technology that has completed a positive
Phase 2 proof-of-concept trial.
Technology
CHADD™
The Company acquired the proprietary CHADD drug
delivery platform as part of the acquisition of ZARS.
The CHADD unit consists of a powder-filled pouch
laminated between a top cover film with oxygenregulating holes and a bottom film with a pressuresensitive adhesive layer that generates heat when
exposed to the air. When the CHADD patch is removed
from its hermetically sealed pouch, oxygen in ambient
air flows into the heat-generating powder, initiating an
oxidative reaction. After an initial rise in temperature,
the mild heat generated by the CHADD unit will reach
and maintain a controlled temperature range for a
predetermined period of time. The CHADD unit may
either be incorporated directly into the drug-containing
patch as with Synera or placed on top of a transdermal
drug patch to initiate temporary increases in drug
concentrations. CHADD units can be customized to
achieve the specific temperature and duration of heating
required for therapy. Depending on the intended
application, a CHADD unit can be designed to deliver
heat for periods from 20 minutes to 12 hours. The
Company believes that the CHADD technology may
have a variety of clinically important advantages over
traditional patch technologies, including more effective
delivery of certain drugs, faster onset of action and
reduced side effects.
Peel
The proprietary phase-changing cream technology has
been used in the Company’s Peel drug delivery
technology and the DuraPeel technology. The Peel
consists of a drug-containing cream which, once applied
to a patient’s skin, dries to form a pliable layer that
releases drug into the skin. Peel based products can
remain on the skin for periods from 20 to 60 minutes,
depending on the desired effect. After the desired effect
is achieved, the Peel product can be easily removed
from the skin. This drug delivery technology is
well-suited for drugs that require a single, short-term
application, such as local anesthetics applied before a
painful procedure and for uneven, irregular or
contoured surfaces.
DuraPeel™
The DuraPeel technology consists of a drug, containing
cream which is spread onto a patient’s skin, where
within a few minutes it forms a pliable layer that is not
inadvertently removed by touching or contact with
clothing. DuraPeel formulations include two solvents:
one that evaporates quickly and one that evaporates
more slowly. Once applied, one solvent in the cream
dries and the product forms a pliable layer. The other
solvent remains in the formulation, allowing for
sustained drug delivery. While the Peel technology
allows for short-term drug delivery for periods of up to
an hour, the DuraPeel technology allows for predictable
drug delivery for up to 12 hours. Following the desired
treatment time, the DuraPeel product can be easily
peeled or washed from the skin. As with the Peel
technology, DuraPeel based formulations can be applied
over uneven, irregular or contoured surfaces of the body.
Immunology Group
The Immunology Group is based in Leipzig, Germany
and is focused on the development of WF10, a
compound for the treatment of immune related diseases.
Nuvo Research Inc. Annual Report 2012 11
Management’s Discussion and Analysis cont’d
The immune system provides an essential defence to
micro-organisms, cancer and substances it sees as
foreign and potentially harmful. WF10, a solution of
OXO-K993 containing stabilized chlorite ions, focuses
on supporting the immune system by targeting the
macrophage, a type of white blood cell that coordinates
much of the immune system, to regulate normal
immune function. All immune system regulation
research is managed through Nuvo Research AG.
On December 13, 2011, Nuvo increased its ownership
in the Immunology Group from 60% to 100% by
acquiring the minority interest in Nuvo Research AG
held by Dr. Kühne. The transaction is fully described
under the section entitled Significant Transactions 2011 –
Acquisition of Non-Controlling Interest. Complete
ownership in Nuvo Research AG improves the
Company’s flexibility in managing all aspects of WF10,
including future development and financing.
WF10
WF10 appears to act on the macrophage. Normally
functioning macrophages can alternate between one of
two basic states: phagocytic and inflammatory.
Phagocytic macrophages digest invading organisms,
such as viruses, and initiate a biological defence
pathway. Inflammatory macrophages, in turn, induce a
variety of reactions, including fever, sweating, swollen
glands, malaise and appetite loss, the common,
uncomfortable signs of illness. Such responses, while
entirely normal, must be turned on and off in a
controlled manner. If left unchecked, pathogens can
overdrive the system toward the inflammatory state
creating an imbalance that may lead to such medical
disorders as chronic inflammation, immune deficiency,
organ damage and tumour proliferation.
WF10’s proposed mode of activity is based on a theory
about how macrophages regulate the immune system.
Research suggests that, in some cases, WF10 may
rebalance improperly functioning immune systems.
The drug has potential applications in adjuvant cancer
therapy, diseases related to immune deficiencies and
the management of chronic viral infections.
Based on the concept that WF10 may rebalance
improperly functioning immune systems, the
Company’s scientists hypothesized that it may be
effective for the treatment of conditions such as
allergic rhinitis where the body’s immune system
inappropriately responds to the presence of foreign
allergens and rheumatoid arthritis where autoimmunity
plays a pivotal role in the progression of cartilage
destruction in the joints. Autoimmunity is the failure
of the body to recognize its own cells and tissues and
therefore allows the body to initiate an immune
response against its own cells and tissues.
12 Nuvo Research Inc. Annual Report 2012
In early 2010, after receiving Germany’s BfArM
approval, the Company initiated a Phase 2 clinical trial
to evaluate WF10 as a treatment for moderate to severe
allergic rhinitis. The trial was a 60-subject randomized
double blind, placebo-controlled, single-centre trial to
assess the efficacy and safety of a regimen of five
WF10 infusions for the treatment of patients with
moderate to severe persistent allergic rhinitis. The trial
met its primary endpoint as measured by the change in
Total Nasal Symptom Score (TNSS) from baseline to
assessment after three weeks comparing the WF10
group with the placebo group. The TNSS is a validated
scale to measure the aggregation of nasal symptoms
associated with allergic rhinitis. The results were
statistically significant as the p-value for the primary
endpoint was less than 0.001 for the intent-to-treat
and per protocol groups. During 2011, the
Immunology Group completed its evaluation of the
entire data set including the secondary endpoints all
of which were achieved. In August 2012, the U.S.
Patent Office issued Patent No. 8,252,343 providing
patent coverage for WF10 with an expiry date of
March 4, 2029. This patent covers a method of
treating allergic asthma, allergic rhinitis and atopic
dermatitis using a chlorite based formulation, such
as WF10.
A portion of the cost of the allergic rhinitis trial was
funded using proceeds received from the Development
Bank of Saxony (SAB) under a 2009 funding
commitment for a three-year period that ended in July
2012. This commitment was to support two cooperative drug development projects between the
Company and the Fraunhofer Institute for Cell
Therapy and Immunology IZI (Fraunhofer Institute) in
Leipzig, Germany. These projects were for the
preclinical and clinical development of WF10 as a
potential treatment for allergic rhinitis and rheumatoid
arthritis. The total cost of these projects was estimated
to be €4.1 million and the SAB committed to provide
up to € 2.2 million in funding to support these projects,
€1.9 million of which will be provided to the
Company’s co-operative partners and €0.3 million
which will be provided directly to the Company.
In July 2012, the SAB agreed to provide the Company
with an additional €4.4 million of funding for the
further development of its improved reformulated
versions of WF10 (Reformulated WF10). The SAB
funding will be used to support a number of preclinical
studies relating to both WF10 and Reformulated WF10
for which the Company filed a U.S. provisional patent
in December 2011. In December 2012, the Company
filed an international PCT application and a U.S.
patent application claiming priority to the December
2011 U.S. provisional application. In addition,
Company has an issued patent and an allowed patent
application in the U.S. related to a method of using
WF10 and Reformulated WF10 to treat allergic
asthma, allergic rhinitis and atopic dermatitis. These
studies are being conducted by the Company in
partnership with the University of Leipzig and the
Fraunhofer Institute and are focused on demonstrating,
the efficacy, safety and stability of Reformulated
WF10. The total cost of this development program is
estimated to be €6.3 million and the SAB committed
to provide up to €4.4 million in funding to support
these projects, €3.7 million of which will be provided
to the Company’s co-operative partners and
€0.7 million which will be provided directly to the
Company. The funding will take the form of a
non-repayable reimbursement of specific development
monies expended by the Company until July 2014.
The Company will have certain contractual obligations
to the SAB including the obligation to provide matching
funding from its own resources of €1.9 million over
the two-year period ending in July 2014.
Oxoferin is marketed by Nuvo Manufacturing GmbH
and its partners in parts of Europe, Asia and South
America as a topical wound healing agent under several
trade names including Oxoferin and Oxovasin. The
product has also been licensed for Russia, some of the
former Soviet republics, including all of the Baltic States,
Malaysia, the Philippines, Vietnam, Singapore and other
Indochina countries. However, the product has not been
approved, nor marketed, in any of these territories. The
Company’s partners, including Ranbaxy Laboratories
Limited, are at various stages in pursuing the necessary
marketing approvals which are not expected until late
2013 at the earliest.
The Company is currently exploring WF10’s commercial
potential in the U.S. market for airway diseases, as well
as the regulatory requirements to get WF10 approved in
the U.S. for allergic rhinitis and asthma.
Pennsaid
The Canadian and U.S.’ composition of matter patents
for Pennsaid have expired. However, upon FDA
approval of Pennsaid in the U.S., the product received
a three-year period of marketing exclusivity from the
date of approval pursuant to the “Hatch-Waxman
Act”, and C.F.R. 314.108(b)(4) which provide that a
product filed as a 505(b)(2) application and supported
by sponsor initiated clinical studies required as a
condition of approval is entitled to three years of
marketing exclusivity starting from the effective date
of approval. This period of marketing exclusively
prohibited the sale of generic versions of Pennsaid in
the U.S. until November 2012, three years from the
effective date of approval. As such market exclusivity
has now expired a generic version of Pennsaid can
be sold in the U.S. if such generic version is approved
by the FDA.
Regardless of the future development plans for WF10,
a number of additional studies will need to be
conducted before WF10 can be submitted for regulatory
approval for the treatment of allergic rhinitis or any
other illness and there can be no assurance that the
results of these additional studies will be favourable or
that regulators will approve WF10 for these or other
purposes. Any such studies and approvals would be
expected to take a number of years.
WF10 is approved in Thailand as a treatment for post
radiation cystitis and diabetic foot ulcers but is not
otherwise approved for marketing and sale elsewhere
except in its diluted topical form, Oxoferin.
Oxoferin™
Oxoferin, a topical wound healing agent, is a diluted
form of WF10, a chlorite-based, immunomodulating
drug. The Company believes that research to-date
suggests Oxoferin™ has a positive impact on wound
healing leading to contraction, closure and faster healing
of wounds. Chronic, hard-to-heal wounds are a serious
problem with an increasing incidence. Chronic wounds
can be caused by such conditions as burns, pressure
sores and poor circulation in the lower extremities.
Co-morbid conditions, such as diabetes and
atherosclerosis, reduce blood flow to the extremities and
also increase the likelihood of developing chronic
wounds such as diabetic foot ulcers and venous ulcers.
The Company’s patents associated with Oxoferin
have expired.
Intellectual Property
The pharmaceutical industry is a highly competitive
sector where long-term success depends upon
developing safe and effective proprietary products.
In July 2012, the U.S. Patent Office issued the
Pennsaid Patent with an expiry date of July 10, 2029.
The Pennsaid Patent is listed in the FDA’s Orange
Book. In addition, there are additional U.S. patent
applications relating to methods of using Pennsaid that
are currently pending.
The European composition of matter patent for
Pennsaid (covering Austria, Belgium, France, Germany,
Italy, Liechtenstein, Luxembourg, Netherlands,
Sweden, Switzerland and the United Kingdom) expired
in June 2006. In Italy, the Supplementary Protection
Certificate that extended the life of this patent expired
in March 2011.
Nuvo Research Inc. Annual Report 2012 13
Management’s Discussion and Analysis cont’d
Pennsaid 2%
The Company has filed patent applications to cover
Pennsaid 2% and other related formulations in a
number of jurisdictions worldwide. The South African
and New Zealand patents covering Pennsaid 2%
were granted in 2010 and 2012, respectively. In
addition, the U.S. Patent Office issued U.S. Patent
No. 8,252,838 relating to compositions and methods
of using Pennsaid 2% in September of 2012. The U.S.
Pennsaid 2% patent expires on April 21, 2028. There
are additional patent applications pending in the U.S.
that relate to the Pennsaid 2% franchise.
Pliaglis
Through the acquisition of ZARS, the Company owns
two patent families which cover Pliaglis. Claims are
directed to compositions of matter and methods of use.
A number of patents have issued in Austria, Belgium,
Canada, China, Cyprus, Denmark, Finland, France,
Germany, Great Britain, Greece, Ireland, Italy,
Luxemburg, Monaco, Netherlands, Portugal, Spain,
Sweden, Switzerland, and the U.S. In addition, a patent
application is pending in Japan. Of the two patent
families, the latest expiry date is 2019 in the U.S. and
2020 in countries outside of the U.S.
The Company owes royalties to two companies for
1% and 1.5% of sales of Pliaglis.
Synera
With the acquisition of ZARS, the Company acquired
several patent families covering the Synera patch,
methods of manufacture and methods of use. One
family specifically covers the Synera patch with
composition of matter claims, manufacture claims and
method of use claims (prescribed indications). In this
family, a number of patents have issued in Austria,
Belgium, Canada, China, France, Germany, Great
Britain, Italy, Netherlands, Spain, Sweden, Switzerland,
and the U.S. Several patent applications are also
pending in various jurisdictions. Of the several patent
families, the latest expiry date is 2020 worldwide.
Additionally, two patent families directed to new
methods of use are currently pending with anticipated
expiry dates of 2030 and 2031 upon grant.
The Company owes royalties to two companies for
1% and 1.5% of sales of Synera.
WF10 and Oxoferin
With the acquisition of Oxo Chemie on May 31, 2002,
the Company acquired patents relating to the immune
regulation technology underlying WF10 some of which
have since expired. The Company does not hold
composition of matter patents on WF10 itself or on all
its potential uses, but does hold patents and has filed
14 Nuvo Research Inc. Annual Report 2012
patent applications for particular prescribed uses of
WF10. For example, the Company has an issued patent
and an allowed patent application in the U.S. related
to a method of using WF10 and Reformulated WF10
to treat allergic asthma, allergic rhinitis and atopic
dermatitis. In 2011, the Company conducted research
with a view to developing an improved version of
WF10. These research efforts led to the filing of a new
U.S. provisional patent application in December 2011.
In 2012, an international PCT application and a U.S.
patent application were filed claiming priority to this
provisional application.
All Oxoferin composition of matter patents have
expired. The Company is conducting research with a
view to developing an improved version of Oxoferin
with enhanced wound healing abilities. In 2011,
these research efforts led to the filing of an
international PCT application that covers a new
version of Oxoferin. The Company also filed a U.S.
provisional patent application in 2011 covering
new compositions and methods for wound healing.
In 2012, an international PCT application was filed
claiming priority to this provisional application.
Developing patent protection for its platforms and
future products is a key driver for the long-term
success of Nuvo. With this goal in mind, the Company
has acquired patents, patent rights and applied for
patents to protect its early stage drug development
candidates in the field of pain and dermatology.
Manufacturing
Nuvo’s long-term business strategy does not require
internal manufacturing capability as partners or
contracted third parties could be contracted to produce
future drug products developed by the Company.
However, as the Company already has production
facilities for its current commercial drug Pennsaid, the
follow on product Pennsaid 2% and the drug
substance for Synera, management has decided to
continue operating its own manufacturing facility for
the foreseeable future.
In February 2000, the Company acquired its existing
manufacturing facility in Varennes, Québec with
manufacturing, bottling and packaging capabilities and
a research laboratory and, shortly thereafter, received
an Establishment License from Health Canada in
recognition of compliance with Good Manufacturing
Practices (GMP) regulations. Since November 2000,
the facility has been approved for the manufacture,
testing and warehousing of drug products destined for
member countries in the European Union by the United
Kingdom Medicines Control Agency. In 2011 the plant
was inspected by Canada’s Health Products and Food
Branch Inspectorate and found to be compliant with
Canadian Drug GMP requirements. In September 2012
and March 2013, the plant passed two FDA inspections
as part of the U.S. Pennsaid 2% NDA review and U.S.
Synera sNDA review. The facility remains in compliance
with current GMP regulations and is the site for
commercial production of Pennsaid worldwide.
Since 2010, the Company has not pursued contract
manufacturing opportunities from third parties as it
had done historically, as it has been focused on the
supply of Pennsaid for the U.S. launch and planning
and validation for the production of Pennsaid 2% and
the drug substance for Synera.
In 2011, the Company relocated certain ZARS’
production equipment to Varennes so it would have
the capability and capacity to manufacture several
of ZARS’ drugs and drug candidates, including the
drug product for Synera that is used in the patches that
are currently manufactured by a third party. The
Company has filed an sNDA with the FDA to transfer
manufacturing to Varennes and expects to begin
commercial production of the drug product in mid 2013.
In 2012, the Company modified one of its Pennsaid
manufacturing lines to provide the Company with the
capacity to meet the anticipated demand for Pennsaid
2% sales in the U.S., if approved by the FDA.
The Company also owns a 3,000 square foot
manufacturing facility in Wanzleben, Germany,
acquired in May 2002 as part of the Oxo Chemie
acquisition. This plant produces OXO-K993, the
active ingredient in WF10 and Oxoferin.
C A PA B I L I T Y T O D E L I V E R R E S U LT S
Nuvo will need to spend considerable resources to
research, develop, commercialize and manufacture its
products and technologies. The Company may finance
these activities through: existing cash and cash
equivalents; revenue generated by product sales,
royalties and sales and other milestones under existing
agreements; licensing and co-development agreements
for other new drug candidates or for its existing
products in territories where they are not currently
licensed; or by raising funds in the capital markets.
The Company is or will be dependent on its commercial
partners for the sales and marketing of its products in
the following territories:
• Pennsaid – in the U.S., Canada, Greece and Italy;
• Pennsaid 2% – U.S., Canada, South Africa, Israel
and Central and South America;
• Synera – Europe, Russia and many of its former
republics, Turkey, Israel and the People’s Republic
of China;
• Pliaglis – throughout the world; and
• Oxoferin – Venezuela, Russia, and several
Asian countries.
The Company has broad in-house talent with the
capability to commercialize and develop its pipeline.
To execute the current business plan, the Company may
selectively add key personnel and in the future may
need to hire more staff as activities expand. In addition,
the Company has access to the commercial, regulatory
and scientific expertise of its advisory boards to assist it
through all aspects of the commercialization and drug
development process.
GOALS
In order to achieve the Company’s vision of becoming
a leader in the development and commercialization of
pharmaceutical products for the treatment of pain, in
May 2011, the Company began a major transformation
when it acquired ZARS. This transaction shifted the
focus of the Company from early stage drug
development to later stage drug development and
commercialization. This transformational acquisition
added two approved products, Synera and Pliaglis, a
pipeline of pain products in various stages of
development and two important drug delivery platforms.
For 2013, the Company will focus on four main goals:
successfully selling Synera in the U.S. to national
accounts and building the sales with its existing
customers; the launch of Pliaglis in Europe and the
U.S.; assisting Covidien with the studies required in
response the CRL from the FDA for Pennsaid 2% and
selectively advancing the development plan for WF10,
while at the same time effectively managing the
Company’s cash resources.
In addition to devoting a portion of its own resources
towards drug development, Nuvo, with its broadened
scope of products, knowledge and capabilities
believes it is well positioned to acquire additional
pain products and to acquire and develop new and
existing drug product candidates. Nuvo may
commercialize these products or develop them to
significant milestones using internal resources and may
look for a co-development or licensing partners to
mitigate the risk and improve the odds of success.
Nuvo Research Inc. Annual Report 2012 15
Management’s Discussion and Analysis cont’d
• the entry of a generic version of Pennsaid into the
U.S. as this may trigger an event of default on the
Paladin Debt and may significantly reduce revenue
and cash flow;
Nonetheless, companies in the pharmaceutical R&D
industry typically require periodic funding in order
to develop drug candidate pipelines until such time as
at least one drug candidate has been successfully
commercialized such that they are receiving sufficient
revenue to fund their operations. Nuvo has not yet
reached this stage and; therefore, the Company
monitors on a regular basis, its liquidity position, the
status of its commercialization efforts and those of its
partners, the status of its drug development programs,
including cost estimates for completing various stages
of development, the scientific progress on each drug
candidate, the potential to license or co-develop each
drug candidate and continues to actively pursue fund
raising possibilities through various means, including
the sale of its equity securities. There can be no
assurance that additional financing would be available
on acceptable terms, or at all, when and if required. If
adequate funds were not available when required, the
Company may have to substantially reduce or eliminate
planned expenditures, discontinue its marketing efforts
for Synera in the U.S., terminate or delay clinical trials
for its product candidates, curtail product development
programs designed to expand the product pipeline or
discontinue certain operations such as the Immunology
Group. If the Company is unable to obtain additional
financing when and if required, the Company may be
unable to continue operations.
• the ability to gain marketing approval in the
remaining 2 European countries and Galderma’s
ability to successfully launch Pliaglis in the E.U.
as it will earn royalties on this product;
The Consolidated Financial Statements do not include
adjustments to the amounts and classification of assets
and liabilities that would be necessary should the
Company be unable to continue as a going concern.
LIQUIDITY
The Company has incurred substantial losses since its
inception, as it has invested significantly in drug
development activities and other legacy ventures. At
December 31, 2012, the Company had an accumulated
deficit of $221.2 million, including a net loss of
approximately $13.6 million for the year then ended
which included an $11.9 million non-cash charge
related to the impairment of intangible assets and
goodwill. As at December 31, 2012, the Company had
cash and cash equivalents of $12.1 million.
The Company expects that it will continue to incur
losses as its revenue streams are not yet sufficient to
fund: its operations, the infrastructure necessary to
support Synera in the U.S., the infrastructure necessary
to support a public company and the costs of
selectively advancing its drug development pipeline.
The Company’s ability to continue as a going concern
depends on:
• the success of its approved products Pennsaid and
Synera, as it earns revenue from these products in
the form of royalties and product sales and has the
ability to earn milestone payments;
• Galderma’s ability to successfully relaunch Pliaglis
in the U.S., as the Company will earn royalties on
this product;
• the approval of Pennsaid 2% in the U.S.; and
• its ability to secure additional licensing fees, secure
co-development agreements, obtain additional
capital, gain regulatory approval for other drugs and
ultimately achieve profitable operations.
The Company currently anticipates that its cash and
cash equivalents, together with the revenues it expects
to generate from product sales of Pennsaid and Synera,
royalty payments from its Canadian and U.S. Pennsaid
licensing agreements and Pliaglis licensing agreements,
once Pliaglis is launched will be sufficient to fund
operations in 2013.
16 Nuvo Research Inc. Annual Report 2012
S E L E C T E D F I N A N C I A L I N F O R M AT I O N
Year ended
December 31, 2012
Year ended
December 31, 2011
in thousands (except per share and share information)
(restated)
O P E R AT I O N S
Product sales
Cost of goods sold
$
8,936
7,275
$
8,948
7,269
GROSS MARGIN ON PRODUCT SALES
1,661
1,679
Royalties
Licensing fees
Research and other contract revenue
8,284
7,252
178
5,771
1,641
373
17,375
9,464
Operating expenses
21,229
18,797
Loss from operations
(3,854)
(9,333)
9,513
(2,606)
Loss before income taxes
Income taxes
(13,367)
196
(6,727)
104
Net loss
Other comprehensive income (loss)
(13,563)
(544)
(6,831)
1,097
T O TA L C O M P R E H E N S I V E L O S S
(14,107)
(5,734)
(14,107)
–
(4,433)
(1,301)
Other (income) expenses
C O M P R E H E N S I V E L O S S AT T R I B U T I O N
Owners of the parent
Non-controlling interest
$
(14,107)
$
(5,734)
S H A R E I N F O R M AT I O N
Net loss per share – basic and diluted
Average number of common shares outstanding for the period (in millions)
– basic and diluted
(0.024)
(0.014)
567.7
489.3
FINANCIAL POSITION
Cash and cash equivalents
Total assets
Finance lease & other obligations, including current portion
Total liabilities
Total equity
$
12,149
28,485
3,258
7,016
21,469
$
14,724
44,854
544
9,944
34,910
Nuvo Research Inc. Annual Report 2012 17
Management’s Discussion and Analysis cont’d
Non-IFRS Financial Measure
Loss from operations is a non-IFRS financial measure
that does not have a standardized meaning prescribed
by IFRS. However, the Company believes that the
loss from operations is a useful measure as it provides
investors with an indication of the performance of the
Company before considering gains or losses from foreign
exchange or items that are non-recurring transactions.
Fluctuations in Operating Results
The Company’s results of operations have fluctuated
significantly from period-to-period in the past and are
likely to do so in the future. The Company anticipates
that its quarterly and annual results of operations will
be impacted for the foreseeable future by several factors,
including the level of Pennsaid’s U.S. net sales and
Canadian net sales which impacts royalty payments, the
level of sales attained by Synera in the U.S., the timing
and amount of royalties and other payments received
pursuant to current and future collaborations and
licensing arrangements, including those for Pliaglis and
Synera and the progress and timing of expenditures
related to R&D efforts. Due to these fluctuations, the
Company believes that the period-to-period comparisons
of its operating results are not necessarily a good
indicator of future performance.
SIGNIFICANT TRANSACTIONS
2012
Paladin
In May 2012, the Company entered into a license and
supply agreement with Paladin granting Paladin
in thousands
Cash consideration
99.8 million common shares issued
ZARS Contingent Consideration
exclusive Canadian rights to market and sell Synera,
upon regulatory approval. Under the terms of the
agreement, Nuvo will receive a double digit royalty on
net sales of Synera in Canada and will supply Synera to
Paladin. Paladin is responsible for obtaining regulatory
approval for Synera in Canada.
In addition, Paladin has agreed to loan Nuvo $8.0 million
in two equal tranches of $4.0 million each. The first
tranche was advanced on closing and the second
tranche can be drawn by Nuvo, at its option, upon the
achievement of predefined milestones. The loan will
bear interest at a rate of 15% per annum and matures
on May 25, 2016. The loan is secured by a charge over
the assets of Nuvo’s Pain Group.
2011
ZARS Acquisition
On May 12, 2011 (the Acquisition Date), the Company
obtained control of ZARS by acquiring all of the
issued and outstanding shares of ZARS. ZARS is a
U.S. based specialty pharmaceutical company focused
on the development and commercialization of topically
administered drugs, primarily with respect to pain. The
ZARS acquisition significantly broadened the
Company’s pain pipeline by adding two approved
products, Synera and Pliaglis, a pipeline of pain
products in various stages of development and two
important drug delivery platforms; thereby, advancing
the Company’s step-by-step approach to transforming
the Pain Group into a leader in the topical pain space.
The following summarizes the Acquisition Date fair
value of the major classes of consideration transferred:
$
149
9,488
5,084
Total consideration
Less cash acquired
14,721
1,626
Total consideration, net of cash acquired
13,095
The fair value of the common shares issued is based on
the Company’s listed share price of $0.105 at the
Acquisition Date, less an adjustment to reflect that the
recipients of these shares were subject to a “lock-up
Covenant” such that they could not sell or transfer the
shares until December 31, 2011. In addition to the
total consideration, the Company incurred acquisition
related costs of approximately $1.1 million for
external consulting, professional and legal fees and
costs related to conducting due diligence. These costs
have been included in general and administrative
expenses (G&A) in the Company’s Consolidated
Statements of Comprehensive Loss for the year ended
18 Nuvo Research Inc. Annual Report 2012
December 31, 2011. In addition, the Company
incurred $67,000 in costs directly related to issuing the
shares to ZARS. These costs were directly recorded as
a reduction to common shares in equity. The Company
received net cash of $1.5 million on the acquisition of
ZARS representing acquired cash and cash equivalents
of $1.6 million, net of $0.1 million of cash
consideration paid on closing.
The fair value of the total consideration (Total
Consideration) was directly impacted by management’s
estimates at the Acquisition Date of the probability of
the Company achieving certain milestones related to
Pliaglis, Synera and Pennsaid, which if achieved or in
some cases not achieved, would result in the issuance
of up to 114.6 million additional common shares
(Milestone Shares) to the former ZARS shareholders
(ZARS Contingent Consideration). The ZARS
Contingent Consideration consisted of:
• 74,870,000 Nuvo shares which only become
payable if the Company, prior to December 31,
2012, achieved both (i) the re-approval of Pliaglis
by the FDA and the first commercial sale of Pliaglis
in the U.S. by Galderma after such re-approval,
and (ii) the approval of Pliaglis by the Germany’s
Federal Institute for Drugs and Medical Devices
(Bundesinstitut für Arzneimittel und
Medizinprodukte) BfArM and the first commercial
sale of Pliaglis in Europe by Galderma (Pliaglis
Milestone); and
• 39,750,000 (three separate milestones of
13,250,000) Nuvo shares payable upon certain
future events.
The Total Consideration was allocated to the
underlying assets acquired and liabilities assumed
based upon their fair value at the Acquisition Date.
The Company determined its estimates of fair values
based on discounted cash flows, market information,
independent valuations and other information.
Identifiable assets, liabilities and goodwill:
$
in thousands
Total consideration
Cash
Non-cash working capital
Property and equipment
Intangible assets
Bank debt
Deferred revenue
Net identifiable assets and liabilities
Residual purchase price allocated to goodwill
The terms of the acquisition included a mechanism to
reimburse the Company for certain working capital
adjustments that occurred subsequent to the
Acquisition Date. Under this mechanism, the Company
could elect to be reimbursed for the amount of the
adjustment in cash or could compel the former ZARS
shareholders to return a sufficient number of Nuvo
common shares to satisfy the obligation. During the
year ended December 31, 2011, a $32,000 adjustment
was calculated and 415,385 common shares with a
value of $32,000 were returned to the Company and
subsequently cancelled. The value of these cancelled
common shares was recorded as a reduction to
common shares in equity.
In October 2011, one of the milestones relating to the
ZARS Contingent Consideration was achieved and in
November 2011, the Company issued an additional
13,034,191 common shares and $16,000 cash to the
former ZARS shareholders. The fair value of this
milestone in the Total Consideration was $137,000
and was transferred to common shares, net of the
$16,000 cash paid in lieu of common shares.
At December 31, 2012, the Pliaglis Milestone was not
achieved. In addition, there were 2 additional
milestones representing 13.25 million shares each that
were contingent upon the achievement of the Pliaglis
14,721
1,626
(2,621)
457
16,007
(3,022)
(1,982)
10,465
4,256
Milestone (Pliaglis Condition Milestones). Therefore,
101.3 million remaining Milestone Shares are no
longer issuable and the Company has no further
obligations to the ZARS’ former shareholders to issue
the Milestone Shares.
Through December 31, 2012, the Company had issued
a total of 112,440,942 common shares related to the
ZARS Acquisition as follows: 99,822,136 common
shares issued on the Acquisition Date, 13,034,191
issued upon the achievement of one of the milestones
relating to the ZARS Contingent Consideration, less
415,385 that were returned to the Company in
satisfaction of the working capital adjustment and
subsequently cancelled.
Restatement of ZARS Contingent Consideration
The Company incorrectly applied IAS 32 Financial
Instruments: Presentation, such that the remaining fair
value of contingent consideration of $3.3 million was
incorrectly classified as contributed surplus when it still
met the definition of a financial liability. Management
had treated the separate milestones of contingent
consideration as distinct targets, independent of one
another, issuing a fixed number of the Company’s
common shares per milestone. However, the merger
agreement, as legally written, required the success of
the Pliaglis Milestone to be complete in order for the
Nuvo Research Inc. Annual Report 2012 19
Management’s Discussion and Analysis cont’d
Pliaglis Conditional Milestones to be eligible for award
subject to the achievement of the triggering mechanisms
in each of these milestones which deemed the milestones
as interdependent. As the milestones were interdependent,
a variable number of shares could be delivered. The
classification of the obligation should have been based
on the overall arrangement, and since the arrangement
called for a variable number of shares to be delivered,
IAS 32 deems that the arrangement should have been
classified as a financial liability and revalued at every
reporting date thereafter. As at June 21, 2011, the
Company restated the contributed surplus of $3.3 million
as a liability and recorded changes in income (loss)
based on changes in the Company’s share price in
future reporting quarters and the revised probability
attached to achieving the Pliaglis Milestone. When one
of the milestones was achieved in October 2011, as
noted above, the $137,000 debit to contributed surplus
would have reduced the liability from $3.3 million
to $3.2 million. The effect of the restatement on the
Company’s Consolidated Financial Statements at
December 31, 2011 was as follows:
$
in thousands
Increase to current liabilities
Increase in gain on ZARS Contingent Consideration and
decrease to net loss and accumulated deficit
(2,300)
Decrease in contributed surplus
(3,177)
(877)
The quarterly effect of the restatement on the Company’s Consolidated Financial Statements is stated below for the
three months ending:
June 30, 2011
in thousands
ZARS Contingent Consideration liability
Contributed surplus
Deficit
Gain on ZARS Contingent Consideration
Net loss
Net loss per common share
– basic and diluted
ZARS Contingent Consideration liability
Contributed surplus
Deficit
Loss (gain) on ZARS
Contingent Consideration
Net income (loss)
Net loss per common share
– basic and diluted
Restated
$
Previously
Stated
$
Restated
$
Previously
Stated
$
Restated
$
–
16,341
(200,000)
(1,770)
(558)
3,840
13,027
(200,525)
(1,245)
(1,083)
–
16,470
(201,747)
–
(2,203)
3,599
13,156
(202,032)
(240)
(1,963)
–
16,405
(208,465)
–
(2,582)
2,300
13,228
(207,588)
(1,162)
(1,420)
(0.001)
(0.002)
(0.004)
(0.004)
(0.005)
(0.003)
June 30, 2012
September 30, 2012
Previously
Stated
$
Restated
$
Previously
Stated
$
Restated
$
Previously
Stated
$
Restated
$
–
16,359
(210,572)
4,600
13,182
(211,995)
–
16,539
(207,240)
3,910
13,362
(207,973)
–
16,711
(210,396)
2,760
13,534
(209,979)
–
(2,107)
2,300
(4,407)
–
3,332
(690)
4,022
–
(3,156)
(1,150)
(2,006)
(0.004)
(0.008)
0.006
0.007
(0.006)
(0.004)
As at December 31, 2012, the remaining milestones for
the ZARS Contingent Consideration were not achieved
and the liability was derecognized resulting in an
accumulated gain of $2.3 million for the year then
ended. The gains (losses) that would be recorded on the
20 Nuvo Research Inc. Annual Report 2012
December 31, 2011
Previously
Stated
$
March 31, 2012
in thousands
September 30, 2011
ZARS Contingent Consideration are non-cash and by
the end of the year ended December 31, 2012 total
equity remained unchanged, as the liability was
derecognized and the contingent consideration was
restated in accumulated deficit from contributed surplus.
Acquisition of Non-Controlling Interest
On December 13, 2011, the Company increased its
ownership in Nuvo Research AG to 100% by acquiring
the 40% interest held by the minority owner. In
accordance with IAS 27, as there was no change in
control of Nuvo Research AG, the difference between
the amount by which the non-controlling interest was
adjusted and the fair value of the consideration paid
was recognized directly in equity and attributed to
the owners of the parent. The following summarizes
the fair value of the $2.3 million in consideration
transferred to the non-controlling interest:
• 31,947,668 Nuvo common shares at an agreed
price of US$1.7 million ($1.7 million) and in
full settlement of a 68,000 euro loan payable to
the minority owner; and
• A five-year, US$150,000 per annum consulting
agreement with the former minority shareholder,
with a fair value of US$519,000 ($528,000) when
discounted at 15.5%.
The following summarizes the difference between the
amount by which the non-controlling interest was
adjusted and the fair value of the consideration paid to
acquire the non-controlling interest which is the
amount recognized directly in equity and attributed to
the owners of the parent in December 2011:
$
in thousands
Accumulated losses attributed to non-controlling interest
Accumulated other comprehensive income attributed to non-controlling interest
Transferred consideration
2,004
92
2,256
Accrued acquisition costs and other
20
Total impact to equity attributable to the parent
As the five-year consulting agreement is deemed to be
consideration for the acquisition of the non-controlling
interest, it is recorded as a liability as other obligation,
4,372
on the Consolidated Statements of Financial Position
and accreted, through charges to interest expense, to its
nominal value over its term.
R E S U LT S O F C O N T I N U I N G O P E R AT I O N S
Product Sales and Gross Margin
Year ended
December 31, 2012
$
Year ended
December 31, 2011
$
Pennsaid sales
Synera sales
WF10 sales
7,119
1,153
664
7,560
681
707
Total product sales
Cost of goods sold
8,936
7,275
8,948
7,269
Gross margin on product sales
1,661
1,679
in thousands (except gross margin percentage)
Gross margin percentage
Product sales for the year ended December 31, 2012
were consistent at $8.9 million compared to the year
ended December 31, 2011. Sales of Pennsaid products
were the most significant accounting for 80% of total
product sales for the year ended December 31, 2012
versus 84% for the year ended December 31, 2011.
19%
19%
Pennsaid sales
Sales of Pennsaid decreased to $7.1 million for the year
ended December 31, 2012 compared to $7.6 million
for the year ended December 31, 2011. Sales in the
comparative period included $1.6 million of Pennsaid
samples, the format given to physicians by sales
Nuvo Research Inc. Annual Report 2012 21
Management’s Discussion and Analysis cont’d
representatives for physicians to provide trial size
bottles to their patients. In November 2011,
Mallinckrodt advised the Company that at the request
of the FDA, Mallinckrodt ceased distribution of the
sample format due to five reports of patients who
had used an incorrect route of drug administration.
In June 2012, Mallinckrodt resumed distribution
of the sample format to U.S. healthcare professionals;
however, the samples distributed are from
Mallinckrodt’s existing inventory. Commercial sales
of Pennsaid increased to $7.1 million from
$6.0 million in the comparative period. The increase
is primarily due to $1.2 million in higher sales to
Mallinckrodt. In January 2012, Endo Pharmaceuticals
Holdings Inc. (Endo) indicated that there would be
temporary shortages in the U.S. of its licensed product,
Voltaren Gel, as a result of manufacturing issues
unrelated to Voltaren Gel. These product shortages,
which ended during the second quarter, contributed to
the increase in Pennsaid shipments to Mallinckrodt.
Sales to Greece increased slightly to $2.2 million
compared to $2.1 million. The majority of sales in
2011 occurred prior to the Greek austerity measures
where all topical antirheumatics, including Pennsaid,
lost government reimbursement. In addition, Pennsaid
was reclassified as an OTC product and in late 2011,
was relaunched by the Company’s Greek partner as an
OTC product. In addition, sales to the Company’s
Canadian partner increased by $0.2 million. Partially
offsetting these increases was a decrease of
$0.3 million in sales to Nuvo’s Italian distributor.
Geographically for the year ended December 31, 2012,
sales in the U.S. were $3.2 million or 45% of total
Pennsaid product sales [December 31, 2011 – $3.6
million or 47%], sales in Europe were $2.9 million or
41% of Pennsaid product sales [December 31, 2011 –
$3.2 million or 42%] and sales in Canada were
$1.0 million representing 14% of Pennsaid’s product
sales [December 31, 2011 – $0.8 million or 11%].
The Company expects that U.S. product sales may
decline in absolute amount and as a percentage of
Pennsaid’s total product sales, as 2012 sales benefitted
from the Voltaren Gel product shortage. In addition,
Canadian product sales may decline in absolute
amount and as a percentage of Pennsaid’s total product
sales, as a competitor’s generic version of Pennsaid was
approved in Canada during 2010 and could be
launched at any time. It is not known, if or when, the
generic version of Pennsaid will be sold in the
Canadian market.
22 Nuvo Research Inc. Annual Report 2012
Synera sales
Synera sales for the year ended December 31, 2012
were $1.2 million compared to $0.7 million for the
year ended December 31, 2011. In 2011, sales of
Synera commenced on May 12, 2011, the date the
Company acquired Synera as part of the ZARS
Acquisition. The Company earns revenue from Synera
in the U.S. based on its net product sales calculated as
gross sales less chargebacks, rebates, distribution fees,
allowances for returned product and other customary
deductions. The Company directly markets Synera in
the U.S. and in February 2012, the Company launched
Synera with a dedicated pain specialty contract sales
force targeting interventional pain physicians. In the
fall of 2012, the Company refocused its resources on
large national accounts such as dialysis centers,
infusion centers and blood diagnostic laboratories.
To execute this strategy, the Company terminated its
agreement with its contract sales organization (CSO)
and will use its internal Pain Group commercial
team to focus on the national accounts and the key
interventional pain doctors who use Synera.
WF10 sales
Sales of WF10 for the year ended December 31, 2012
were $0.7 million consistent with the year ended
December 31, 2011. The Company experienced an
increase in sales to its distributor in Venezuela, but this
was offset by an overall decrease in translated revenues
due to the weakening of the euro.
Gross margin
For the year ended December 31, 2012, the gross
margin on product sales was consistent at $1.7 million
versus a year ago. A decrease in the gross margin
for Pennsaid primarily related to lower product sales
and a planned four-week shutdown of the Pennsaid
manufacturing facility during the third quarter to
prepare for the U.S. launch of Pennsaid 2%
(if approved by the FDA), was offset by the margin
related to higher Synera sales. During the shutdown,
the Company did not produce any Pennsaid and all
fixed overhead during this period were expensed and
not absorbed into inventory.
The gross margin percentage for the year ended
December 31, 2012 was consistent at 19% with the
comparative period.
OTHER REVENUE
Year ended
December 31, 2012
$
Year ended
December 31, 2011
$
8,284
7,252
178
5,771
1,641
373
15,714
7,785
Year ended
December 31, 2012
Year ended
December 31, 2011
Pennsaid U.S. scripts
295,000
167,000
Pennsaid U.S. 150ml bottles dispensed
391,000
217,000
in thousands
Royalties
Licensing fees
Research and other contract revenue
R O YA LT Y R E V E N U E
Royalty revenue is the most important source of ongoing
revenue the Company receives, as there are nominal costs
associated with this revenue. In the U.S., according to
IMS Data, a provider of dispensed prescription data,
approximately 295,000 Pennsaid prescriptions were
dispensed in 2012, an increase of 77%. For each
prescription, approximately 1.32 bottles of Pennsaid
were dispensed for the year ended December 31, 2012.
Royalty revenue increased to $8.3 million for the year
ended December 31, 2012 compared to $5.8 million
for the year ended December 31, 2011. The increase
in royalty revenue is primarily due to increased Pennsaid
sales in the U.S. In January 2012, Endo indicated
that there would be temporary shortages in the U.S. of
its licensed product, Voltaren Gel, as a result of
manufacturing issues unrelated to Voltaren Gel. These
product shortages, which ended during the second
quarter, contributed to the increase in Pennsaid
royalties. Partially offsetting this increase was a
decrease in the Company’s licensee’s net sales (defined
as gross sales less estimates for chargebacks, rebates,
sales incentives and allowances, returns and losses and
other customary deductions) during the year, as the
Company’s U.S. licensee incurred significantly higher
rebates related to new reimbursement coverage that
commenced in 2012 compared to the prior year.
Royalty revenue earned from the Company’s Canadian
licensee was consistent with the comparative period at
$1.2 million. Royalties related to sales of Rapydan and
the global sales of Pliaglis were not significant.
The Company receives royalties from its U.S. and
Canadian licensees of Pennsaid, from Eurocept, its
European licensee for Rapydan (the European brand
name for Synera) and from Galderma, its global licensee
for Pliaglis. Royalties from each licensee are determined
using agreed upon formulas based upon a definition of
the licensee’s net sales as defined in each licensing
agreement. While the Company receives royalty
payments quarterly, it can only recognize the amount as
revenue when reasonable assurance exists regarding
measurement and collectability. The Company recognizes
royalty revenue based on the net sales of each licensee.
License Fees
License fees were $7.3 million for the year ended
December 31, 2012, versus $1.6 million for the year
ended December 31, 2011. In 2012, the increase in
license fee revenue of $5.7 million was primarily
attributable to a milestone payment earned by the
Company of US$6.0 million ($6.2 million). Under the
terms of the licensing agreement with Galderma, the
Company is entitled to receive milestones payments
upon the marketing approval of Pliaglis in the first
three European countries which were all earned in the
year. Partially offsetting this increase was a decrease of
$0.5 million related to the licensing arrangements with
Galderma for Pliaglis. Under the terms of these
licensing arrangements, ZARS received an upfront
payment of US$6.0 million in 2009 and was required to
assist in correcting the manufacturing issues and to
prepare and submit the MAA and manage the
regulatory process for Pliaglis in Europe until approval.
The amount was amortized on a straight-line basis over
the respective performance period which ended in May
2012. The remaining balance in the current and
comparative period was comprised of $0.3 million
related to the recognition of a portion of the upfront
fees received from Paladin in 2005 for the Canadian
marketing rights for Pennsaid.
Nuvo Research Inc. Annual Report 2012 23
Management’s Discussion and Analysis cont’d
Research and Other Contract Revenue
Research and other contract revenue for the year ended
December 31, 2012 decreased to $0.2 million compared
with $0.4 million for the year ended December 31, 2011.
These revenues were mainly derived from development
services provided by the Company to Mallinckrodt.
in thousands, except percentages
Four largest customers
% of total revenue
Largest customer as % of total revenue
Significant Customers
As the Company sells product and receives royalties in
a limited number of markets through exclusive
agreements, it receives most of its revenue from a
limited number of customers. Revenue, derived from
the Company’s current four largest customers, is
illustrated in the following table:
Year ended
December 31, 2012
$ 21,990
89%
42%
Year ended
December 31, 2011
$ 13,803
83%
51%
O P E R AT I N G E X P E N S E S
in thousands
Research and development
Selling and marketing
General and administrative
Interest expense (income), net
Total operating expenses
Year ended
December 31, 2012
$
Year ended
December 31, 2011
$
6,849
4,892
9,123
365
7,323
1,312
10,306
(144)
21,229
18,797
Total operating expenses for the year ended December 31,
2012 were $21.2 million compared to $18.8 million for
the year ended December 31, 2011. The increase in
operating expenses primarily related to sales and marketing
(S&M) costs for the Company’s launch of Synera in the U.S.
R&D expenditures vary depending on the stage of
development of drug products and candidates in the
Company’s pipeline and management’s allocation of the
Company’s resources to these activities in general and
to each drug specifically.
Research and Development
R&D expenses were $6.8 million for the year ended
December 31, 2012 compared to $7.3 million for the
year ended December 31, 2011. The decrease in R&D
expenses was attributable to the closure of the
Company’s San Diego research facility in 2011, a
corresponding reduction in the size of the Company’s
early stage R&D team and the costs associated with
preparing and filing the Investigational New Drug
(IND) application for NRI-ANA that were partially
offset by:
Sales and Marketing
S&M expenses were $4.9 million for the year ended
December 31, 2012 compared to $1.3 for the year
ended December 31, 2011. S&M expenses relate
entirely to Synera. In February 2012, the Company
launched Synera in the U.S., targeting interventional
pain physicians with a dedicated pain specialty contract
sales force using a CSO. In August 2012, the Company
refocused its resources on large national accounts such
as dialysis centers, infusion centers and blood
diagnostic laboratories. To execute this strategy, the
Company terminated its agreement with its CSO for
$0.2 million and also terminated two members of the
Pain Group management team focused on the
interventional pain doctor initiative. The Pain Group’s
internal commercial team will continue to focus on the
national accounts and the key interventional pain
doctors who use Synera.
• The costs associated with ongoing research for Synera;
• The operating costs associated with the Company’s
laboratory in Varennes, Québec and its CMC,
medical affairs and regulatory groups in
Mississauga, Ontario, West Chester, Pennsylvania
and Salt Lake City, Utah; and
• External work in the areas of CMC, intellectual
property and preclinical work on early stage pain
drug candidates.
24 Nuvo Research Inc. Annual Report 2012
General and Administrative
G&A expenses were $9.1 million for the year ended
December 31, 2012 compared to $10.3 million for the
year ended December 31, 2011. The decrease is related
to $1.1 million in consulting, professional and other
fees incurred in completing the ZARS Acquisition in the
comparative period. The balance of the decrease related
to lower termination benefits.
Interest
Interest expense was $0.4 million for the year ended
December 31, 2012 compared to $8,000 for the year
ended December 31, 2011. The increase was attributable
to the 15% per annum interest cost related to the
$4.0 million loan with the Company’s Canadian partner
(See – Significant Transactions – 2012 – Paladin) and to
the non-cash accretion charges on the five-year
consulting agreement as part of the consideration paid
for the acquisition of the non-controlling interest.
Interest income decreased to $16,000 for the year ended
December 31, 2012 compared to $152,000 for the year
ended December 31, 2011. The decrease was related to
lower average cash balances for the year ended December
31, 2012 versus the year ended December 31, 2011.
The aggregate result was net interest expense of
$0.4 million for the year ended December 31, 2012
compared to net interest income of $0.1 million for the
year ended December 31, 2011.
Loss from Operations
Loss from operations decreased to $3.9 million for
the year ended December 31, 2012 compared to
$9.3 million for the year ended December 31, 2011.
The decrease in loss was attributable to $6.2 million of
milestone revenue earned from Galderma and higher
royalty revenue, offset partially by higher operating
expenses primarily related to the S&M costs associated
with selling Synera in the U.S.
OTHER (INCOME) EXPENSES
Year ended
December 31, 2012
Year ended
December 31, 2011
(restated)
in thousands
Impairment of intangible assets and goodwill
Litigation settlement
Gain on disposal of property, plant and equipment
Gain on ZARS Contingent Consideration
Foreign currency loss
Total other (income) expense
Impairment of Intangible Assets and Goodwill
The Company reviewed the carrying values of the
intangible assets for potential impairment at December
31, 2012 as commercial efforts for Synera and the
launch timing for Pliaglis did not meet expectations.
Indications for impairment did exist, and management
determined that each asset was impaired, such that
recoverable amounts were lower than the carrying
amounts. The recoverable amount and value in use
(being the present value of expected future cash flows)
was calculated using licensing partner revenue forecasts,
net of direct costs forecasted by management. The
Company recorded an impairment charge for Synera
of $0.3 million and an impairment charge for Pliaglis
of $7.2 million.
The U.S. operations dedicated to generating cash
inflows for Synera and Pliaglis were considered to be
the cash-generating units (CGU) for recorded goodwill
for the purposes of impairment testing. Under the
$
$
11,868
(277)
(2)
(2,300)
224
–
–
(114)
(2,647)
155
9,513
(2,606)
impairment test, the recoverable amount of the CGU
was determined at its value in use, based on a
discounted cash flow model, and tested for impairment
annually at December 31. The value in use calculation
considered forecasted cash flows during the patent
life of Synera and Pliaglis based on the current
commercialization plans for these products. As at
December 31, 2012, the recoverable amount was less
than its carrying amount, and the entire goodwill of
$4.4 million was written off.
Gain on ZARS Contingent Consideration
The ZARS Contingent Consideration was originally
structured as promissory notes payable to the former
shareholders of ZARS, but allowed the Company to
seek shareholder approval for the issuance of additional
shares, in lieu of the promissory notes. The Company’s
shareholders approved the conversion of the promissory
notes payable into contingent shares at the Company’s
Nuvo Research Inc. Annual Report 2012 25
Management’s Discussion and Analysis cont’d
Annual and Special Meeting of Shareholders on June 21,
2011. The Company accounted for this conversion by
derecognizing the liability related to the promissory
notes and recording the value of the potentially issuable
shares in liabilities. The Company revalued the
consideration of $3.3 million based on the Company’s
share price on the date of shareholder approval. This
resulted in a gain of $1.8 million representing the
difference between the fair value of the ZARS
Contingent Consideration derecognized as a liability
in the amount of $5.1 million and the fair value of
the remaining liability in the amount of $3.3 million.
As at December 31, 2011, the ZARS Contingent
Consideration liability was revalued at $2.3 million
and an additional gain of $0.9 million was recognized.
In each reporting period, the ZARS Contingent
Consideration liability was revalued based on the
Company’s share price and the probability of the
Pliaglis Milestone and the Pliaglis Contingent
Milestones being achieved. At December 31, 2012,
the Pliaglis Milestone was not achieved; therefore,
the liability of $2.3 million was derecognized and a
corresponding gain was recognized. For the year ended
December 31, 2011 the gain was $2.6 million (see
Significant Transactions – 2012 – ZARS Acquisition –
Restatement of ZARS Contingent Consideration).
Litigation Settlement
In 2012, the Company reached a settlement with the
Liquidator in the Leadenhall matter (see Litigation –
Leadenhall). Under the terms of the settlement agreement,
the Company received $0.3 million which represents its
share of the escrow that was held by the Liquidator.
Foreign Currency Losses
Net foreign currency losses increased slightly to
$224,000 for the year ended December 31, 2012
compared to $155,000 for the year ended December 31,
2011. In 2012, a weaker euro and U.S. dollar decreased
the value of the Company’s euro and U.S. denominated
cash and receivables.
N E T L O S S A N D T O TA L C O M P R E H E N S I V E L O S S
in thousands
Year ended
December 31, 2012
$
Year ended
December 31, 2011
$
Net loss before income taxes
Income taxes
(13,367)
196
(6,727)
104
Net loss
Unrealized gains (losses) on translation of foreign operations
(13,563)
(544)
(6,831)
1,097
Total comprehensive loss
(14,107)
(5,734)
Net Loss
Net loss was $13.6 million for the year ended
December 31, 2012 compared to $6.8 million for the
year ended December 31, 2011. The significant increase
in net loss related to the $11.9 million impairment of
intangible assets and goodwill, offset partially by the
improvement in the loss from operations. Net loss for
the year ended December 31, 2012 included income tax
expense of $196,000 related to U.S. withholding taxes
on the royalty income earned on Pennsaid U.S. sales
compared with $104,000 in the comparative period.
Total Comprehensive Loss
Total comprehensive loss was $14.1 million for the year
ended December 31, 2012 compared to $5.7 million for
the year ended December 31, 2011. The year ended
December 31, 2012 included a $0.5 million unrealized
loss on the translation of foreign operations versus an
unrealized gain of $1.1 million in the comparative period.
26 Nuvo Research Inc. Annual Report 2012
Net Loss Per Common Share
Net loss per common share on both a basic and diluted
basis was $0.024 for the year ended December 31,
2012 versus a net loss of $0.014 for the year ended
December 31, 2011.
The weighted average number of common shares
outstanding on a basic and diluted basis was
567.7 million for the year ended December 31, 2012
compared to 489.3 million for the year ended
December 31, 2011. The majority of the increase in
the average number of shares outstanding was
attributable to the 112.4 million shares issued for the
ZARS acquisition and 31.9 million shares that were
issued in December 2011 for the acquisition of the
non-controlling interest in Nuvo Research AG.
Attribution of Losses
Net losses attributable to the parent for the year ended
December 31, 2012 was $13.6 million compared to
$5.6 million for the year ended December 31, 2011.
In the comparative period, the net loss attributable to
the Company’s minority interest partner was $1.3
million. In December 2011, the Company acquired
the remaining 40% interest in Nuvo Research AG from
its minority interest partner and the Company now
owns 100% of all its subsidiaries; therefore, all of
the Company’s net loss is attributed to the owners of
the parent.
Segments
On a segmented basis, Pain, which includes all Pennsaid
activities and the ZARS operations, incurred net loss
before income taxes of $10.3 million for the year ended
December 31, 2012 compared to net losses before
income taxes of $2.8 million for the year ended
December 31, 2011. The Pain Group results included
the impairment of intangible assets and goodwill and
the gain on the ZARS Contingent Consideration.
Immunology, which includes all WF10 activities,
incurred losses before income taxes of $3.1 million for
the year ended December 31, 2012 compared to
$3.9 million for the year ended December 31, 2011.
L I Q U I D I T Y A N D C A P I TA L R E S O U R C E S
Year ended
December 31, 2012
Year ended
December 31, 2011
(restated)
in thousands
Net loss
Items not involving current cash flows
$
$
(13,563)
9,836
(6,831)
(3,090)
Cash used in operations
Net change in non-cash working capital
(3,727)
(1,348)
(9,921)
(1,918)
Cash used in operating activities
Cash provided by (used in) investing activities
Cash provided by (used in) financing activities
(5,075)
(141)
2,714
(11,839)
1,406
(3,037)
Effect of exchange rates on cash and cash equivalents
(2,502)
(73)
(13,470)
(75)
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
(2,575)
14,724
(13,545)
28,269
Cash and cash equivalents, end of year
12,149
14,724
Cash and Cash Equivalents
Cash and cash equivalents were $12.1 million as at
December 31, 2012 a decrease of $2.6 million
compared to $14.7 million as at December 31, 2011,
primarily as a result of cash used in operating activities
and cash used for loan repayments partially offset by
the proceeds from the loan from Paladin.
Operating Activities
Cash used in operations was $3.7 million for the year
ended December 31, 2012 compared to $9.9 million for
the year ended December 31, 2011. The improvement
in cash used in operations primarily related to the
receipt of US$5.0 million from Galderma for the
regulatory approval of Pliaglis in Europe in the first
two countries. In addition, the higher net loss in the
current period included the $11.9 million non-cash
impairment charge on intangible assets and goodwill.
Overall cash used in operating activities decreased by
$6.7 million to $5.1 million for the year ended
December 31, 2012 versus $11.8 million for the year
ended December 31, 2011. The decrease resulted from
lower cash used in operations and a reduced
investment in non-cash working capital of $1.3 million
in the year ended December 31, 2012 compared to
$1.9 million in the year ended December 31, 2011.
The $1.3 million investment in non-cash working
capital was primarily attributable to a $1.9 million
decrease in accounts payable and accrued liabilities
offset partially by a reduction in inventory levels. In
2011, the $1.9 million investment in non-cash working
capital was attributable to a $2.7 million decrease in
accounts payable primarily related to the payment
of excess and overdue accounts payable as required as
part of the ZARs acquisition. These amounts were
partially offset by a $1.1 million decrease in other
Nuvo Research Inc. Annual Report 2012 27
Management’s Discussion and Analysis cont’d
assets, as the Company received the grant it was
awarded in November 2010 under the U.S.
Government’s Qualifying Therapeutic Discovery Project.
Investing Activities
Net cash used in investing activities totaled $0.1 million
for the year ended December 31, 2012 compared to net
cash provided by investing activities of $1.4 million for
the year ended December 31, 2011. For the year ended
December 31, 2012, the cash used in investing activities
was attributable to the acquisition of property, plant and
equipment (PP&E) for production and laboratory
equipment acquired by the Company’s manufacturing
facility in Varennes, Quebec, partially offset by the
proceeds received from the disposition of PP&E. For the
comparative period, the cash provided by investing
activities was mainly attributable to the net cash acquired
from the ZARS Acquisition offset by capital expenditures.
Financing Activities
Net cash provided by financing activities totaled
$2.7 million for the year ended December 31, 2012
compared to net cash used in financing activities of
$3.0 million for the year ended December 31, 2011.
In 2012, cash of $4.0 million was received from the
Company’s Canadian licensing partner (See – Significant
Transactions – 2012 – Paladin) which represented the
first tranche of an $8.0 million loan that bears interest
at 15% per annum and is secured by the assets of the
Pain Group. These proceeds were partially offset by
payments of other obligations. During the year ended
December 31, 2011, the cash used in financing activities
related primarily to the repayment of ZARS’ debt that
was assumed as part of the ZARS Acquisition.
Non-Cash Financing and Investing Activities
As fully described in the section entitled, “Significant
Transactions – 2011 – ZARS Acquisition”, the
Company acquired all of the issued and outstanding
shares of ZARS in exchange for the issuance of
99.8 million Nuvo common shares, the ZARS Contingent
Consideration and a cash payment of $0.1 million.
As fully described in the section entitled, “Significant
Transactions – 2011 – Acquisition of Non-Controlling
Interest”, the Company acquired the 40% interest in
Nuvo Research AG held by the minority owner for
non-cash consideration with a fair value of $2.3 million
that included the issuance of 31.9 million Nuvo
common shares with a fair value of $1.7 million and
a five-year consulting contract with a fair value of
$0.5 million. As the five-year consulting agreement
was considered to be partial consideration for the
acquisition, it was recorded as a liability, other
obligation, on the Consolidated Statements of Financial
Position and accreted, through charges to interest
expense, to its nominal value over its term.
S E L E C T E D Q U A RT E R LY I N F O R M AT I O N ( U N A U D I T E D )
The following is selected quarterly financial information for the last eight quarterly reporting periods:
March 31, 2012
in thousands (except per share data)
June 30, 2012 September 30, 2012 December 31, 2012
(restated)
(restated)
(restated)
$
$
$
$
Revenue
6,229
Net income (loss) before income taxes
Net income (loss) per common share
(4,341)(2)
11,357
4,082(1)(3)
3,500
(1,958)(1)(4)
3,564
(11,150)(5)(6)
(0.008)(2)
0.007(1)
(0.004)(1)
(0.020)(5)(6)
– basic and diluted
March 31, 2011
$
Revenue
Net loss before income taxes
Net loss per common share
– basic and diluted
(1)
(2)
(3)
(4)
(5)
(6)
(3)
(4)
June 30, 2011 September 30, 2011
December 31, 2011
(restated)
(restated)
(restated)
$
$
$
3,825
(2,343)
3,761
(1,061)(1)
3,957
(1,933)(1)
5,190
(1,390)(1)
(0.006)
(0.002)(2)
(0.004)(1)
(0.003)(1)
Net loss before income taxes includes the gains on the ZARS Contingent Consideration as restated in 2012.
Net loss before income taxes includes the loss on the ZARS Contingent Consideration as restated in 2012.
The quarter ended June 30, 2012 includes US$5.0 million in licensing fees from Galderma representing the milestone payments
for the marketing approval of Pliaglis in the first two European countries.
The quarter ended September 30, 2012 includes US$1.0 million in licensing fees from Galderma representing the milestone
payments for the marketing approval of Pliaglis in the third European country.
Net loss before income taxes included an $11.9 million impairment charge on intangible assets and goodwill related to
the ZARS Acquisition.
Net loss before income taxes included a $2.3 million gain on the ZARS Contingent Consideration.
28 Nuvo Research Inc. Annual Report 2012
F O U RT H Q U A RT E R R E S U LT S
Three months ended
December 31, 2012
Three months ended
December 31, 2011
(restated)
$
$
2,155
1,770
2,611
2,165
385
446
1,278
85
46
1,884
545
150
1,794
3,025
1,539
290
2,084
1,709
1,312
2,380
130
(22)
Operating expenses
4,043
5,379
Other (income) expenses
8,901
(964)
in thousands
Product sales
Cost of goods sold
Gross margin on product sales
Royalties
License fees
Research and other contract revenue
Research and development
Selling and marketing expenses
General and administrative expenses
Interest (income) expense, net
Net loss before income taxes
Income taxes
(11,150)
22
(1,390)
30
Net loss
(11,172)
(1,420)
Other comprehensive income (loss)
Total comprehensive loss
Key Developments
During the quarter and prior to the release of the
fourth quarter results:
• In October 2012, the Company received
confirmation from Galderma of the FDA approval
for the marketing of Pliaglis in the U.S.;
• In January 2013, the Company entered into the
Apotex Settlement Agreement where Nuvo and
Mallinckrodt granted a license to Apotex that
permits Apotex, upon approval of its ANDA by the
FDA, to launch its generic version of Pennsaid on a
date that is the earlier of 45 days after Mallinckrodt
or Nuvo makes a first commercial shipment of
Pennsaid 2% in the U.S. and April 1, 2014, or
earlier under certain circumstances;
• Galderma launched the commercial marketing and
sale of Pliaglis in the U.S. in March 2013 at the
American Academy of Dermatology Conference in
Miami; and
• In March 2013, the Company’s U.S. licensee,
Mallinckrodt received a CRL to the NDA for
Pennsaid 2% in which the FDA confirmed that the
244
(10,928)
(631)
(2,051)
only substantive additional requirement is the
completion of a PK study comparing Pennsaid 2%
to original Pennsaid. Mallinckrodt has indicated
that it expects to complete the study, submit the
results and receive a formal response from the FDA
in late 2013 or early 2014.
Operating Results
Total revenue for the three months ended December 31,
2012 was $3.6 million compared to $5.2 million for
the three months ended December 31, 2011. The
decrease was attributable to a $0.7 million decrease
in royalty revenue from Pennsaid sales in the U.S.,
a $0.5 million decrease in license fees earned under
Galderma licensing arrangements for Pliaglis which
were fully amortized in May 2012 and a $0.4 million
decrease in Pennsaid product sales. The decrease in
Pennsaid U.S. royalties related to lower net sales as our
licensee incurred significantly higher rebates related to
new reimbursement coverage that commenced in 2012
compared to the prior year. The decrease in Pennsaid
product sales related to lower product sales to our U.S.
licensee offset partially by higher sales to our Canadian
Nuvo Research Inc. Annual Report 2012 29
Management’s Discussion and Analysis cont’d
licensee. Sales of Synera were consistent at $0.3 million
versus the comparative period.
For the three months ended December 31, 2012, gross
margin on product sales decreased to $385,000
compared to $446,000 for the comparative quarter in
2011. The decrease in gross margin was primarily related
to lower Pennsaid product sales.
Total operating expenses for the three months ended
December 31, 2012 decreased to $4.0 million versus
$5.4 million for the three months ended December 31,
2011. The decrease in operating expenses was primarily
due to lower S&M expenses as the Company terminated
its agreement with its CSO for Synera in third quarter of
2012. As such, there were no CSO costs in the quarter
and lower infrastructure costs for ZARS as a result of
integration activities.
R&D expenses decreased to $1.5 million for the three
months ended December 31, 2012 compared to
$1.7 million for the three months ended December 31,
2011. The decrease in the quarter primarily related to
lower spending on drug development programs.
S&M expenses were $0.3 million for the three months
ended December 31, 2012 compared with $1.3 million
for the comparative period in 2011. S&M expenses
relate entirely to the Company’s marketing costs for
Synera in the U.S. In the comparative period, the
Company hired experienced pharmaceutical executives
to prepare for a U.S. launch of Synera, targeting
interventional pain physicians with pain specialty sales
representatives using a CSO. In September 2012, the
Company refocused its resources on large national
accounts and terminated its agreement with its CSO and
also terminated two members of the Pain Group
management team focused on the interventional pain
doctor initiative; therefore, the fourth quarter no longer
included costs related to the CSO.
G&A expenses decreased to $2.1 million for the three
months ended December 31, 2012 compared to
$2.4 million for the three months ended December 31,
2011. The decrease in the quarter related to
termination benefits incurred in the comparative period.
Other expenses increased to $8.9 million for the three
months ended December 31, 2012 compared to other
income of $1.0 million for the three months ended
December 31, 2011 primarily related to the
$11.9 million impairment charge on intangible assets
and goodwill, offset partially by a $1.6 million increase
in the gain on the ZARS Contingent Consideration.
Net loss for the three months ended December 31, 2012
was $11.2 million versus $1.4 million for the three
months ended December 31, 2011. The increased loss
was substantially a result of the impairment charge on
intangible assets and goodwill, offset partially by the
increased gain on the ZARS Contingent Consideration.
Total comprehensive loss was $10.9 million for the
quarter ended December 31, 2012 compared to
$2.1 million for the quarter ended December 31, 2011.
The quarter ended December 31, 2012 included a
$0.2 million unrealized gain on the translation of foreign
operations versus an unrealized loss of $0.6 million in
the quarter ended December 31, 2011.
Liquidity
Three months ended
December 31, 2012
Three months ended
December 31, 2011
(restated)
in thousands
Net loss
Items not involving current cash flows
$
$
(11,172)
9,222
(1,420)
(1,377)
(1,950)
2,997
(2,797)
(415)
1,047
(111)
(447)
(3,212)
110
18
489
170
(3,084)
(230)
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
659
11,490
(3,314)
18,038
Cash and cash equivalents, end of year
12,149
14,724
Cash used in operations
Net change in non-cash working capital
Cash provided by (used in) operating activities
Cash provided by (used in) investing activities
Cash provided by (used in) financing activities
Effect of exchange rates on cash and cash equivalents
30 Nuvo Research Inc. Annual Report 2012
Cash and cash equivalents on hand at December 31,
2012 of $12.1 million were $0.6 million higher than
the $11.5 million at September 30, 2012. Cash
provided by operating activities was $1.0 million
compared to cash used in operating activities of
$3.2 million for the three months ended December 31,
2011. This improvement was due a significant recovery
of the Company’s investment in working capital related
to the receipt of the US$5.0 million ($5.1 million)
milestone payment from Galderma related to the
European regulatory approvals for Pliaglis.
Net cash used in investing activities totaled
$111,000 for the three months ended December 31,
2012 compared to net cash provided by investing
activities of $110,000 for the three months ended
December 31, 2011. The amount in the fourth quarter
of 2012 related entirely to capital expenditures.
The amount in the fourth quarter of 2011 included
proceeds on the disposition of PP&E offset partially
by capital expenditures.
Net cash used in financing activities totaled
$0.4 million for the three months ended December 31,
2012, compared to net cash provided by financing
activities of $18,000 for the three months ended
December 31, 2011. During the fourth quarter of
2012, the Company made $0.5 million of repayments
on finance and other obligations.
FINANCIAL INSTRUMENTS
Fair Values
IFRS 7 Financial Instruments: Disclosures requires
disclosure of a three-level hierarchy that reflects the
significance of the inputs used in making fair value
measurements. Fair values of assets and liabilities
included in Level 1 are determined by reference to
quoted prices in active markets for identical assets and
liabilities. Assets and liabilities in Level 2 include those
whose valuations are determined using inputs other
than quoted prices for which all significant outputs
are observable, either directly or indirectly. Level 3
valuations are those based on inputs that are
unobservable and significant to the overall fair value
measurement. The Company assessed its financial
instruments that are reported at market value, cash
and cash equivalents of $12.1 million and determined
that they are based on Level 1 inputs.
The Company has determined the estimated fair
values of its financial instruments based on appropriate
valuation methodologies. However, considerable
judgment is required to develop these estimates.
Accordingly, these estimated values are not necessarily
indicative of the amounts the Company could realize
in a current market exchange. The estimated fair value
amounts can be materially affected by the use of
different assumptions or methodologies. The methods
and assumptions used to estimate the fair value of each
class of financial instruments are discussed below.
The fair values of short-term financial assets and
liabilities, including cash and cash equivalents,
accounts receivable, accounts payable and accrued
liabilities as presented in the Consolidated Statements
of Financial Position approximate their carrying
amounts due to the short period to maturity of these
financial instruments.
Rates currently available to the Company for long-term
obligations, with similar terms and remaining maturities,
have been used to estimate the fair value of the finance
lease and other obligations. These fair values
approximate the carrying values for all instruments.
FINANCIAL RISK MANAGEMENT
Risk Factors
The following is a discussion of credit, liquidity,
interest and currency risks and related mitigation
strategies that have been identified. This is not an
exhaustive list of all risks nor will the mitigation
strategies eliminate all risks listed.
Credit Risk
The Company’s cash and cash equivalents subject the
Company to a significant concentration of credit risk.
At December 31, 2012, the Company had $10.7 million
invested with one financial institution in various bank
accounts as per its practice of protecting its capital
rather than maximizing investment yield through
additional risk. This financial institution is a major
Canadian bank which the Company believes lessens
the degree of credit risk. The remaining $1.4 million
of cash and cash equivalent balances are held in
bank accounts in various geographic regions outside
of Canada.
The Company, in the normal course of business, is
exposed to credit risk from its global customers most
of whom are in the pharmaceutical industry. The
accounts receivable are subject to normal industry
risks in each geographic region in which the Company
operates. In addition, the Company is exposed to
credit related losses on sales to its customers outside
North America and the E.U. due to potentially higher
risks of enforceability and collectability. The Company
attempts to manage these risks prior to the signing of
distribution or licensing agreements by dealing with
creditworthy customers; however, due to the limited
number of potential customers in each market, this
is not always possible. In addition, a customer’s
creditworthiness may change subsequent to becoming
Nuvo Research Inc. Annual Report 2012 31
Management’s Discussion and Analysis cont’d
a licensee or distributor and the terms and conditions
in the agreement may prevent the Company from
seeking new licensees or distributors in these territories
during the term of the agreement. At December 31,
2012, the Company’s four largest customers located
in North America and the E.U. represent 79%
in thousands
Current
0-30 days past due
31-60 days past due
61-90 days past due
As at March 27, 2013, $486,000 of the past due
amounts have been collected.
Liquidity Risk
While the Company has $12.1 million in cash and cash
equivalents at December 31, 2012, it continues to have
an ongoing need for substantial capital resources to
research, develop, commercialize and manufacture its
products and technologies. Other than in the U.S. and
Canada, the Company has limited participation in
Pennsaid sales revenues in countries where it is currently
marketed. In Canada, the Company receives royalties
based on Canadian net sales, but the market is relatively
small. These funds are used entirely towards repayment
of the Paladin Debt. In the U.S., the Company receives
royalties based on U.S. net sales at rates consistent with
industry standards and has the opportunity to earn up to
$100 million in sales milestones. However, Pennsaid is
subject to generic risk in the U.S. as three companies
have filed ANDAs in the U.S. (one in early 2013) for
approval to market a generic version of Pennsaid.
Although the Company and Mallinckrodt have filed
patent infringement complaints with the courts against
two of the generic companies and settled with one, a
launch of a generic in the U.S. would materially impact
revenues. A generic version of Pennsaid available for
commercial sale in the U.S. may trigger an event of
default on the Paladin Debt.
32 Nuvo Research Inc. Annual Report 2012
[2011 – 85%], of accounts receivable, and accounts
receivable from customers located outside of North
America and the E.U. represent 12% [2011 – 7%],
of accounts receivable.
Pursuant to their collective terms, accounts receivable
are aged as follows:
Year ended
December 31, 2012
$
Year ended
December 31, 2011
$
2,938
543
208
82
3,301
162
226
11
3,771
3,700
In addition, minimal revenues are being generated by
Synera and Pliaglis, the two key products added through
the acquisition of ZARS. The commercial success for
Synera has been limited, as are the royalties generated by
the European marketing partner. While the Company has
licensed Pliaglis’ worldwide rights to Galderma, Pliaglis
was recently approved in 2012 in a number of European
countries and the U.S. and just recently launched in the
U.S. and the European launch will occur in the second
quarter of 2013. Pliaglis is not yet generating any
significant royalty revenue for the Company. As a result,
the Company’s revenues may not be sufficient to provide
the capital required for the Company to be selfsustaining without the need for future financings.
The Company has contractual obligations related to
accounts payable and accrued liabilities, purchase
commitments and finance lease and other obligations of
$7.1 million that are due in less than a year and $1.8
million of contractual obligations that are payable from
2014 to 2015.
Interest Rate Risk
All finance lease and other obligations are at fixed
interest rates.
Currency Risk
The Company operates globally, which gives rise to a
risk that earnings and cash flows may be adversely
affected by fluctuations in foreign currency exchange
rates. The Company is primarily exposed to the U.S.
dollar and euro, but also transacts in other foreign
currencies. The Company currently does not use financial
instruments to hedge these risks. The significant balances
in foreign currencies are as follows:
Euros
in thousands
Cash and cash equivalents
Accounts receivable
Other current assets
Accounts payable and accrued liabilities
Finance lease and other obligations
Based on the aforementioned net exposure as at
December 31, 2012, and assuming that all other
variables remain constant, a 10% appreciation or
U.S. Dollars
2012
2011
2012
2011
€
€
$
$
1,620
2,248
6,360
4,482
523
726
2,579
2,260
138
192
(287)
(475)
(1,220)
–
(2,562)
623
–
–
(473)
(525)
1,994
2,691
7,246
4,278
depreciation of the Canadian dollar against the U.S.
dollar and euro would have resulted in (decreases)
increases in total comprehensive loss as follows:
Comprehensive loss (income)
Canadian Dollar
Appreciates
Depreciates
10%
10%
Versus U.S. dollar
655
(801)
Versus euro
238
(291)
in thousands
In terms of the euro, the Company has three significant
exposures: its net investment and net cash flows in
its European operations, its euro denominated cash
and cash equivalents held in its Canadian operations
and sales of Pennsaid by the Canadian operations
to European distributors. In terms of the U.S. dollar,
the Company has five significant exposures: its net
investment and net cash flows in its U.S. operations,
its U.S. dollar denominated cash and cash equivalents
held in its Canadian operations, the cost of running
trials and other studies at U.S. sites, the cost of
purchasing raw materials either priced in U.S. dollars
or sourced from U.S. suppliers that are needed to
produce Pennsaid or other products at the Canadian
manufacturing facility and revenue generated in
U.S. dollars, including royalties and milestone
payments received from licensing agreements with
Mallinckrodt, Galderma and Eurocept and product
sales to Mallinckrodt.
The Company does not actively hedge any of its
foreign currency exposures given the relative risk of
currency versus other risks the Company faces and
the cost of establishing the necessary credit facilities
and purchasing financial instruments to mitigate
or hedge these exposures. As a result, the Company
does not attempt to hedge its net investment in
foreign subsidiaries.
The Company does not currently hedge its euro
cash flows. Sales to European distributors for
Pennsaid are primarily contracted in euros. The
Company receives payments from the distributors in
its euro bank accounts and uses these funds to pay
euro denominated expenditures and to fund the net
outflows of the European operations as required.
Periodically, the Company reviews the amount of
euros held, and if they are excessive compared to the
Company’s projected future euro cash flows, they may
be converted into U.S. or Canadian dollars.
The Company does not currently hedge its U.S. dollar
cash flows. The Company’s U.S. operations have net
cash outflows and currently these are funded using
the Company’s U.S. dollar denominated cash and cash
equivalents and payments received under the terms
of the U.S. Licensing Agreement. Periodically, the
Company reviews its projected future U.S. dollar cash
flows and if the U.S. dollars held are insufficient,
Nuvo Research Inc. Annual Report 2012 33
Management’s Discussion and Analysis cont’d
into Canadian dollars or other currencies as needed
for the Company’s other operations.
the Company may convert a portion of its other
currencies into U.S. dollars. If the amount of U.S.
dollars held is excessive, they may be converted
C O N T R A C T U A L O B L I G AT I O N S
The following table lists the Company’s contractual obligations for the twelve-month periods ending December 31
as follows:
2015 and
Total
2013
2014
thereafter
$
$
$
$
8
372
1,742
6,746
3
213
1,628
5,260
3
68
114
1,163
2
91
–
323
8,868
7,104
1,348
416
in thousands
Finance lease obligations
Operating leases
Purchase obligations
Other obligations (i)
(i)
Other obligations include accounts payable, accrued liabilities and other obligations.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet
arrangements.
R E L AT E D PA RT Y T R A N S A C T I O N S
The Company has a consulting arrangement with one
of its independent directors. During 2012, consulting
expenses totaled $37,000 [2011 – $68,000].
O U T S TA N D I N G S H A R E D ATA
The number of common shares outstanding as at
December 31, 2012 was 567.8 million, an increase of
3.8 million from 564.0 million at December 31, 2011.
The increase was due to the issuance of 1.8 million
shares issued from the employee Share Purchase Plan,
1.5 million shares issued from the Share Bonus Plan
upon the vesting of PSUs pursuant to the PSU Plan and
0.5 million shares issued for the settlement of
professional fees.
As at December 31, 2012, there were 49,129,283
options outstanding of which 32,647,882 were vested.
Stock options increased in the year by 6,461,365
million as 11,225,415 new stock options were granted
during the year while 4,723,650 were forfeited and
40,400 stock options expired.
L I T I G AT I O N
From time-to-time, during the ordinary course of
business, the Company is threatened with, or is named
as, a defendant in various legal proceedings including
lawsuits based upon product liability, personal injury,
breach of contract and lost profits or other
consequential damage claims.
34 Nuvo Research Inc. Annual Report 2012
Leadenhall
In July 2003, a $2.0 million short-term loan was
extended to the Company by Leadenhall Bank & Trust
Company Limited (the Mortgagee). The terms of this
loan were for interest to accrue at 2% per month and
for full repayment to occur on May 31, 2004. The
repayment date was extended on two occasions; first
to September 30, 2004 and subsequently to February 28,
2005. The loan was collateralized by a subsidiary of
the Company through a $2.0 million mortgage charge
(the Mortgage) on the Company’s former head office.
In 2005 a dispute surrounding the Mortgage arose
between the parties. The Mortgage dispute centered on
the calculation and amount of interest owing and was
the subject of an Ontario court action (the Ontario
Action) commenced by the Mortgagee in April 2005.
The Mortgagee’s position was that interest should be
calculated monthly at a rate of 2% per month,
including interest on late payments and costs. The
Company’s position was that the Mortgage was null
and void and should be discharged or alternatively,
that the interest payable was limited to 5% per annum
pursuant to the provisions of the Interest Act
(Canada). Subsequent to the filing by the Mortgagee of
its Statement of Claim and the Company of its
Statement of Defense and Counterclaim, the Mortgagee
was placed into voluntary liquidation by its
shareholders and a liquidator (the Liquidator) was
appointed in the Bahamas, where the Mortgagee is
situated to settle the affairs on the Mortgage. The
Ontario Action was subsequently dismissed by the
courts for delay.
In November of 2005, the Company negotiated a
written agreement (the Settlement Agreement) with the
Liquidator to settle all claims pursuant to the Ontario
Action for US$1.1 million (the Settlement Amount)
payable out of closing funds received on the sale of
the Company’s former head office. The Settlement
Agreement was subject to the approval of the Bahamian
court that appointed the Liquidator. The Liquidator
agreed to seek court approval as soon as possible after
signing the Settlement Agreement. The Liquidator did
not seek court approval prior to the completion of the
head office sale, and in order to allow the sale to
proceed, the Liquidator and the Company entered into
an escrow arrangement (the Escrow Agreement).
Pursuant to the Escrow Agreement, the Liquidator
agreed that upon payment of US$1.4 million (the
Escrow Amount) to the Liquidator, to be held in escrow
pending court approval of the Settlement Agreement,
the Liquidator would deliver a discharge of the
Mortgage. It was further agreed that upon approval of
the Settlement Agreement by the Bahamian Court the
Settlement Amount would be released from escrow and
paid to the Liquidator and the balance, US$0.3 million,
would be released to the Company (the Excess
Amount). In January 2006, the Liquidator discharged
the mortgage, the Company completed the sale of its
head office and it paid the Escrow Amount into escrow
with the Liquidator’s Bahamian counsel.
Subsequent to receipt of the Escrow Amount, the
Liquidator continually delayed seeking court approval
of the Settlement Agreement and has not yet presented
it to the Bahamian court for approval. Since April
2006, the Liquidator indicated that while still intending
to present the Settlement Agreement to the court for its
consideration, it would not recommend that the court
approve it. In addition, in its February 2007 Affidavit,
the Liquidator indicated that if the Court did not
approve the Settlement Agreement, it would request
that the Bahamian court order that all escrowed funds,
including the Excess Amount be released to it and not
to the Company. The Liquidator further stated that
the full amount in escrow was insufficient to retire the
mortgage principal, plus interest at the alleged interest
rate of 2% per month and that it may pursue the
Company for the deficiency. The Company retained
legal counsel in the Bahamas to assist it in securing
court approval of the Settlement Agreement and to
ensure that if the Settlement Agreement was not
approved, that the escrow continues in accordance with
the terms of the Escrow Agreement.
A hearing in the Bahamian court was held in March
2007. At this hearing, the Liquidator submitted
additional arguments to the Bahamian court requesting
that all matters, including those that form the basis of
the Ontario Action, be decided by the Bahamian court.
While this request was not ruled upon, the judge issued
an order that the escrow funds continue to be held in
escrow for at least 90 days to provide the Company
the opportunity to bring an action in the Bahamian
courts for the release of the funds based upon the
non-ratification of the Settlement Agreement. The judge
retired shortly thereafter and the case was not
reassigned to another judge for over a year.
As a result, the Company was not able to bring its
action to release the escrow funds to it before the
Bahamian courts. In June 2007, its Bahamian legal
counsel filed a summons in the Leadenhall liquidation
proceedings requesting that the Company be granted
leave to join the liquidation as an interested party.
The Summons was served on the Liquidator in June
2007 and required that the Company be notified if
the Liquidator intended to make application to have
the escrow funds released to it. Since June 2007, the
shortage of commercial judges available to hear the case
and a lack of co-operation by the Liquidator hindered
the Company’s Bahamian legal counsel’s efforts to
obtain a date for a hearing at which a judge could
consider the Settlement Agreement. Late in 2008, the
Company’s Bahamian legal counsel informed the
Company that a commercial court judge had been
assigned to handle all aspects of the Leadenhall
liquidation; however, early in 2009, prior to obtaining
a hearing, this judge resigned from the Bench and the
case had not yet been assigned to another judge.
Given these delays, the Company through its Bahamian
legal counsel, reinitiated dialogue with the Liquidator’s
counsel in 2009 and presented a proposal aimed at
resolving all outstanding matters between the Company
and the Liquidator, if acceptable, the parties would
jointly approach the courts to seek its approval. The
Company did not receive a response to its proposal
from the Liquidator’s counsel and subsequently learned
that the Liquidator had switched legal counsel
(Liquidator’s New Counsel). In November 2010, the
Company, the Liquidator and the Liquidator’s New
Counsel restarted discussions aimed at resolving all
outstanding matters between the Company and the
Liquidator and in 2011 were able to reach a settlement
agreement (2011 Settlement Agreement). In December
2011, the Bahamian court approved the 2011
Settlement Agreement. Under the terms of the 2011
Settlement Agreement, the funds remaining in escrow
were split between the Company and the Liquidator
with the Company’s apportionment estimated at
approximately $0.3 million (the Settlement Amount).
In 2012, the Court signed an Order that approved
settlement terms agreed to by the Company and the
Liquidator. The Company and the Liquidator executed
a mutual release agreement and the Settlement Amount
was received and recorded in income.
Nuvo Research Inc. Annual Report 2012 35
Management’s Discussion and Analysis cont’d
benefit from synergies of the combination.
Management first considers the Company’s
commercialized products and then determines the
operations that contribute to each product’s
revenue base and net cash inflows. Management
has identified 3 CGUs: the U.S. operations
dedicated to generating cash inflows for Synera
and Pliaglis, the manufacturing facility in Québec
that generates cash inflows for Pennsaid and the
Immunology Group that generates cash inflows
for WF10.
CRITICAL ACCOUNTING POLICIES
A N D E S T I M AT E S
The preparation of consolidated financial statements
in conformity with IFRS requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the
Consolidated Financial Statements and the reported
amounts of revenue and expenses during the reporting
periods. Management has identified the following
accounting estimates that it believes are most critical to
understanding the Consolidated Financial Statements
and those that require the application of management’s
most subjective judgments, often requiring the need to
make estimates about the effect of matters that are
inherently uncertain and may change in subsequent
periods. The Company’s actual results could differ from
these estimates and such differences could be material.
All significant accounting policies are disclosed in
Note 3, “Summary of Significant Accounting Policies”
of the Company’s Consolidated Financial Statements
for the year ended December 31, 2012.
Critical Accounting Estimates
Key areas of estimation or use of managerial
assumptions are as follows:
(i)
(ii)
Business combinations, intangible
assets and goodwill:
The amount of goodwill initially recognized as a
result of a business combination and the
determination of the fair value of the identifiable
assets acquired and the liabilities assumed is
based, to a considerable extent, on management’s
judgment. The Company determines fair values
based on discounted cash flows, market
information, independent valuations and
management’s estimates. The values calculated for
intangible assets and goodwill involve significant
estimates and assumptions, including those with
respect to future cash flows, discount rates and
asset lives. These significant estimates and
judgments could impact the Company’s future
results if the current estimates of future
performance and fair values change and could
affect the amount of amortization expense on
intangible assets in future periods.
Cash-generating Units
The identification of CGUs within the Company
requires considerable judgment. Under IFRS,
management must determine the smallest group
of assets that generate independent cash inflows
and allocate goodwill acquired in a business
combination to the CGU that is expected to
36 Nuvo Research Inc. Annual Report 2012
(iii) Income taxes:
The Company recognizes deferred tax assets,
related tax-loss carryforwards and other
deductible temporary differences where it is
probable that sufficient future taxable income can
be generated in order to fully utilize such losses
and deductions. This requires significant estimates
and assumptions regarding future earnings and
the ability to implement certain tax planning
opportunities in order to assess the likelihood of
utilizing such losses and deductions.
(iv) Property, plant and equipment:
Measurement of PP&E involves the use of
estimates for determining the expected useful lives
of depreciable assets. Management’s judgment is
also required to determine depreciation methods
and an asset’s residual value and whether an asset
is a qualifying asset for the purposes of
capitalizing borrowing costs.
(v)
Impairment of goodwill and non-financial assets:
The Company reviews the carrying value of
goodwill and non-financial assets for potential
impairment when events or changes in
circumstances indicate that the carrying amount
may not be recoverable. The impairment test on
CGUs is carried out by comparing the carrying
amount of the CGU and its recoverable amount.
The recoverable amount of a CGU is the higher of
fair value, less costs to sell and its value in use.
This complex valuation process entails the use of
methods such as the discounted cash flow method
which requires numerous assumptions to estimate
future cash flows. The recoverable amount is
impacted significantly by the discount rate
selected to be used in the discounted cash flow
model, as well as the quantum and timing of
expected future cash flows and the growth rate
used for the extrapolation.
(vi) Provisions:
A provision is a liability of uncertain timing or
amount. Provisions are recognized when the
Company has a present obligation (legal or
constructive) as a result of a past event, it is
probable that the Company will be required to
settle the obligation and a reliable estimate can be
made of the amount of the obligation. A legal
obligation can arise through a contract, legislation
or other operation of law. A constructive
obligation arises from an entity’s actions; whereby,
through an established pattern of past practice,
published policies or a sufficiently specific current
statement, the entity has indicated it will accept
certain responsibilities and has thus created a valid
expectation that it will discharge those
responsibilities. The amount recognized as a
provision is the best estimate, at each period end,
of the expenditures required to settle the present
obligation considering the risks and uncertainties
associated with the obligation. Judgment is
necessary to determine the likelihood that pending
litigation or other claims will succeed or a liability
will arise and then to quantify the amount.
(vii) Share-based payments:
The Company measures the cost of share-based
payments, either equity or cash-settled, with
employees by reference to the fair value of the
equity instrument or underlying equity instrument
at the date on which they are granted. In addition,
cash-settled share-based payments are remeasured
at fair value at every reporting date.
Estimating fair value for share-based payments
requires management to determine the most
appropriate valuation model for a grant, which is
dependent on the terms and conditions of each grant.
In valuing certain types of stock-based payments,
such as incentive stock options, the Company uses
the Black-Scholes option pricing model.
Several assumptions are used in the underlying
calculation of fair values of the Company’s stock
options using the Black-Scholes option pricing
model including the expected life of the option,
stock price volatility and forfeiture rates. Details
of the assumptions used are included in Note 15
of the financial statements.
(viii) Foreign Currency translation:
The determination of functional currency for each
of the Company’s entities requires considerable
judgment. The functional currency is determined
based on the currency of the primary economic
environment in which that entity operates. As the
Company generates and expends cash in a variety
of currencies, management considers several
factors including: the currency in which it receives
its various revenue streams and the magnitude of
each, the currency in which it purchases materials
and pays its employees and the geographic
environments influencing each of its consolidated
entities and its products.
(ix) Revenue Recognition
As is typical in the pharmaceutical industry, the
Company’s royalty streams are subject to a variety
of deductions that generally are estimated and
recorded in the same period that the revenues are
recognized and primarily represent rebates,
discounts and incentives and product returns.
These deductions represent estimates of the related
obligations. Amounts recorded for sales
deductions can result from a complex series of
judgments about future events and uncertainties
and can rely on estimates and assumptions.
RECENT ACCOUNTING PRONOUNCEMENTS
Certain new standards, interpretations, amendments
and improvements to existing standards were issued by
the International Accounting Standards Board (IASB)
or IFRS Interpretations Committee (IFRIC) that are
mandatory for fiscal periods beginning July 1, 2012 or
later. The standards impacted that may be applicable
to the Company are as follows:
IFRS 9 – Financial Instruments
In October 2010, the IASB issued IFRS 9 Financial
Instruments which replaces IAS 39 Financial
Instruments: Recognition and Measurement. IFRS 9
establishes principles for the financial reporting of
financial assets and financial liabilities that will present
relevant and useful information to users of financial
statements for their assessment of the amounts, timing
and uncertainty of an entity’s future cash flows. This
new standard is effective for the Company’s interim
and annual consolidated financial statements
commencing January 1, 2015.
IFRS 10 – Consolidated Financial Statements
In May 2011, the IASB issued IFRS 10 Consolidated
Financial Statements, which replaces IAS 27
Consolidation and Separate Financial Statements and
SIC-12 Consolidation – Special Purpose Entities. IFRS
10 establishes principles for the presentation and
preparation of consolidated financial statements when
an entity controls one or more entities. This new
standard is effective for the Company’s interim and
annual consolidated financial statements commencing
January 1, 2013.
Nuvo Research Inc. Annual Report 2012 37
Management’s Discussion and Analysis cont’d
IFRS 12 – Disclosure of Interests in Other Entities
In May 2011, the IASB issued IFRS 12 Disclosure of
Interests in Other Entities. IFRS 12 is a comprehensive
new standard on disclosure requirements for all forms
of interests in other entities, including subsidiaries,
joint arrangements, associates and unconsolidated
structured entities. This new standard is effective for
the Company’s interim and annual consolidated
financial statements commencing January 1, 2013.
IFRS 13 – Fair Value Measurement
In June 2011, the IASB issued new guidance on IFRS 13
Fair Value Measurement. IFRS 13 aims to improve
consistency and reduce complexity by providing a single
source of guidance for all fair value measurements
across all IFRS, clarifying the definition of fair value
and enhancing disclosure requirements about fair value
measurements. This new guidance is effective for the
Company’s interim and annual consolidated financial
statements commencing January 1, 2013.
IAS 1 – Presentation of Financial Statements:
Other Comprehensive Income
In June 2011, the IASB issued amendments to IAS 1
Presentation of Financial Statements to improve the
consistency and clarity of the presentation of items of
comprehensive income by requiring that items
presented in Other Comprehensive Income (OCI) be
grouped on the basis of whether they are at some point
reclassified from OCI to net earnings or not. The
amendments require companies preparing financial
statements in accordance with IFRSs to group together
items within OCI that may be reclassified to the profit
or loss section of the income statement. The
amendments also reaffirm existing requirements that
items in OCI and profit or loss should be presented as
either a single statement or two consecutive statements.
These amendments are effective for annual periods
beginning on or after July 1, 2012.
The Company is currently assessing the impact of
the adoption of these standards on its Consolidated
Financial Statements, but it does not anticipate
significant changes in 2013.
MANAGEMENT’S RESPONSIBILITY FOR
F I N A N C I A L R E P O RT I N G
Disclosure Controls
Disclosure controls and procedures (DCP) are designed
to provide reasonable assurance that information
required to be disclosed by the Company in its filings
under Canadian securities legislation is recorded,
processed, summarized and reported in a timely
manner. The system of DCP includes, among other
38 Nuvo Research Inc. Annual Report 2012
things, the Company’s Corporate Disclosure and Code
of Conduct and Business Ethics policies, the review
and approval procedures of the Corporate Disclosure
Committee and continuous review and monitoring
procedures by senior management.
As at December 31, 2012, the system of DCP has been
evaluated, under the supervision of the Company’s
Chairman and Co-Chief Executive Officer, President
and Co-Chief Executive Officer and Vice President and
Chief Financial Officer. Based on this evaluation, the
Company’s management has concluded that the DCP
are effective and provide reasonable assurance that all
material information relating to the Company would
be made known to them. While the Co-Chief Executive
Officers and the Chief Financial Officer believe that
the Company’s DCP provide reasonable assurance,
they are also aware that any control system can only
provide reasonable, not absolute, assurance of
achieving its control objectives.
Internal Controls Over Financial Reporting
Management is also responsible for the design of
internal controls over financial reporting (ICFR)
within the Company in order to provide reasonable
assurance regarding the reliability of financial
reporting and the preparation of financial statements
for external purposes in accordance with IFRS. Due to
its inherent limitations, ICFR may not prevent or
detect misstatements. In addition, the design of any
system of control is based upon certain assumptions
about the likelihood of future events, and there can
be no assurance that any design will succeed in
achieving its stated goals under all future events, no
matter how remote, or that the degree of compliance
with the policies or procedures may not deteriorate.
Accordingly, even effective ICFR can only provide
reasonable, not absolute, assurance of achieving the
control objectives for financial reporting.
The design and operating effectiveness of the
Company’s ICFR were evaluated, under the supervision
of the Company’s Chairman and Co-Chief Executive
Officer, President and Co-Chief Executive Officer and
Vice President and Chief Financial Officer, in
accordance with criteria established in the Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and Multilateral
Instrument 52-109 as at December 31, 2012, which
included the Company’s changes related to its
conversion to IFRS. Based on this evaluation, the
Company’s management has concluded that ICFR are
effective and provided reasonable assurance that its
financial reporting is reliable.
Changes to Internal Controls
Over Financial Reporting
During 2012, the Company’s internal controls and
procedures were amended to include ZARS [see
Significant Transactions – 2011 – ZARS Acquisition]
in the scope of the Company’s disclosure controls and
procedures and the design of internal controls over
financial reporting. Management has reviewed and
aligned internal procedures of ZARS to be consistent
with the controls and procedures of the Company.
R I S K FA C T O R S
Prospects for companies in the biotechnology and
pharmaceutical industry generally may be regarded
as uncertain given the nature of the industry and,
accordingly, investments in biotechnology and
pharmaceutical companies should be regarded as
speculative. R&D involves a high and significant
degree of risk. An investor should carefully consider
the risks and uncertainties described below, as well
as other information contained in this MD&A, as well
as broader risk factors discussed in the Company’s
AIF. The risks and uncertainties described below are
not an exhaustive list. Additional risks and
uncertainties not presently known to the Company or
that the Company believes to be immaterial may also
adversely affect the Company’s business. If any one
or more of the following risks occur, the Company’s
business, financial condition and results of operations
could be seriously harmed. Further, if the Company
fails to meet the expectations of the public market in
any given period, the market price of the Company’s
common shares could decline. Before making an
investment decision, each prospective investor should
carefully consider the risk factors set out below and
those included in the AIF and other public documents.
Need for Additional Financing
The Company has an ongoing need for substantial
capital resources to research, develop, commercialize
and manufacture its products and technologies. Other
than the U.S. and Canada, the Company only has
limited participation in Pennsaid sales revenues in
countries where it is currently marketed. In Canada,
the Company receives royalties based on Canadian net
sales, but the market is relatively small and these funds
are used entirely towards repayment of the Paladin
Debt. In the U.S., the Company receives royalties based
on net sales at rates consistent with industry standards.
Pennsaid is subject to generic risk in the U.S., as four
companies have filed ANDAs in the U.S. (including
one that filed in early 2013 and one has withdrawn
its ANDA) for approval to market a generic version
of Pennsaid. Although, the Company has the Pennsaid
Patent, that was issued in July 2012, it does not
automatically prevent a generic version of Pennsaid
from being approved by the FDA or if approved, from
being sold in the U.S. The Company and Mallinckrodt
have filed patent infringement complaints with the
courts against Apotex and Lupin and settled with
Apotex. A launch of a generic in the U.S. would
materially impact revenues and a generic version of
Pennsaid available for commercial sale in the U.S. may
trigger an event of default on the Paladin Debt. In
addition, a condition of the FDA approval of Pennsaid
is the completion of certain post-marketing studies
including the Carc Study. Mallinckrodt has completed
all of the post-marketing studies without any
significant adverse finding and submitted the results to
the FDA. An unfavourable review in any of these
studies could cause the FDA to withdraw the NDA for
Pennsaid; therefore, removing Pennsaid from the
market in the U.S. Pennsaid 2%, the follow-on product
to Pennsaid has patent protection that expires in April
2028. An NDA for Pennsaid 2% was submitted to the
FDA by Mallinckrodt and the FDA has set a PDUFA
date of March 4, 2013 for action on the submission.
Mallinckrodt received a CRL to the NDA for Pennsaid
2% in which the FDA confirmed the only substantive
additional requirement is the completion of a PK study
comparing Pennsaid 2% to original Pennsaid.
Mallinckrodt has indicated that it expects to complete
the study, submit the results and receive a formal
response from the FDA in late 2013 or early 2014.
There can be no assurance that the PK study will be
successful or that the FDA review will be completed
positively or that if approved, Pennsaid 2% will be
launched prior to Apotex launching their generic
version of Pennsaid as per the terms of the Apotex
Settlement or that another generic company launches
their version of Pennsaid. The entry of a generic
version of Pennsaid into the U.S. market before FDA
approval and the commercial launch of Pennsaid 2%
could have a significant adverse effect on Pennsaid and
Pennsaid 2% sales and the resulting level of royalties
earned by the Company. In any of these scenarios, the
Company’s future cash flows would be negatively
impacted as the Company would lose all or a
significant portion of its royalties and potential
milestone payments.
In addition, minimal revenues are being generated by
Synera and Pliaglis, the two key products added
through the acquisition of ZARS. The commercial
activities for Synera are limited to product sales in the
U.S. and royalties generated by the European
marketing partner. While the Company has licensed
Pliaglis’ worldwide rights to Galderma, Pliaglis has
just recently been approved in a number of European
countries and the U.S. Galderma launched the
Nuvo Research Inc. Annual Report 2012 39
Management’s Discussion and Analysis cont’d
commercial sale and marketing of Pliaglis in the U.S. in
March 2013 at the American Academy of Dermatology
Conference in Miami and will launch the commercial
marketing and sale of Pliaglis in Europe in the second
quarter of 2013 at the Anti-Aging Medicine World
Congress & Medispa in Monaco. As a result of the
recent and upcoming launches, the Company’s revenues
may not be sufficient to provide the capital required
for the Company to be self-sustaining without the need
for future financings. In addition, it may take some
time before revenue from these launches is realized.
As a result, there can be no assurance that the
Company will have sufficient capital to fund its
ongoing operations, develop or commercialize any
further products without future financings. There can
be no assurance, especially considering the current
economic environment, that additional financing will
be available on acceptable terms, or at all. If adequate
funds are not available or Pennsaid is genericized in
the U.S. market or if Pennsaid revenues in the U.S.
decline or if Pennsaid 2% is not approved in the U.S. or
if the sales of Synera in the U.S. do not increase or if
the launch of Synera in key European Union markets is
not successful or if the launch of Pliaglis in both the
U.S. and Europe is not successful or if the Company is
unable to avoid an event of default on the Paladin
Debt, the Company may have to substantially reduce or
eliminate planned expenditures, discontinue its
marketing efforts for Synera in the U.S., terminate or
delay clinical trials for its product candidates, curtail
product development programs designed to expand the
product pipeline or discontinue certain operations such
as the Immunology Group.
Current Economic Environment
Challenging global market and economic conditions
with a tighter credit environment and recession in most
major economies began in fiscal 2008, developed in
2009 and are continuing in 2013. Continued concerns
about the systemic impact of potential long-term and
wide-spread recession, geopolitical issues, the
availability and cost of credit and the global housing
and mortgage markets have contributed to increased
market volatility and diminished expectations for
western and emerging economies. These conditions,
combined with declining business and consumer
confidence and increased unemployment, have
contributed to volatility of unprecedented levels. As a
result of these market conditions, the cost and
availability of credit has been and may continue to be
adversely affected by illiquid credit markets and wider
credit spreads. Concern about the stability of the
markets generally and the strength of counterparties
specifically has led many lenders and institutional
40 Nuvo Research Inc. Annual Report 2012
investors to reduce, and in some cases, cease to provide
credit to businesses and consumers. These factors have
led to a decrease in spending by businesses and
consumers alike, and a corresponding decrease in global
infrastructure spending. Continued turbulence in
Canada and international markets and economies and
prolonged declines in business consumer spending may
adversely affect the Company’s liquidity and financial
condition, and the liquidity and financial condition of
the Company’s customers.
These factors may limit the Company’s ability to access
capital. In addition, lack of access to capital may
cause the Company’s suppliers to increase their prices,
reduce their output or change their terms of sale. If the
Company’s customers’ or suppliers’ operating and
financial performance deteriorates or if they are unable
to make scheduled payments or obtain credit, its
customers may not be able to pay, or may delay
payment of accounts receivable owed and its suppliers
may restrict credit or impose different payment terms.
Any inability of customers to pay the Company for its
products or any demands by suppliers for different
payment terms, may adversely affect its earnings and
cash flow. In addition, many governments used, and
continue to use, significant levels of fiscal stimulus in an
attempt to avoid recessions and now have significant
and growing debts and deficits that may require actions
such as spending cuts and higher taxes. These conditions
may impact consumer demand for the Company’s
products and reimbursement or coverage under
government health care programs that may impact
future demand.
The Company has no control over changes in inflation
and interest rates, foreign currency exchange rates
and controls or other economic factors affecting its
businesses or the possibility of political unrest, legal
and regulatory changes in jurisdictions in which the
Company operates. These factors could negatively
affect the Company’s future results of operations in
those markets.
Dependence on Sales and Marketing Partnerships
The Company has limited sales and marketing
experience, though in 2011 it recruited pharmaceutical
executives with significant commercialization experience
in outpatient pain therapeutics. The Company lacks
financial and other resources necessary to undertake
marketing and advertising activities worldwide.
Accordingly, the Company relies on marketing
arrangements, including joint ventures, licensing or
other third-party arrangements, to distribute its products
in jurisdictions where it lacks the resources or expertise.
The Company faces, and will continue to face significant
competition in seeking appropriate partners and
distributors. Moreover, collaboration and distribution
arrangements are complex and time consuming to
negotiate, document and implement. Therefore, there
can be no assurance that the Company will be able to
find additional marketing and distribution partners in
any jurisdiction or be able to enter into any marketing
and distribution arrangements on any terms, acceptable
or not. Moreover, there can be no assurance that its
partners will dedicate the resources needed to
successfully market and distribute the Company’s
products and maximize sales. In addition, under these
arrangements, disputes may arise with respect to
payments that the Company or its partners believe are
due under such distribution or marketing arrangements,
a partner or distributor may develop or distribute
products that compete with the Company’s products or
they may terminate the relationship.
The Company has no influence in sales and marketing
activities for Pennsaid in Canada. Decisions impacting
sales and marketing efforts are made by Paladin which
sells and markets Pennsaid in Canada. If Paladin was
unable to continue to be successful in selling and
marketing Pennsaid in Canada, it could have an adverse
effect on the Company’s Canadian product sales, royalty
revenue and cash resources.
The Company has minimal influence in sales and
marketing activities for Pennsaid in the U.S. Although
Nuvo has four of eight seats on the Pennsaid JSC that
was established as per the U.S. Licensing Agreement
with Mallinckrodt to monitor and provide advice
respecting the commercialization plans for Pennsaid and
the development of Pennsaid 2%. The Company, with
limited exceptions, no longer controls the strategy or the
execution of the clinical development program for
Pennsaid 2% or the commercialization of Pennsaid and
Pennsaid 2%, those responsibilities having been
contractually assumed by Mallinckrodt. An unsuccessful
commercialization would have an adverse effect on the
Company’s potential product sales, royalty income, sales
milestone payments and cash resources. Mallinckrodt
has satisfied the minimum spending and detailing
commitments, so if Mallinckrodt was unable or
unwilling to continue to market or detail Pennsaid to
the same extent, sales of Pennsaid in the U.S. would
likely decline. Additionally, if Mallinckrodt terminated
the U.S. Licensing Agreement and ceased marketing,
promoting and distributing Pennsaid in the U.S., sales
would likely decline materially and the Company would
need to commercialize Pennsaid for which the Company
currently have minimal infrastructure, or alternatively
enter into a new agreement with another pharmaceutical
company, of which no assurance can be given. If the
Company is unable to build the necessary infrastructure
to commercialize the product which would substantially
increase the Company’s expenses and capital
requirements that Nuvo might not be able to fund or are
unable to find a suitable partner, the Company may be
unable to generate revenue from Pennsaid. Both the
aforementioned situations would have an adverse effect
on the Company’s product sales, royalty revenue, sales
milestone payments and cash resources.
In addition, under the terms of the U.S. Licensing
Agreement, Mallinckrodt assumed full responsibility for
managing, planning, executing and paying for all
development activities for Pennsaid 2%. The Company,
with limited exceptions, no longer controls the strategy
or the execution of the clinical development program
for Pennsaid 2%, this responsibility having been
contractually assumed by Mallinckrodt. The Company
does have approval rights with respect to any changes
to the development plan for Pennsaid 2%. Any such
changes require the unanimous approval of the
Pennsaid JSC of which the Company has equal
representation. The Company relies upon Mallinckrodt
to execute a successful drug development program and
ultimately gain U.S. approval for Pennsaid 2%. If
Mallinckrodt fails during this process, it could have an
adverse effect on the Company’s future revenue from
the U.S. and other jurisdictions where Pennsaid 2% has
been licensed.
The Company has minimal influence in the
worldwide sales and marketing activities for Pliaglis
as these decisions are made by Galderma. Although
the Company has three seats on the Joint Steering
Committee that was established to monitor the
development and commercial activities related to
Pliaglis, the Company has no direct control over the
technical, regulatory and commercial activities for
the product with the exception of ownership and
responsibility for filing the European MAA and
managing the regulatory review process through final
approval. Upon approval of the European MAA, the
Company transferred ownership of the MAA to
Galderma. As the Company does not control the
technical and regulatory activities related to Pliaglis
outside of the European Union, it must rely on
Galderma to execute a successful regulatory program
in these regions. In addition, Galderma is responsible
for the worldwide commercialization of Pliaglis and,
as such, the Company will rely on Galderma to
successfully execute a worldwide commercialization
program. Delays in obtaining the appropriate
regulatory approvals for Pliaglis in Europe and other
territories or an unsuccessful launch in any major
territory, may have an adverse effect on the Company’s
Nuvo Research Inc. Annual Report 2012 41
Management’s Discussion and Analysis cont’d
royalty income, milestone payments and cash flows.
The Company is eligible to receive milestones
payments based on the regulatory approval of Pliaglis
in South America. An approval delay in this region
may impact the Company’s future cash flows. Under
the terms of the First Amendment, ZARS received a
cash payment of US$6 million in exchange for agreeing
to a downward adjustment to the royalty rates it was
to receive on the global net sales of Pliaglis. These
reduced royalty rates continue until such time as
Pliaglis achieves a predetermined monetary milestone
that is based on the cumulative aggregate sales of
Pliaglis and the difference between the original and the
adjusted royalty rates. In addition, if this milestone is
not achieved by April 2015, the royalty rates will be
reduced further until such time as the target is reached,
subject to a minimum annual royalty rate being paid to
ZARS. Upon the sales thresholds being met, the
royalty rates revert back to the amounts specified
under the original agreements. Additionally, the event
driven milestone payments in the Rest of World Pliaglis
License Agreement were reduced to US$8 million and
ZARS agreed to assume certain costs and
responsibilities associated with obtaining regulatory
approval for Pliaglis in Europe.
The Company has licensed the rights for Synera to
Eurocept for Europe and certain other territories and
has substantially similar dependence on Eurocept with
respect to the sales and marketing for Synera as it
does with Galderma for Pliaglis.
Generic Drug Manufacturers
Regulatory approval for competing generic drugs can
be obtained without investing in the same level of
costly and time-consuming clinical trials, the Company
has conducted, or might conduct, in the future. Due to
the substantially reduced development costs, generic
drug manufacturers are often able to charge much
lower prices for their products than the original
developer. The Company may face competition from
manufacturers of generic drugs on some of the
products it commercializes, since a number of the
Company’s patents have expired. If the Company faces
generic competition the prices at which the Company’s
products are sold, the royalty rates the Company
receives, the volume of product sold and the overall
revenues it receives may be substantially reduced. In
2010, Health Canada approved a competitor’s generic
version of Pennsaid. It is not known if or when the
competitor’s generic version of Pennsaid will be sold in
the Canadian market. The launch of the generic
product could have an adverse effect on the Company’s
future revenue from Canada.
42 Nuvo Research Inc. Annual Report 2012
In the U.S., under the “Hatch-Waxman Act”, the FDA
can approve an ANDA, for a generic version of a
branded drug for a branded variation of an existing
branded drug, without undertaking the clinical testing
necessary to obtain approval to market a new drug.
This is referred to as the “ANDA process”. In place of
such clinical studies, an ANDA applicant usually
needs only to submit PK data demonstrating that its
product has the same active ingredient(s) and is
bioequivalent to the branded product, in addition to
any data necessary to establish that any difference in
inactive ingredients does not result in different safety
or efficacy profiles, as compared to the reference drug.
The ANDA process was developed primarily for
systemic drugs, such as oral dosage forms, and not
locally acting drugs, such as topical pain medications.
Recently, the FDA has published guidance outlining
specific requirements on what information a sponsor
would need to include in its ANDA for certain
specific topical pain medications, including Pennsaid.
The guidance varies depending on the drug and
formulation and in some cases requires clinical studies
and/or CMC data.
The “Hatch-Waxman Act” requires an applicant for
a drug that relies, at least in part, on the patent of
a branded drug, to notify the sponsor of the branded
drug of their application and potential infringement
of a patent. Upon receipt of this notice the sponsor of
the branded drug has 45 days to bring a patent
infringement suit in federal district court against the
applicant seeking approval of a product covered by
the patent. If such a suit is commenced and the ANDA
was filed after the patent had been listed in the FDA
Orange Book, then the FDA is generally prohibited
from granting approval of the ANDA or Section
505(b)(2) NDA until the earliest of 30 months from
the date the FDA accepted the application for filing, or
the conclusion of litigation in the generic’s favour or
expiration of the patent. If the litigation is resolved in
favour of the applicant or the challenged patent expires
during the 30-month stay period, the stay is lifted and
the FDA may thereafter approve the application based
on the standards for approval of ANDAs and Section
505(b)(2) NDAs. Frequently, the unpredictable nature
and significant costs of patent litigation leads the
parties to settle out of court. Settlement agreements
between branded companies and generic applicants
may allow, among other things, a generic product to
enter the market prior to the expiration of any or all of
the applicable patents covering the branded product,
either through the introduction of an authorized
generic or by providing a license to the patents in suit.
In July 2012, the U.S. Patent Office issued the Pennsaid
Patent with an expiry date of July 10, 2029.
Mallinckrodt listed the Pennsaid Patent in the FDA’s
Orange Book. The Orange Book listing requires any
ANDA applicant seeking FDA approval for a generic
version of Pennsaid prior to expiration of the patent to
notify Nuvo and Mallinckrodt of its ANDA before it
can obtain FDA approval. Prior to the Orange Book
listing, there was no such requirement imposed on the
generic applicants.
Subsequent to the Orange Book listing, Nuvo and
Mallinckrodt received Paragraph IV certification notices
in 2012 from three companies advising Nuvo and
Mallinckrodt that they have each filed an ANDA with
the FDA seeking approval to market a generic version
of Pennsaid. One of the applicants has since withdrawn
from the process. Nuvo and Mallinckrodt have filed a
patent infringement complaint with the courts against
the two generic companies, Apotex and Lupin. In
January, Nuvo and Mallinckrodt entered into the
Apotex Settlement Agreement. Under the terms of the
Apotex Settlement Agreement, Nuvo and Mallinckrodt
granted a license to Apotex that permits Apotex, upon
approval of its ANDA by the FDA, to launch its generic
version of Pennsaid on a date that is the earlier of
45 days after Mallinckrodt or Nuvo makes a first
commercial shipment of Pennsaid 2% in the U.S. and
April 1, 2014, or earlier under certain circumstances.
The complaint is pending against Lupin. In February
2013, Nuvo and Mallinckrodt received a fourth
Paragraph IV certification notice from a company
advising Nuvo and Mallinckrodt that they have filed an
ANDA with the FDA seeking approval to market a
generic version of Pennsaid. The Pennsaid Patent does
not automatically prevent a generic version of Pennsaid
from being approved by the FDA or if approved, from
being sold in the U.S. However, it does provide the
Company with the opportunity to commence legal
action against the ANDA applicants for patent
infringement. A patent infringement complaint has not
been filed at this time against this fourth company.
The approval or launch of generic versions of any of
the Company’s products in any market could have an
adverse effect on the Company’s future revenue and its
cash balances if it needs to commence litigation to
protect its rights.
Obtaining Government and Regulatory Approvals
The manufacture and sale of pharmaceutical products
in Canada, the U.S. and certain countries of the
European Union is highly regulated, which significantly
increases the difficulty and costs involved in obtaining
and maintaining regulatory approval for marketing new
and existing products.
The regulatory approval process in Canada, the U.S.
and in other countries can be long and may involve
significant delays despite the Company’s best efforts.
Moreover, regulations are rigorous, time consuming and
costly and the Company cannot predict the extent to
which it may be affected by changes in regulatory
developments and its ability to meet such regulations.
There is also a risk that the Company’s products may
be withdrawn from the market and the required
approvals suspended as a result of non-compliance with
regulatory requirements.
Furthermore, there can be no assurance that the
regulators will not require modification to any
submissions, which may result in delays or failure to
obtain regulatory approvals. Any delay or failure
to obtain regulatory approvals could adversely affect
the Company’s business, financial condition and
operational results. Further, there can be no assurance
that the Company’s products will prove to be safe
and effective in clinical trials or receive the requisite
regulatory approval in any market.
Failure to obtain necessary regulatory approvals,
the restriction, suspension or revocation of existing
approvals or any other failure to comply with
regulatory requirements, could have a material adverse
effect on the Company’s business, financial condition
and operational results.
Changes in Government Regulation
The business of the Company may be adversely
affected by such factors as changes in the regulatory
environment with respect to intellectual property,
regulation, export controls or product marketing
approvals. Such changes remain beyond the Company’s
control and have an unpredictable impact.
Competition
The pharmaceutical industry is characterized by
evolving technology and intense competition. The
Company is engaged in areas of research where
developments are expected to continue at a rapid pace.
Many companies, including major pharmaceutical,
as well as specialized biotechnology companies, are
engaged in activities focused on medical conditions
that are the same as or similar to those targeted by the
Company. The Company’s success depends upon
maintaining its competitive position in the R&D and
commercialization of its products. Competition from
pharmaceutical, chemical and biotechnology companies,
as well as universities and research institutes, is intense
and expected to increase. Many of these organizations
have substantially greater R&D capabilities, experience
in manufacturing, marketing, financial and managerial
resources and they represent significant competition.
Nuvo Research Inc. Annual Report 2012 43
Management’s Discussion and Analysis cont’d
If the Company fails to compete successfully in any of
these areas, its business, results of operations, financial
condition and cash flows could be adversely affected.
The intensely competitive environment of the branded
products business requires an ongoing, extensive search
for medical and technological innovations and the
ability to market products effectively, including the
ability to communicate the effectiveness, safety and
value of branded products for their intended uses to
healthcare professionals in private practice, group
practices and managed care organizations. There can
be no assurance that the Company and its drug
development partners will be able to successfully
develop medical or technological innovations or that
the Company and its licensing partners will be able to
effectively market the Company’s existing products or
any future products.
The Company’s branded products may face competition
from generic versions. Generic versions are generally
significantly cheaper than the branded version, and,
where available, may be required or encouraged in
preference to the branded version under third-party
reimbursement programs, or substituted by pharmacies
for branded versions by law. The entrance of generic
competition to the Company’s branded products
generally reduces the market share and adversely affects
the Company’s profitability and cash flows. Generic
competition with the Company’s branded products
would be expected to have a material adverse effect on
net sales and profitability of the branded product and
of the Company.
Additionally, the Company competes to acquire the
intellectual property assets that are required to continue
to develop and broaden its product portfolio. In addition
to in-house R&D efforts, the Company seeks to acquire
rights to new intellectual property through corporate
acquisitions, asset acquisitions, licensing and joint venture
arrangements. Competitors with greater resources may
acquire assets that the Company seeks, and even if the
Company is successful, competition may increase the
acquisition price of such assets. If the Company fails to
compete successfully, its growth may be limited.
Since the Company’s drug development process
involves applying its DuraPeel™, CHADD™, MMPE™,
HTE and other technology platforms, with the expertise
and experience of its scientists to formulate topical
drugs using existing and unprotected active
pharmaceutical ingredients, the Company may face
additional regulatory risks if any of its competitors are
developing similar drug candidates. Under the 1984
U.S. federal law, the Drug Price Competition and
Patent Term Restoration Act, informally known as
the “Hatch-Waxman Act”, and C.F.R. 314.108(b)(4)
44 Nuvo Research Inc. Annual Report 2012
a product filed as a 505(b)(2) application and
supported by sponsor initiated clinical studies required
as a condition of approval is entitled to three years of
exclusivity starting from the effective date of approval
or longer if granted either orphan drug exclusivity
(21 C.F.R. 314.20-316.36) or pediatric exclusivity
(section 505A of the Act). If the Company’s competitors
receive the benefit of exclusivity under the “HatchWaxman Act” for a drug product similar to one the
Company is developing this period of marketing
exclusively could prohibit the approval of the
Company’s drug candidate in the U.S. for at least three
years from the effective date of approval of the
competitor’s product. Further, approval or filing of any
of the Company’s future 505(b)(2) applications may be
delayed because of patent and exclusivity rights that
apply to the listed drug (according to 21 C.F.R.
314.50(i), 314.107, and section 505A of the Act).
Healthcare Reform in the United States
While healthcare reform may increase the number of
patients who have insurance coverage for the
Company’s products, its cost containment measures
may adversely affect reimbursement for these products.
In March 2010, the U.S. Health Reform Law was
enacted in the U.S. This legislation has both current and
longer-term impacts on the Company, as discussed
below. The provisions of the U.S. Health Reform Law
are effective on various dates over the next several
years. The principal provisions affecting the Company
provide for the following:
• a new Medicare Part D coverage gap discount
program, in which manufacturers must agree to offer
50% point-of-sale discounts off negotiated prices
of applicable brand drugs to eligible beneficiaries
during their coverage gap period, as a condition of
the manufacturer’s outpatient drugs to be covered
under Medicare Part D (effective January 1, 2011);
• an annual fee payable to the federal government
(which is not deductible for U.S. income tax
purposes) based on the prior-calendar-year share
relative to other companies of branded prescription
drug sales to specified government programs
(effective January 1, 2011, with the total fee to be
paid each year by the pharmaceutical industry
increasing annually through 2018);
• new requirements to report certain financial
arrangements with physicians and others, including
reporting any “transfer of value” made or
distributed to prescribers and other healthcare
providers and reporting any investment interests held
by physicians and their immediate family members
during each calendar year (beginning in 2012, with
reporting starting in 2013);
• a new requirement to annually report drug samples
that manufacturers and distributors provide to
physicians (effective April 1, 2012);
• creation of the Independent Payment Advisory Board
which, beginning in 2014, will have authority to
recommend certain changes to the Medicare
program that could result in reduced payments for
items and services (recommendations could have the
effect of law even if Congress does not act on the
recommendations); and
• establishment of a Center for Medicare Innovation
at the Centers for Medicare & Medicaid Services to
test innovative payment and service delivery models
to lower Medicare and Medicaid spending,
potentially including prescription drug spending,
(beginning January 1, 2011).
A number of the provisions of the U.S. Health Reform
Law may adversely affect reimbursement for the
Company’s products. Additionally, the best price
requirements with respect to Medicaid rebates have
traditionally been a significant consideration with
respect to the level of rebates in the Company’s
Medicare and commercial contracting. The U.S. Health
Reform Law’s effects on rebate amounts could
adversely impact the Company’s future results of
operations. Tracking and reporting on these initiatives
will come at a cost which is unknown, but may be
significant. In addition, if the Company is found to
violate these initiatives, it could have a material adverse
effect on the business, financial conditions, results of
operations and cash flows of the Company.
Over the next few years, regulations and guidance
implementing the U.S. Health Reform Law, as well as
additional healthcare reform proposals may have a
financial impact on the Company. In addition, the U.S.
Health Reform Law requires that, except in certain
circumstances, individuals must obtain health insurance
beginning in 2014 and it also provides for an expansion
of Medicaid coverage in 2014. It is expected that,
as a result of these provisions, there will be a
substantial increase in the number of Americans with
health insurance beginning in 2014, a significant
portion of whom will be eligible for Medicaid. The
Company anticipates that this will increase demand for
pharmaceutical products overall. However, in view of
the many uncertainties, including, but not limited to,
pending litigation challenging the new law and changes
in the partisan composition of Congress, it is not
possible at this time to determine whether and to
what extent sales of the Company’s prescription
pharmaceutical products in the U.S. will be impacted.
Sales, Marketing and Distribution of
Synera in the United States
In order to successfully commercialize Synera in the
U.S., the Company must devote significant resources to
develop a capable sales, marketing and distribution
infrastructure or enter into collaborations with partners
to perform some or all of these services for the
Company. The Company may be unable to devote the
resources necessary to develop a suitable sales,
marketing and distribution infrastructure. The Company
distributes Synera primarily through a small network
of third-party wholesalers that generally sell, distribute
or provide Synera to hospitals, medical clinics and retail
pharmacies. The business would be harmed if any of
these wholesalers were unable or unwilling to distribute
Synera or unable or unwilling to purchase Synera on
commercially favourable terms to the Company. It is
possible that distribution partners could decide to
change their policies or fees, or both, in the future. This
could result in their refusal to distribute smaller volume
products, higher product distribution costs, lower
margins or the need to find alternative methods of
distributing products. Such alternative methods may not
exist or may not be economically viable.
Factors that may inhibit the Company’s efforts to grow
sales, marketing and distribution infrastructure and its
ability to successfully commercialize Synera include:
• a lack of sufficient financial resources; and
• unforeseen costs and expenses associated with
maintaining and expanding a sales and marketing
infrastructure.
The Company may not be able to enter into
collaborations on acceptable terms, if at all, and the
Company may face competition in the search for
partners with whom the Company may collaborate. If
the Company is not able to develop and maintain an
effective sales, marketing and distribution infrastructure,
or collaborate with a partner to perform these functions,
the Company may be unable to commercialize Synera
successfully in the U.S., which would adversely affect the
Company’s financial condition.
Manufacturing and Supply Risks
The Company purchases key raw materials necessary
for the manufacture of its products and finished
products from a limited number of suppliers around the
world and in some cases relies on its licensing partners
to manufacture its products.
In the case of Pennsaid, the Company has a supply
agreement with a single supplier based in the U.S. to
Nuvo Research Inc. Annual Report 2012 45
Management’s Discussion and Analysis cont’d
purchase from that supplier all of the Company’s
requirements for pharmaceutical grade DMSO (one of
the key ingredients in Pennsaid and Pennsaid 2%) until
October 31, 2015 using the supplier’s patented process.
It may be difficult to find another manufacturer if the
supplier is unable to supply the Company with a
sufficient amount of DMSO or if the Company is
forced for any other reason to find another supplier.
It could take another supplier a significant period of
time to develop and certify the necessary processes to
manufacture the product on terms acceptable to the
Company. There may not be suppliers that are able
to meet the Company’s volume or quality requirements
at a price that is as favourable as those it currently has.
Any operating, production or quality problems
experienced by these suppliers that result in a reduction
or interruption in supply could significantly delay the
manufacture and sale of the Company’s products.
Synera contains the active drugs lidocaine and
tetracaine. The Company has only one approved
supplier for tetracaine and two approved suppliers
for lidocaine. The Synera patch contains numerous
components, many of which are unique to the product,
that are purchased either directly or through the
CMO that produces the patches. Given the relatively
low production volumes and unique nature of many of
the components, several are single sourced and will
remain single sourced for the foreseeable future. The
Company currently depends on one CMO as the only
qualified supplier of Synera and Rapydan for all global
markets. The Company has initiated discussions
pertaining to, but has not yet entered into, a long-term
commercial supply agreement with this CMO. Due to
the lead-time necessary to obtain FDA approval of a
new manufacturing site, if the Company is required for
any reason to change manufacturing sites it will be
expensive and time consuming and may cause
interruptions in the supply of products to customers.
As a result, any such delay could have a material
adverse effect on the Company’s business, financial
condition, results of operations and cash flows.
In addition, since Synera, WF10 and Oxoferin are
manufactured by CMOs, the Company has limited
ability to control the manufacturing process or costs
related to this process. Increases in the prices paid to
the CMO, price increases from suppliers of any
component of the product, interruptions in supply of
product or lapses in quality could adversely impact the
Company’s margins, profitability and cash flows. The
Company is reliant on its third-party CMOs to
maintain the facilities at which it manufactures the
Company’s products in compliance with FDA, EMA,
state and local regulations or other countries regulatory
46 Nuvo Research Inc. Annual Report 2012
authorities. If the CMO fails to maintain compliance
with regulatory authorities, they could be ordered to
cease manufacturing which would have a material
adverse impact on the Company’s business, results of
operations, financial condition and cash flows. In
addition to FDA regulation, violation of standards
enforced by the Environmental Protection Agency
(EPA), and the Occupational Safety and Health
Administration (OSHA), and their counterpart agencies
at the state level, could slow down or curtail operations
of the CMO or any of its suppliers.
If the relationships with the CMO or any of the
single-sourced suppliers is discontinued or, if any
manufacturer is unable to supply or produce required
quantities of product on a timely basis or at all,
or if a supplier ceases production of an ingredient or
component, the operations would be negatively
impacted and the business would be harmed. The
Company will need to strengthen the current Synera
supply chain as some component suppliers have
discontinued supply of these low volume components
in the past. If the Company’s promotional efforts for
Synera in the U.S. are successful, this may require
significantly higher production volumes that current
Synera suppliers may not be able to meet. The failure
of any supplier to meet necessary production volumes
could materially impact the launch of the product.
Under the terms of the Pliaglis license agreements,
Galderma has the sole right to manufacture Pliaglis
and; therefore, the Company does and will depend on
Galderma as the only qualified supplier of the product
for all global markets and will have limited ability, if
any, to control the manufacturing process. Pliaglis also
contains the active drugs lidocaine and tetracaine and
in the past the form of tetracaine used in the product
has, at times, been difficult to procure. The Company is
reliant on Galderma to maintain the facilities at which
it manufactures Pliaglis in compliance with FDA, EMA,
state and local regulations and other regulatory
agencies. If Galderma fails to maintain compliance with
FDA, EMA or other critical regulations, they could be
ordered to cease manufacturing which would have a
material adverse impact on the Company’s business,
results of operations, financial condition and cash
flows. In addition to FDA regulation, violation of
standards enforced by the EPA, and the OSHA, and
their counterpart agencies at the state level, could slow
down or curtail operations of Galderma.
In addition, the FDA and other regulatory agencies,
require that raw material manufacturers comply with
all applicable regulations and standards pertaining to
the manufacture, control, testing and use of the raw
materials as appropriate. For the active pharmaceutical
ingredient (API) or critical raw materials depending on
the drug product, this means compliance to current
GMPs for APIs and submission of all data related to the
manufacture, control and testing of the API for quality,
purity, identity and stability, as well as a complete
description of the process, equipment, controls and
standards used for the production of the API. This is
usually submitted to the FDA in the form of a Drug
Master File (DMF) by the manufacturer and referenced
by the sponsor of the NDA. The DMF information and
data is reviewed by the FDA as a critical component of
the approvability of the NDA.
As a result, in the case where only one supplier of a
particular API or critical raw material meets all of the
FDA’s (or other regulatory agencies) requirements and
has a DMF (or similar filing) on file with the FDA,
the Company is at risk should a supplier violate GMP,
fail an FDA inspection, terminate access to its DMF,
be unable to manufacture product, choose not to supply
the Company or decide to increase prices. For DMSO
and tetracaine, the Company has only one approved
supplier for all jurisdictions in which Pennsaid and
Synera have been approved. For Pennsaid’s API,
diclofenac sodium, the Company has two approved
suppliers for Canada and Europe, but only one
approved supplier for the U.S. For some of the
Company’s other raw materials required to manufacture
Pennsaid, Synera, Oxoferin and WF10, the Company
currently has only one approved supplier.
In addition, the Company could be subject to various
import duties applicable to both finished products and
raw materials and it may be affected by other import
and export restrictions, as well as developments with
an impact on international trade. Under certain
circumstances, these international trade factors could
affect manufacturing costs, which will in turn, affect
the Company’s margins, as well as the wholesale and
retail prices of manufactured products.
The Company’s current internal manufacturing
capabilities are limited to its site in Varennes, Québec,
which is the sole manufacturer of Pennsaid for all
markets (and will be the site for the manufacture of
Pennsaid 2% and the bulk drug product used in Synera)
and its site in Wanzleben, Germany which produces
OXO-K993, the active ingredient in WF10 and
Oxoferin. The Company has never achieved capacity in
these facilities, although it has manufactured Pennsaid
and OXO-K993 for existing markets and produced
clinical batches. This exposes the Company to the
following risks, any of which could delay or prevent the
commercialization of its products, result in higher costs
or deprive it of potential product revenues:
• The Company may encounter difficulties in
achieving volume production, quality control and
quality assurance, as well as with shortages of
qualified personnel. Accordingly, the Company
might not be able to manufacture sufficient
quantities to meet its clinical trial needs or to
commercialize its products;
• The Company’s manufacturing facilities are required
to undergo satisfactory current GMP inspections
prior to regulatory approval and are obliged to
operate in accordance with FDA, European and
other nationally mandated GMP, which govern
manufacturing processes, stability testing, record
keeping and quality standards. Failure to establish
and follow GMPs and to document adherence to
such practices, may lead to significant delays in the
availability of material for clinical studies and may
delay or prevent filing or approval of marketing
applications for the Company’s products; and
• Changing manufacturing locations would be difficult
and the number of potential manufacturers is
limited. Changing manufacturers generally requires
re-validation of the manufacturing processes and
procedures in accordance with FDA, European and
other nationally mandated GMPs. Such re-validation
may be costly and would be time consuming.
It would be difficult or impossible to quickly find
replacement manufacturers on acceptable terms,
if at all.
The Company’s manufacturing facilities are subject to
ongoing periodic unannounced inspection by the FDA
and corresponding state and foreign agencies, including
European and Canadian agencies, to ensure strict
compliance with GMPs and other government
regulations. Failure by the Company to comply with
applicable regulations could result in sanctions being
imposed on it, including fines, injunctions, civil
penalties, failure of the government to grant review of
submissions or market approval of drugs, delays,
suspension or withdrawal of approvals, seizures or
recalls of product, operating restrictions, facility
closures and criminal prosecutions, any of which could
harm the Company’s business.
Patents, Trademarks and Proprietary Technology
There can be no assurance as to the breadth or degree
of protection that existing or future patents or patent
applications may afford the Company or that any
patent applications will result in issued patents or that
the Company’s patents or trademarks will be upheld if
challenged. It is possible that the Company’s existing
patent or trademark rights may be deemed invalid.
Although the Company believes that its products do
Nuvo Research Inc. Annual Report 2012 47
Management’s Discussion and Analysis cont’d
not, and will not, infringe valid patents or trademarks
or violate the proprietary rights of others, it is possible
that use, sale or manufacture of its products may
infringe on existing or future patents, trademarks or
proprietary rights of others. If the Company’s products
infringe the patents or proprietary rights of others, the
Company may be required to stop selling or making its
products, may be required to modify or rename its
products or may have to obtain licenses to continue
using, making or selling them. There can be no
assurance that the Company will be able to do so in a
timely manner, upon acceptable terms and conditions,
or at all. The failure to do any of the foregoing could
have a material adverse effect upon the Company. In
addition, there can be no assurance that the Company
will have sufficient financial or other resources to
enforce or defend a patent infringement or proprietary
rights violation action. Moreover, if the Company’s
products infringe patents, trademarks or proprietary
rights of others, the Company could, under certain
circumstances, become liable for substantial damages
which could also have a material adverse effect.
The Company’s key patents for Pennsaid expired in
May 2004 in the U.S., in 2005 in Canada and in 2006
in the European Union. However, in July 2012, the U.S.
Patent Office issued the Pennsaid Patent with an expiry
date of July 10, 2029. Mallinckrodt listed the Pennsaid
Patent in the FDA’s Orange Book. In September 2012,
the U.S. Patent Office issued the Pennsaid 2% Patent
with an expiry date of April 21, 2028. In addition, the
Company has pending patent applications to protect
Pennsaid, Pennsaid 2%, Pliaglis, Synera and for other
pain formulations and platform technologies, including
WF10. However, there can be no assurance that these
patent applications will be granted, and there can be
no assurance that any of the Company’s issued patents
or patent applications, once granted, will not be the
target of challenges by third parties or will be upheld.
Moreover, there can be no assurance that the use, sale
or manufacture of the product will not infringe the
patents of others.
Regardless of the validity of the Company’s patents,
there can be no assurance that others will be unable to
obtain patents or develop competitive non-infringing
products or processes that permit such parties to
compete with the Company. The Company may not be
able to protect its intellectual property rights
throughout the world as filing, prosecuting and
defending patents and trademarks on all of the
Company’s product candidates, products and product
names, when and if they exist, in every jurisdiction
would be prohibitively expensive and can take several
years. Competitors may manufacture, sell or use the
48 Nuvo Research Inc. Annual Report 2012
Company’s technologies and use its trademarks in
jurisdictions where the Company or its partners have
not obtained patent and trademark protection. These
products may compete with the Company’s products,
when and if it has any, and may not be covered by any
of its or its partners’ patent claims or other intellectual
property rights.
The laws of some countries do not protect intellectual
property rights to the same extent as the laws of Canada
and the U.S. and many companies have encountered
significant problems in protecting and defending such
rights in foreign jurisdictions. The legal systems of
certain countries, particularly certain developing
countries, do not favour the enforcement of patents,
trademarks and other intellectual property protection,
particularly those protections relating to biotechnology
and pharmaceuticals, which could make it difficult for
the Company to stop the infringement of its patents.
Proceedings to enforce patent rights in foreign
jurisdictions could result in substantial cost and divert
efforts and attention from other aspects of the business.
The discovery, trial and appeals process in patent
litigation can take several years. Should the Company
commence a lawsuit against a third party for patent
infringement or should there be a lawsuit commenced
against the Company with respect to the validity of its
patents or any alleged patent infringement by the
Company, the cost of such litigation as well as the
ultimate outcome of such litigation, if commenced,
whether or not the Company is successful, could have
a material adverse effect on its business, results of
operations, financial condition and cash flows.
Inability to Achieve Drug Development Goals
within Expected Time Frames
From time-to-time, the Company sets targets and makes
public statements regarding its expected timing for
achieving drug development goals. These include targets
for the commencement and completion of preclinical
and clinical trials, studies and tests and anticipated
regulatory filing and approval dates. These targets are
set based on a number of assumptions that may not
prove to be accurate. The actual timing of these
forward-looking events can vary dramatically from the
Company’s estimates or they might not be achieved at
all, due to factors such as delays or failures in clinical
trials or preclinical work, scheduling changes at CROs,
the need to develop additional data required by
regulators as a condition of approval, the uncertainties
inherent in the regulatory approval process, delays in
achieving manufacturing or marketing arrangements
necessary to commercialize product candidates and
limitations on the funds available to the Company.
If the Company does not meet these targets, including
those which are publicly announced, the ultimate
commercialization of its products may be delayed and,
as a result, its business could be harmed.
Under the terms of the U.S. Licensing Agreement,
Mallinckrodt assumed full responsibility for managing,
planning, executing and paying for all development
activities for Pennsaid 2%. Although Nuvo has four of
eight seats on the Pennsaid JSC that was established as
per the U.S. Licensing Agreement with Mallinckrodt to
monitor and provide advice respecting the development
of Pennsaid 2%, the Company, with limited exceptions,
no longer controls the strategy or the execution of the
clinical development program for Pennsaid 2% those
responsibilities having been contractually assumed by
Mallinckrodt. The Company does have approval rights
with respect to any changes to the development plan for
Pennsaid 2%. Any such changes require the unanimous
approval of the Pennsaid JSC of which Company has
equal representation. In March 2013, Mallinckrodt
received a CRL to the NDA for Pennsaid 2% in which
the FDA confirmed the only substantive additional
requirement is the completion of a PK study comparing
Pennsaid 2% to original Pennsaid. Mallinckrodt has
indicated that it expects to complete the study, submit
the results and receive a formal response from the FDA
in late 2013 or early 2014.
However, there can be no assurance that such trials and
studies will be sufficient for regulatory authorities or
that the required regulatory approvals will be obtained.
If any of these events were to occur, or if the Pennsaid
2% NDA is not approved, this could have a material
adverse effect on the Company.
Uncertainty of Drug Research and Development
There can be no assurance that any of the Company’s
product candidates will be successfully developed in
a timely manner or that they will prove to be more
effective than products based on existing or new
technologies or that a sufficient number of medical
professionals will recommend their use. The risk that
a product candidate may fail clinical trials, the
Company’s inability to successfully complete
development or a decision for financial or other reasons
to halt development of any product candidate,
particularly in instances where significant capital
expenditures have already been made, could have a
material adverse effect on the Company.
The return on the Company’s investment in Nuvo
Research AG depends on the successful completion of
reformulation activities, attaining new intellectual
property protection, clinical development, regulatory
approvals and subsequent commercialization of WF10.
The results from a Phase 3 AIDS study with WF10 in
late-stage AIDS patients were negative and
disappointing. For the Company’s Phase 2 clinical trial
using WF10 as an adjuvant treatment for inoperable
pancreatic cancer, the preliminary results of an interim
analysis indicate that the primary end point, greater
than six months survival, was successfully achieved.
However, it is unclear, based on the open-label study
design and the data reviewed whether the positive
results could be confirmed in a placebo controlled
study. The top-line results from a Phase 2 clinical trial
for evaluating WF10 as a treatment for moderate to
severe allergic rhinitis were positive. Although these
top-line results were positive, reformulation efforts,
future clinical trials and preclinical and clinical
development programs with WF10 for allergic rhinitis
and other disease indications and the pursuit of new IP
protection could yield disappointing or negative results,
further diminishing or eliminating the Company’s
ability to commercially exploit WF10 or recover its
investment in Nuvo Research AG.
The Company has product candidates that are at an
early stage in the drug development process and have
not been subjected to clinical trials. There can be no
assurance that preclinical or clinical testing of the
Company’s product candidates will yield sufficiently
positive results to enable progress toward
commercialization and any such trials will take
significant time to complete. Unsatisfactory results may
prompt the Company to reduce or abandon future
testing or commercialization of particular product
candidates and this may have a material adverse effect
on the Company.
Due to the inherent risk associated with R&D efforts
in the pharmaceutical industry, particularly with respect
to new drugs, the Company’s R&D expenditures may
not result in the successful introduction of FDA
approved new pharmaceutical products. Also, after
submitting an NDA, the FDA may require additional
studies and as a result, the Company may be unable to
reasonably predict the total R&D costs to develop a
particular product.
Risk Related to Clinical Trials
The Company and its drug development partners must
demonstrate through preclinical studies and clinical
trials that the product being developed is safe and
efficacious before obtaining regulatory approval for the
commercial sale of such product. The results of
preclinical studies and previous clinical trials are not
necessarily predictive of future results and the
Company’s current product candidates may not have
favourable results in later testing or trials. Preclinical
Nuvo Research Inc. Annual Report 2012 49
Management’s Discussion and Analysis cont’d
tests and Phase 1 and Phase 2 clinical trials are primarily
designed to test safety, to study pharmacokinetics and
pharmacodynamics and to understand the side effects of
products at various doses and schedules. Success in
preclinical or animal studies and early clinical trials does
not ensure that later large-scale efficacy trials will be
successful and such success is not necessarily predictive
of final results. Favourable results in early trials may
not be repeated in later trials and positive interim results
do not ensure success in final results. Even after the
completion of Phase 3 clinical trials, the FDA, TPD,
EMA or other regulatory authorities may disagree with
the clinical trial design and interpretation of data, and
may require additional clinical trials to demonstrate the
efficacy of product candidates.
A number of companies in the biotechnology and
pharmaceutical industry have suffered significant
setbacks in advanced clinical trials, even after achieving
promising results in earlier trials and preclinical
studies. In many cases where clinical results were not
favourable, were perceived negatively or otherwise did
not meet expectations, the share prices of these
companies declined significantly. Failure to complete
clinical trials successfully and to obtain successful
results on a timely basis could have an adverse effect
on the Company’s future business and its common
share price.
Prolonged Development Time
It takes considerable time to develop new prescription
drug products, to obtain the necessary regulatory
approvals permitting sales, to establish appropriate
distribution channels and market acceptance and to
obtain insurer reimbursement approvals. This time
period is generally from five to more than ten years
and it exposes the Company to significant risks,
including the development of competing products, loss
of investor interest, shifting consumer preferences,
changes in personnel and new regulatory requirements.
During this lengthy period, the Company often incurs
significant development-related costs without obtaining
offsetting revenues.
Competition for Pennsaid
Several major pharmaceutical companies have
developed oral COX-2 selective NSAIDs designed to
reduce gastrointestinal side effects associated with other
types of NSAIDs. Many of these products have been
taken off the market or drug development has stopped
in response to safety concerns. Those that remain,
represent competition for market share. More recently
oral, full-dose, NSAIDs combined with PPI to reduce
certain side effects common to NSAIDs, such as
VIMOVO which combines naproxen, an NSAID, with
50 Nuvo Research Inc. Annual Report 2012
esomeprazole magnesium, a PPI. These types of drugs
also represent competition for market share. While the
Company believes that topical administration gives
Pennsaid a better safety profile than all oral NSAIDs,
including those with PPIs and Cox-2 selective
medications, it may be subject to regulations and
regulatory decisions of governing bodies, such as the
FDA in the U.S., including label warnings that apply to
NSAIDs generally.
In the U.S., other topical products for the treatment of
medical conditions similar to the indication for
Pennsaid have been available OTC for many years and,
while a relatively new market segment, other topical
prescription NSAIDs were approved and launched
before Pennsaid. These competitor topical NSAID
products currently have U.S. sales significantly greater
then Pennsaid and they provide significant competition
for market share. If patients and practitioners believe
these competing products provide pain relief, it may
be difficult to convince them to use Pennsaid or
conversely, if they do not believe that they provide pain
relief they may create a perception that all topically
applied products have similar efficacy, making it more
difficult to convince physicians and their patients of the
value of Pennsaid.
Pennsaid faces competition in the U.S. from at least two
other topically applied diclofenac drug products that
were approved for marketing in 2007 by the FDA. The
FLECTOR® Patch was approved by the FDA for the
topical treatment of acute pain due to minor strains,
sprains and contusions and is marketed by Pfizer Inc.,
one of the largest healthcare companies in the world.
The FLECTOR® Patch, launched in 2008, contains the
NSAID diclofenac epolamine. The second drug product,
Novartis’ Voltaren® Gel which contains the NSAID
diclofenac sodium was approved by the FDA for the
relief of the pain of OA of joints amenable to topical
treatment, such as the knees and those of the hand and
was launched by Endo in the first half of 2008. Both of
these topical products have achieved respectable sales
levels and have benefitted from being launched in the
U.S. market prior to Pennsaid and possibly by having
different indications than Pennsaid.
In 2010, Health Canada approved a competitor’s
generic version of Pennsaid. It is not known if or when
the generic version of Pennsaid will be sold in the
Canadian market. The launch of the competitor’s
generic version of Pennsaid would likely have an
adverse impact on the Company’s future revenue from
Canada. In 2008, Health Canada approved a topical
diclofenac product, Novartis’ Voltaren Emul1%™ and
it has been available in Canada without a prescription
since October 2008. In Europe and Asia, several major
pharmaceutical companies market these and other
topical NSAIDs that compete against Pennsaid in
countries where it is marketed. In Greece, Pennsaid
became an OTC product in 2011 and now competes in
this market with no reimbursement.
In addition to recently approved products, the
Company is also aware of other companies that are
developing topical NSAID products for the U.S. and
other markets that may present additional competition
in the future. Like Pennsaid, these drugs may be
efficacious yet reduce the incidence of some of the
systemic side effects associated with oral NSAIDs.
In addition, prior to July 2012, Pennsaid’s U.S. patents
had expired. In July 2012, the U.S. Patent Office issued
the Pennsaid Patent with an expiry date of July 10,
2029. Mallinckrodt has listed the Pennsaid Patent in the
FDA’s Orange Book. The Orange Book listing requires
any ANDA applicant seeking FDA approval for a
generic version of Pennsaid prior to expiration of the
patent to notify Nuvo and Mallinckrodt of its ANDA
before it can obtain FDA approval. Prior to the Orange
Book listing, there was no such requirement on the
generic applicants. Subsequent to the Orange Book
listing in July 2012 Nuvo and Mallinckrodt received
Paragraph IV certification notices from three companies
advising Nuvo and Mallinckrodt that they have each
filed an ANDA with the FDA seeking approval to
market a generic version of Pennsaid. One of the
applicants has since withdrawn from the process. Nuvo
and Mallinckrodt have filed a patent infringement
complaint with the courts against the two generic
companies Apotex and Lupin. In January, the Company
entered into the Apotex Settlement Agreement. Under
the terms of the Apotex Settlement Agreement, Nuvo
and Mallinckrodt granted a license to Apotex that
permits Apotex, upon approval of its ANDA by the
FDA, to launch its generic version of Pennsaid on a
date that is the earlier of 45 days after Mallinckrodt or
Nuvo makes a first commercial shipment of Pennsaid
2% in the U.S. and April 1, 2014, or earlier under
certain circumstances. The complaint is pending against
Lupin. In February 2013, Nuvo and Mallinckrodt
received a fourth Paragraph IV certification notice from
a company advising Nuvo and Mallinckrodt that they
have filed an ANDA with the FDA seeking approval to
market a generic version of Pennsaid. The Pennsaid
Patent does not automatically prevent a generic version
of Pennsaid from being approved by the FDA or if
approved, from being sold in the U.S. However, it does
provide the Company with the opportunity to
commence legal action against the ANDA applicants for
patent infringement. A patent infringement complaint has
not been filed at this time against this fourth company.
Pennsaid 2% is an improved version of Pennsaid that
contains 2% diclofenac sodium compared to 1.5% and
is more viscous than Pennsaid. Pennsaid 2% is supplied
in a metered dose pump bottle and was studied in
clinical trials using twice daily dosing compared to four
times a day for Pennsaid. Mallinckrodt submitted an
NDA on July 15, 2012 and advised Nuvo that the FDA
accepted the NDA for Pennsaid 2% for review. The
FDA has set a PDUFA date of March 4, 2013 for action
on the submission. Mallinckrodt received a CRL to the
NDA for Pennsaid 2% in which the FDA confirmed the
only substantive additional requirement is the
completion of a PK study comparing Pennsaid 2% to
original Pennsaid. Mallinckrodt has indicated that it
expects to complete the study, submit the results and
receive a formal response from the FDA in late 2013 or
early 2014. However, there can be no assurance that
Pennsaid 2% will meet all government regulatory
requirements or that it will be approved for marketing
in any jurisdiction.
The entry of a generic version of Pennsaid into the
U.S. market could have a significant adverse effect
on Pennsaid and Pennsaid 2% sales and the resulting
level of royalty and milestone payments earned by
the Company.
Competition for Synera and Pliaglis
Synera and Pliaglis face competition in all markets from
other topically applied local anaesthetic drug products
such as EMLA Cream (a eutectic mixture of lidocaine
2.5% and prilocaine 2.5%), L.M.X 4 and L.M.X.5
Anorectal Creams that are available OTC and
compounded anaesthetic creams.
EMLA Cream is an emulsion in which the oil phase is
a eutectic mixture of lidocaine and prilocaine in a ratio
of 1:1 by weight. It is indicated as a topical anaesthetic
for use on intact skin to provide local analgesia and
on genital mucous membranes for superficial minor
surgery and as pre-treatment for infiltration
anaesthesia. The product is owned and sold globally by
AstraZeneca, but is also available as a generic product.
EMLA Cream is applied in a thick layer to intact skin
and must be covered with an occlusive dressing. Local
dermal analgesia is achieved after approximately 60 to
120 minutes. EMLA is also available in a patch form in
multiple jurisdictions for needle punctures. It is used as
a topical anaesthetic and contains lidocaine 2.5% and
prilocaine 2.5%. L.M.X.4 and L.M.X. 5 Anorectal
Creams are topical anaesthetic creams containing 4 and
5% lidocaine, respectively. L.M.X.4 is indicated for the
temporary relief of pain and itching due to: minor cuts;
minor scrapes; minor burns; sunburn; minor skin
irritations and insect bites. L.M.X.5 Anorectal Cream is
Nuvo Research Inc. Annual Report 2012 51
Management’s Discussion and Analysis cont’d
approved for the temporary relief of local discomfort,
including pain and itching, soreness or burning
associated with anorectal disorders. The product is also
used for cosmetic procedures such as waxing and laser
hair removal. L.M.X. 4 and L.M.X.5 Anorectal Creams
are OTC products marketed by Ferndale Laboratories,
Inc. in the U.S. Compounded anaesthetic creams are
prepared by compounding pharmacists and are
available in the U.S. Compounded drugs are not FDA
approved, but can be prescribed by physicians.
Competition for WF10
Several major pharmaceutical companies are at
various stages of developing products targeting the
immune system. Some of these products have already
been approved for marketing and as such, represent
competition for market share.
In 2010, the Company ran a Phase 2 clinical trial
evaluating WF10 as a treatment for moderate to severe
allergic rhinitis that met its primary endpoint. During
2011, the Immunology Group completed its evaluation
of the entire data set including the secondary endpoints
all of which were achieved. In August 2012, the U.S.
Patent Office issued Patent No. 8,252,343 providing
patent coverage related to WF10 with an expiry date
of March 4, 2029. This patent covers a method of
treating allergic asthma, allergic rhinitis and atopic
dermatitis using a chlorite based formulation, such as
WF10. Further, the Company received allowance of
an additional patent application in the U.S. related a
method of using WF10 and Reformulated WF10 to
treat allergic asthma, allergic rhinitis and atopic
dermatitis. The Company is using SAB funding to
support a number of preclinical studies relating to
Reformulated WF10 for which Nuvo filed a U.S.
provisional patent in December 2011. In December
2012, the Company filed an international PCT
application and a U.S. patent application claiming
priority to this provisional application. These studies
are being conducted by Nuvo in partnership with the
University of Leipzig and the Fraunhofer Institute and
are focused on demonstrating, the efficacy, safety and
stability of Reformulated WF10.
Regardless of the future development plan for WF10, a
number of additional studies will need to be conducted
before WF10 could be submitted for regulatory
approval for the treatment of allergic rhinitis or any
other illness and there can be no assurance that the
results of these additional studies would be favourable
or that regulators will approve WF10 for these or other
purposes. Any such studies and approvals would be
expected to take a number of years.
52 Nuvo Research Inc. Annual Report 2012
Publications of Negative Study or
Clinical Trial Results
The Company adheres to the principles outlined by the
Pharmaceutical Research and Manufacturers of America
(PhRMA) guidelines in that it will submit for journal
publication all results of late-stage clinical trials
whether the outcomes are positive or negative. The
publication of negative results of studies or clinical
trials may adversely impact the Company’s sales
revenue if the related drug is marketed and it may
adversely affect the price of the Company’s common
shares. From time-to-time, studies or clinical trials on
various aspects of pharmaceutical products are
conducted by the Company, academics or others,
including government agencies. The results of these
studies or trials, when published, may have a dramatic
effect on the market for the pharmaceutical product
that is the subject of the study. The publication of
negative results of studies or clinical trials related to the
Company’s products, or the therapeutic areas in which
its products compete, could adversely affect sales, the
prescription trends for the products, the reputation of
the products and the price of the Company’s common
shares. In the event of the publication of negative
results of studies or clinical trials related to the
Company’s marketed products or the therapeutic areas
in which these products compete, the business, financial
condition, results of operations and cash flows of the
Company could be materially adversely affected.
Reimbursement and Product Pricing
There can be no assurance that Pennsaid, Pliaglis or
Synera will be successfully commercialized in current
markets or that the additional regulatory approvals
necessary to commercialize Pennsaid, Pennsaid 2%,
Pliaglis and Synera in markets where they are not
currently approved will be obtained. In Canada, private
health coverage insurers have generally approved
reimbursement of Pennsaid costs, but government
health authorities have not approved such
reimbursement. Obtaining reimbursement approval for
a product from each government or other third-party
payer is a time consuming and costly process that could
require the Company to provide supporting scientific,
clinical and cost effectiveness data for the use of its
products to each payer. In certain territories, this
process is the responsibility of the licensee and the
Company will have little financial impact from this
process except to the extent the licensees are forced to
provide significant discounts or rebates which would
affect the level of net sales of the product and reduce
the amount of royalties the Company earns. The
Company may not have or be able to provide data
sufficient to gain acceptance with respect to
reimbursement. Even when a payer determines that a
product is eligible for reimbursement, they may impose
coverage limitations that preclude payment for some
approved uses or that full reimbursement may not be
available for the Company’s products.
Furthermore, even after approval for reimbursement for
the Company’s products is obtained from private health
coverage insurers or government health authorities, it
may be removed at any time. Significant uncertainty
exists as to the reimbursement status of newly approved
healthcare products and there can be no assurance that
third-party coverage will be sufficient to give the
Company an appropriate return on its investment in
developing existing or new products. Increasingly,
government and other third-party payers are attempting
to contain expenditures for new therapeutic products by
limiting or refusing coverage, limiting reimbursement
levels, imposing high co-pays, requiring prior
authorizations and implementing other measures aimed
at discouraging use. Inadequate coverage or
reimbursement could adversely affect market acceptance
of the Company’s products. Third-party payers
increasingly challenge the pricing of pharmaceutical
products. Moreover, the trend toward managed
healthcare in the U.S., the growth of organizations such
as health maintenance organizations and reforms to
healthcare and government insurance programs, could
significantly influence the purchase of healthcare
services and products, resulting in lower prices and
reduced demand for the Company’s products. The
Company expects recent changes in the U.S. Medicare
program and increasing emphasis on managed care to
continue to put pressure on pharmaceutical product
pricing and reimbursement.
In the U.S., each third-party payer plan is organized
into tiers and the number of tiers will vary. Each tier
represents a different reimbursement level. There is no
guarantee that the Company’s products will be
reimbursed even at tiers where the reimbursement
amounts are minimal.
In some countries, particularly the countries of the
European Union, the pricing of prescription
pharmaceuticals is subject to government control. In
these countries, pricing negotiations with governmental
authorities can take considerable time and delay the
introduction of a product to the market. To obtain
reimbursement or pricing approval in some countries,
the Company may be required to conduct a clinical trial
that compares the cost effectiveness of its product
candidate to other available therapies. If reimbursement
of the Company’s product is unavailable or limited in
scope or amount, or if pricing is set at unsatisfactory
levels, its business could be adversely affected. In
addition, any country could pass legislation or change
regulations affecting the pricing of pharmaceuticals in
ways adverse to the Company before or after a
regulatory agency approves any of its product
candidates for marketing. While the Company cannot
predict the likelihood of any legislative or regulatory
changes, if any government or regulatory agency adopts
new legislation or new regulations, the Company’s
business could be harmed.
“Off-label” Promotion of Drugs
Companies may not promote drugs for “off-label” uses
– that is, uses that are not approved by the FDA and
described in the product’s labelling. Under what is
known as the “practice of medicine”, physicians and
other healthcare practitioners may prescribe drug
products for off-label or unapproved uses, and such
uses are common across some medical specialties.
While the FDA does not regulate a physician’s choice
of medications or treatments, the Federal Food, Drug
and Cosmetic Act (FFDCA) and FDA regulations
significantly restrict permissible communications on
the subject of off-label uses of drug products by
pharmaceutical companies. The FDA, HHS OIG, and
the Department of Justice (DOJ) actively enforce laws
and regulations that prohibit the promotion of off-label
uses. A Company that is found to have promoted
off-label uses of its products may be subject to
significant liability, including civil fines, criminal fines
and penalties, civil damages and exclusion from federal
funded healthcare programs such as Medicare and
Medicaid. Conduct giving rise to such liability could
also form the basis for private civil litigation by thirdparty payers or other persons allegedly harmed by
such conduct.
The Company has endeavoured to establish and
implement extensive compliance programs generally
delivered by third parties who understand the
intricacies of the laws, in order to educate and inform
employees and its contract sales force employed by its
CSO on how to comply with the relevant advertising
and promotion restrictions and requirements imposed
under the various laws and regulations. Nonetheless,
the FDA, HHS OIG or the DOJ may take the position
that the Company is not in compliance with such
requirements, and, if such non-compliance is proven,
the Company may be subject to significant liability,
including administrative, civil and criminal penalties
and fines. In addition, management’s attention could be
diverted from the Company’s business operations and
its reputation could be damaged.
Nuvo Research Inc. Annual Report 2012 53
Management’s Discussion and Analysis cont’d
Potential Product Liability
The Company may be subject to product liability claims
associated with the use of its products either after their
approval or during clinical trials and there can be no
assurance that liability insurance will continue to be
available on commercially reasonable terms or at all.
Product liability claims might also exceed the amounts,
or fall outside of such coverage. Product liability claims
against the Company regardless of their merit or
potential outcome, could be costly and divert the
Company’s management’s attention from other business
matters or adversely affect its reputation and the
demand for its products.
In addition, certain drug retailers and distributors
require minimum liability insurance as a condition of
purchasing or accepting products for retail or wholesale
distribution. Failure to satisfy such insurance
requirements could impede the ability of the Company
or its potential partners in achieving broad retail
distribution of its products, resulting in a material
adverse effect on the Company.
There can be no assurance that a product liability claim
or series of claims brought against the Company would
not have an adverse effect on its business, financial
condition, results of operations and cash flows. If any
claim is brought against the Company, regardless of the
success or failure of the claim, there can be no
assurance that the Company will be able to obtain or
maintain product liability insurance in the future on
acceptable terms or with adequate coverage against
potential liabilities or the cost of a recall can be given.
Goodwill and Intangible Assets
The Company has significant intangible assets primarily
related to Pliaglis and Synera. Consequently, potential
impairment of intangibles may significantly impact the
Company’s profitability. Intangible assets are subject to
an impairment analysis whenever events or changes in
circumstances indicate the carrying amount of the asset
may not be recoverable. If any events or change in
circumstances occur for Pliaglis or Synera, such as, but
not limited to, an unsuccessful commercialization effort,
delayed product launches or the failure to gain
marketing approvals in key markets the Company may
be forced to conduct an impairment analysis of the
related intangible assets which may be impaired. If
impaired, the Company may be required to record an
impairment charge which could significantly impact the
Company’s profitability.
54 Nuvo Research Inc. Annual Report 2012
Events giving rise to impairment are an inherent risk in
the pharmaceutical industry and cannot be predicted.
As a result of the significance of goodwill and other
intangible assets, the Company’s results of operations
and financial position in a future period could be
negatively impacted should an impairment of goodwill
or other intangible assets occur.
In 2012, the Company conducted an impairment
analysis of goodwill and intangible assets. The
Company wrote-off 100% of the goodwill value of
$4.4 million and $7.5 million of the intangible asset
value of which $7.2 million related to Pliaglis and
$0.3 million to Synera. At December 31, 2012,
intangible assets represented approximately 31% of
the Company’s total assets.
Personnel
The Company depends upon certain key members of
its scientific and management teams. The loss of any of
these individuals could have a material adverse effect
on the Company. The Company does not maintain
key-man insurance on any employee.
The Company’s success depends, in large part, on its
ability to continue to attract and retain qualified
scientific, commercial and management personnel. The
Company faces intense competition for such personnel.
It may not be able to attract and retain qualified
management and scientific personnel in the future. Also,
it must provide training for its employee base due to the
highly specialized nature of pharmaceutical products.
Further, the Company expects that its growth and
potential expansion into specific areas and activities
requiring new or additional expertise, such as in the
areas of research and development, preclinical studies,
CMC work, clinical trials, regulatory approvals, sales
and marketing will place additional requirements on
management, operational and financial resources.
The Company expects these demands will require an
increase in the number of management and scientific
personnel and development of additional expertise by
existing personnel. The failure to attract and retain
such personnel, or to develop such expertise, could
materially adversely affect prospects for its success. In
addition, to attract qualified personnel the Company
may be required to establish offices in different
locations. Failure of personnel in different locations to
work effectively together could materially adversely
affect the Company’s success.
Given these potential challenges, current personnel may
be unable to adapt or may not have the appropriate
skills and the Company may fail to assimilate and train
new employees. Highly skilled employees with the
education and training required, especially employees
with significant experience and expertise in drug
delivery systems, are in high demand. Once trained, the
Company’s employees may be hired by its competitors.
International Operations
The Company has operations outside of Canada,
primarily in the U.S. and Europe, in order to research,
develop, market, distribute and manufacture certain
products and potential products, the Company may
expand such operations further in the future.
Participation in international markets requires resources
and management attention and subjects the Company
to business risks, including the following:
Acquisition and Integration of Complementary
Technologies or Businesses
The Company may pursue product or business
acquisitions that could complement or expand its
business. However, it may not be able to identify
appropriate acquisition candidates in the future. If an
acquisition candidate is identified, the Company may
not be able to successfully negotiate the terms of any
such acquisition or finance such acquisition. Any such
acquisition could result in unanticipated costs or
liabilities, diversion of management’s attention from the
core business, the expenditure of resources and the
potential loss of key employees, particularly those of
the acquired organizations. In addition, the Company
may not be able to successfully integrate any businesses,
products, technologies or personnel that it might
acquire in the future, which may harm its business.
• different regulatory requirements for approval of its
product candidates;
To the extent the Company issues common shares or
other rights to finance any acquisition, existing
shareholders may be diluted. They may also result in
goodwill and other long-lived assets that are subject to
impairment tests, which could result in future
impairment charges.
Losses Due to Foreign Currency Fluctuations
The Company anticipates that the majority of the
revenue from commercialization of its product
candidates may be in currencies other than Canadian
dollars. Fluctuation in the exchange rate of the
Canadian dollar relative to these other currencies could
result in the Company realizing a lower profit margin
on sales of its product candidates than anticipated at
the time of entering into such commercial agreements.
Adverse movements in exchange rates could have a
material adverse effect on the Company’s financial
condition and results of operations.
• dependence on local distributors;
• longer payment cycles and problems in collecting
accounts receivable;
• adverse changes in trade and tax regulations;
• absence or substantial lack of legal protection for
intellectual property rights;
• difficulty in managing widespread operations;
• political and economic instability;
• increased costs and complexities associated with
financial reporting; and
• currency risks.
The occurrence of any of these or other factors may
cause the Company’s international operations to not be
successful, could lower the prices at which it can sell its
products or otherwise have an adverse effect on its
operating results.
Taxes
The Company is a multinational corporation with
global operations. As such, it is subject to the tax laws
and regulations of Canadian federal, provincial and
local governments, the U.S. and of many international
jurisdictions including transfer pricing laws and
regulations between many of these jurisdictions.
Significant judgment is required in determining the
Company’s provision for income taxes and claims for
investment tax credits (ITCs) related to qualifying
Scientific Research and Experimental Development
(SR&ED) expenditures. Various internal and external
factors may have favourable or unfavourable effects on
future provisions for income taxes and the Company’s
effective income tax rate. These factors include, but are
not limited to, changes in tax laws, regulations and/or
Nuvo Research Inc. Annual Report 2012 55
Management’s Discussion and Analysis cont’d
rates, results of audits by tax authorities, changing
interpretations of existing tax laws or regulations,
changes in estimates of prior years’ items, future levels
of R&D spending and changes in overall levels of
income before taxes. Furthermore, new accounting
pronouncements or new interpretation of existing
accounting pronouncements can have a material impact
on the Company’s effective income tax rate.
The Company could be impacted by certain tax
treatments for various revenue streams in different tax
jurisdictions. The Company is subject to withholding
taxes on certain of its revenue streams. The withholding
tax rates that have been used are based on the
interpretation of specific tax acts and related treaties. If
a tax authority has a different interpretation from the
Company’s it could potentially impose additional taxes,
penalties or fines. This would potentially reduce the
amounts of revenue ultimately received by the Company.
The Company, from time-to-time, has executed multiple
reorganization transactions impacting its tax structure.
If a tax authority has a different interpretation from the
Company’s, it could potentially impose additional
taxes, penalties or fines.
Volatility of Share Price
Market prices for pharmaceutical related securities,
including those of the Company, have been historically
volatile and subject to substantial fluctuations. The
stock market from time-to-time experiences significant
price and volume fluctuations unrelated to the
operating performance of particular companies. Future
announcements concerning the Company or its
competitors, including the results of testing,
technological innovations, new commercial products,
marketing arrangements, government regulations,
developments concerning regulatory actions affecting
the Company’s products and its competitors’ products
in any jurisdiction, developments concerning
proprietary rights, litigation, additions or departures of
key personnel, cash flow, public concerns about the
safety of the Company’s products and economic
conditions and political factors in the U.S., Europe,
Canada or other regions – may have a significant
impact on the market price of the common shares. In
addition, there can be no assurance that the common
shares will continue to be listed on the TSX.
56 Nuvo Research Inc. Annual Report 2012
Compliance with Laws and Regulations
Affecting Public Companies
Any future changes to the laws and regulations
affecting public companies, compliance with existing
provisions of Multilateral Instrument 52-109 –
Certification of Disclosure in Issuer’s Annual and
Interim Filings of the Canadian Securities
Administrators and the other applicable Canadian
securities laws and regulation and related rules and
policies, may cause the Company to incur increased
costs as it evaluates the implications of new rules and
implements any new requirements. Delays or a failure
to comply with the new laws, rules and regulations
could result in enforcement actions, the assessment of
other penalties and civil suits.
The new laws and regulations may make it more
expensive for the Company to provide indemnities to
the Company’s officers and directors and may make it
more difficult to obtain certain types of insurance,
including liability insurance for directors and officers;
as such, the Company may be forced to accept reduced
policy limits and coverage or incur substantially higher
costs to obtain the same or similar coverage. The
impact of these events could also make it more difficult
for the Company to attract and retain qualified persons
to serve on its Board of Directors or as executive
officers. The Company may be required to hire
additional personnel and utilize additional outside legal,
accounting and advisory services, all of which could
cause general and administrative costs to increase
beyond what the Company currently has planned.
The Company is continuously evaluating and
monitoring developments with respect to these laws,
rules and regulations and it cannot predict or estimate
the amount of the additional costs it may incur or the
timing of such costs.
The Company is required annually to review and report
on the effectiveness of its internal control over financial
reporting in accordance with Multilateral Instrument
52-109 – Certification of Disclosure in Issuer’s Annual
and Interim Filings of the Canadian Securities
Administrators. The results of this review are reported
in the Company’s Annual Report, The Company’s
Co-Chief Executive Officers and Chief Financial Officer
are required to report on the effectiveness of the
Company’s internal control over financial reporting.
Management’s review is designed to provide reasonable
assurance, not absolute assurance, that all material
weaknesses existing within the Company’s internal
controls are identified. Material weaknesses represent
deficiencies existing in the Company’s internal controls
that may not prevent or detect a misstatement occurring
which could have a material adverse effect on the
quarterly or annual financial statements of the
Company. In addition, management cannot provide
assurance that the remedial actions being taken by the
Company to address any material weaknesses identified
will be successful, nor can management provide
assurance that no further material weaknesses will be
identified within its internal controls over financial
reporting in future years.
• products may fail to achieve market acceptance;
If the Company fails to maintain effective internal
controls over its financial reporting, there is the
possibility of errors or omissions occurring or
misrepresentations in the Company’s disclosures which
could have a material adverse effect on the Company’s
business, its financial statements and the value of the
Company’s common shares.
• issue of preferred shares;
Additional Risks
Additional risks that could be materially adversely
affect the Company’s business or an investment in its
common shares include, but are not limited to:
• government assistance for certain drug
development programs;
• limits on the marketing approval for the Company’s
products such that they are subject to ongoing
regulatory review and regulatory requirements;
• inadequate patient enrolment for the Company’s
current trials or future clinical trials;
• rapid technological change that could make
the Company’s products or drug delivery
technologies obsolete;
• further dilution and a declining share price from
additional equity financings;
• the inability to raise future capital when and if
required;
• the inability to comply with laws regulating
hazardous waste;
• public company requirements that may strain
resources;
• an inability to achieve and maintain profitability;
• an inability to realize the anticipated benefits from
the acquisition of ZARS;
• a failure of its information technology systems;
• potential litigation;
• the inability to achieve expected savings from
restructurings;
• shareholders’ rights plan may prevent or delay a
change in control;
• an inability to manage the growth of the Company;
• fluctuations in quarterly results;
• absence of dividends;
• an active trading market for common shares;
• an inability to protect know-how and trade secrets;
and
• securities industry analyst research reports.
A D D I T I O N A L I N F O R M AT I O N
Additional information relating to the Company,
including the Company’s most recently filed AIF and
Management Information Circular, can be found on
SEDAR at www.sedar.com.
• unsatisfactory performance by third parties whom
the Company relies upon to conduct, supervise and
monitor its clinical trials and preclinical studies;
Nuvo Research Inc. Annual Report 2012 57
Management’s Report
The accompanying consolidated financial statements have been prepared by management and approved by the
Board of Directors of the Company. Management is responsible for the information and representations contained
in these financial statements and the accompanying Management’s Discussion and Analysis. The financial statements
have been prepared in accordance with International Financial Reporting Standards (IFRS). The significant
accounting policies followed by the Company are set out in note 2 to the consolidated financial statements.
To assist management in discharging these responsibilities, the Company maintains a system of procedures
and internal controls which are designed to provide reasonable assurance that its assets are safeguarded, that
transactions are executed in accordance with management’s authorization, and that the financial records form
a reliable base for the preparation of accurate and timely financial information.
The Company’s external auditors are appointed by the shareholders. They independently perform the necessary
tests of accounting records and procedures to enable them to report their opinion as to the fairness of the
consolidated financial statements and their conformity with IFRS.
The Board of Directors ensures that management fulfills its responsibilities for financial reporting and internal
control. The Board of Directors exercises this responsibility through an Audit Committee composed of three
Directors, all of whom are not involved in the day-to-day operations of the Company. The Audit Committee
meets quarterly with management, and with external auditors to review audit recommendations and any matters
that the auditors believe should be brought to the attention of the Board of Directors. The Audit Committee
reviews the consolidated financial statements and Management’s Discussion and Analysis and recommends their
approval by the Board of Directors.
Chairman and
Co-Chief Executive Officer
March 27, 2013
58 Nuvo Research Inc. Annual Report 2012
President and
Co-Chief Executive Officer
March 27, 2013
Vice President
and Chief Financial Officer
March 27, 2013
Independent Auditors’ Report
To the Shareholders of Nuvo Research Inc.
We have audited the accompanying consolidated financial statements of Nuvo Research Inc., which comprise the
consolidated statement of financial position as at December 31, 2012, and the consolidated statement of loss
and comprehensive loss, statement of changes in equity and statement of cash flows for the year then ended, and
a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with International Financial Reporting Standards, and for such internal control as management
determines is necessary to enable the preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We
conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require
that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment
of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error.
In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the consolidated financial statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness
of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position
of Nuvo Research Inc. as at December 31, 2012, and their financial performance and cash flows for the year then
ended in accordance with International Financial Reporting Standards.
Restated Comparative Information
The consolidated financial statements of Nuvo Research Inc. for the year ended December 31, 2011 (prior to the
restatement of the comparative information described in Note 26 to the consolidated financial statements) were
audited by another auditor who expressed an unmodified opinion on those consolidated financial statements on
February 29, 2012.
As part of our audit of the consolidated financial statements of Nuvo Research Inc. for the year ended
December 31, 2012, we also audited the adjustments described in Note 26 that were applied to restate the
consolidated financial statements for the year ended December 31, 2011. In our opinion, such adjustments are
appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to
the consolidated financial statements of Nuvo Research Inc. for the year ended December 31, 2011 other than
with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance
on the consolidated financial statements for the year ended December 31, 2011 taken as a whole.
Emphasis of Matter
Without qualifying our opinion, we draw attention to Note 1 in the consolidated financial statements which
indicates that the Company incurred a net loss of $13,563 during the year ended December 31, 2012 and, as of
that date, the Company had an accumulated deficit of $221,151. These conditions, along with other matters
as set forth in Note 1, indicate the existence of a material uncertainty that may cast significant doubt about the
Company’s ability to continue as a going concern.
Chartered Accountants
Licensed Public Accountants
March 27, 2013
Toronto, Ontario
Nuvo Research Inc. Annual Report 2012 59
Consolidated Statements of Financial Position
As at
December 31, 2012
As at
December 31, 2011
(restated – Note 26)
$
$
Cash and cash equivalents
Accounts receivable (notes 13, 21)
Inventories (note 6)
Other current assets (note 7)
12,149
3,771
1,156
1,056
14,724
3,700
1,844
1,307
T O TA L C U R R E N T A S S E T S
18,132
21,575
(Canadian dollars in thousands)
ASSETS
CURRENT
Property, plant and equipment (note 8)
Intangible assets (notes 4, 9)
1,614
1,960
8,739
–
16,821
4,498
28,485
44,854
Accounts payable and accrued liabilities
ZARS Contingent Consideration (notes 4, 26)
Current portion of deferred revenue (note 11)
Current portion of finance lease and other obligations (note 12)
3,360
–
341
1,900
5,208
2,300
1,494
55
T O TA L C U R R E N T L I A B I L I T I E S
5,601
9,057
Deferred revenue (note 11)
Finance lease and other obligations (note 12)
57
1,358
398
489
T O TA L L I A B I L I T I E S
7,016
9,944
Goodwill (notes 4, 10)
T O TA L A S S E T S
LIABILITIES AND EQUITY
CURRENT
EQUITY
Common shares
Contributed surplus (notes 4, 26)
Accumulated other comprehensive income
Deficit (notes 4, 26)
228,705
13,495
420
(221,151)
228,306
13,228
964
(207,588)
T O TA L E Q U I T Y
21,469
34,910
T O TA L L I A B I L I T I E S A N D E Q U I T Y
28,485
44,854
See accompanying Notes.
On behalf of the Board
Anthony E. Dobranowski, Director
60 Nuvo Research Inc. Annual Report 2012
Dr. Klaus von Lindeiner, Director
Consolidated Statements of Loss and
Comprehensive Loss
Year ended
December 31, 2012
Year ended
December 31, 2011
(restated – Note 26)
$
$
Product sales
Cost of goods sold (notes 6, 15, 17)
8,936
7,275
8,948
7,269
GROSS MARGIN ON PRODUCT SALES
1,661
1,679
8,284
7,252
5,771
1,641
178
373
17,375
9,464
(Canadian dollars in thousands, except per share and share figures)
REVENUE
OTHER REVENUE
Royalties (note 11)
Licensing fees (notes 11, 13)
Research and other contract revenue
O P E R AT I N G E X P E N S E S
Research and development expenses (notes 7, 15, 17)
Sales and marketing expenses (notes 15, 17)
General and administrative expenses (notes 15, 17)
Interest expense (note 12)
Interest income
6,849
4,892
9,123
381
(16)
7,323
1,312
10,306
8
(152)
21,229
18,797
11,868
(277)
(2)
(2,300)
224
–
–
(114)
(2,647)
155
Net loss before income taxes
Income taxes
(13,367)
196
(6,727)
104
NET LOSS
(13,563)
(6,831)
(544)
1,097
T O TA L C O M P R E H E N S I V E L O S S
(14,107)
(5,734)
Net loss attributable to:
Owners of the parent
Non-controlling interest
(13,563)
–
(5,562)
(1,269)
(13,563)
(6,831)
(14,107)
–
(4,433)
(1,301)
(14,107)
(5,734)
(0.024)
(0.014)
567.7
489.3
OTHER EXPENSES (INCOME)
Impairment of intangible assets and goodwill (notes 9, 10)
Litigation settlement (note 25)
Gain on disposal of property, plant and equipment
Gain on ZARS Contingent Consideration (notes 4, 26)
Foreign currency loss
Other comprehensive income (loss)
Unrealized gains (losses) on translation of foreign operations
Total comprehensive loss attributable to:
Owners of the parent
Non-controlling interest
Net loss per common share – basic and diluted (note 16)
Average number of common shares outstanding (in millions)
– basic and diluted
See accompanying Notes.
Nuvo Research Inc. Annual Report 2012 61
Consolidated Statements of Changes in Equity
(Canadian dollars in thousands, except for number of shares)
Equity Attributable to Owners of the Parent
NonControlling
Total
Interest
Contributed
Surplus
AOCI
Deficit
$
$
$
$
4, 5, 15
4, 5, 15
4, 15, 26
5
4, 5, 26
Balance, January 1, 2011
418,223
216,864
12,885
(257)
(197,654)
31,838
(703)
31,135
Acquisition of ZARS Pharma, Inc.
112,440
9,511
–
–
–
9,511
–
9,511
31,948
1,720
–
92
(4,372)
(2,560)
2,004
(556)
–
–
–
1,129
–
1,129
(32)
1,097
–
–
209
–
–
209
–
209
250
42
(12)
–
–
30
–
30
Common Shares
(000s)
Notes
$
$
Total
Equity
$
5
(restated see Note 4)
Acquisition of non-controlling interest
Unrealized gains (losses) on
translation of foreign operations
Stock option compensation expense
Stock options exercised
Performance stock unit
compensation expense
Shares issued under Share Bonus Plan
–
–
279
–
–
279
–
279
591
133
(133)
–
–
–
–
–
251
18
–
–
–
18
–
18
251
18
–
–
–
18
–
18
–
–
–
–
(5,562)
(5,562)
(1,269)
(6,831)
563,954
228,306
13,228
964
(207,588)
34,910
–
34,910
–
–
339
–
–
339
–
339
–
–
–
(544)
–
(544)
–
(544)
Employee contributions to
Share Purchase Plan
Employer’s portion of
Share Purchase Plan
Net loss (restated see Note 26)
Balance, December 31, 2011
Stock option compensation expense
Unrealized losses on translation
of foreign operations
Performance stock unit
compensation expense
Shares issued under Share Bonus Plan
–
–
180
–
–
180
–
180
1,494
252
(252)
–
–
–
–
–
922
61
–
–
–
61
–
61
922
61
–
–
–
61
–
61
500
25
–
–
–
25
–
25
–
–
–
–
(13,563)
(13,563)
–
(13,563)
567,792
228,705
13,495
420
(221,151)
21,469
–
21,469
Employee contributions
to Share Purchase Plan
Employer’s portion of
Share Purchase Plan
Professional fees settled in shares
Net loss
Balance, December 31, 2012
See accompanying Notes.
62 Nuvo Research Inc. Annual Report 2012
Consolidated Statements of Cash Flows
Year ended
December 31, 2012
Year ended
December 31, 2011
(restated – Note 26)
(Canadian dollars in thousands)
$
$
O P E R AT I N G A C T I V I T I E S
Net loss
Items not involving current cash flows:
Gain on ZARS Contingent Consideration (notes 4, 26)
Impairment of intangible assets (note 9)
Impairment of goodwill (note 10)
Depreciation and amortization (notes 8, 9, 17)
Deferred license revenue recognized (note 11)
Deferred royalty revenue, net of royalties earned (note 11)
Stock-based compensation (note 15)
(13,563)
(6,831)
(2,300)
7,491
4,377
674
(1,092)
(385)
(2,647)
–
–
704
(1,641)
(331)
734
133
123
(2)
72
11
442
369
109
(114)
6
13
Net change in non-cash working capital (note 18)
(3,727)
(1,348)
(9,921)
(1,918)
C A S H U S E D I N O P E R AT I N G A C T I V I T I E S
(5,075)
(11,839)
Acquisition of ZARS Pharma, Inc. (note 4)
Proceeds on disposal of property, plant and equipment
Acquisition of property, plant and equipment (note 8)
–
8
(149)
1,394
173
(161)
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
(141)
1,406
4,000
(1,345)
61
(2)
–
(3,022)
48
(63)
2,714
(3,037)
Unrealized foreign exchange loss
Inventory write-down (note 6)
Gain on disposal of property, plant and equipment
Accretion of long-term obligations
Other
INVESTING ACTIVITIES
FINANCING ACTIVITIES
Proceeds from other obligations (note 12(i))
Repayment of other obligations (notes 4, 12)
Issuance of common shares
Repayments of finance lease obligations
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Effect of exchange rate changes on cash and cash equivalents
(73)
(75)
Net change in cash and cash equivalents during the year
Cash and cash equivalents, beginning of year
(2,575)
14,724
(13,545)
28,269
C A S H A N D C A S H E Q U I VA L E N T S , E N D O F Y E A R
12,149
14,724
269
21
182
5
161
90
Interest paid1
Interest received1
Income taxes paid1
1. Amounts paid and received for interest and paid for income taxes were reflected as operating cash flows in the consolidated
statements of cash flows.
See accompanying Notes.
Significant non-cash financing activities are discussed in Notes 4 and 5.
Nuvo Research Inc. Annual Report 2012 63
Notes to Consolidated Financial Statements
Unless noted otherwise, all amounts shown are in thousands of Canadian dollars
1 . N AT U R E O F B U S I N E S S A N D G O I N G C O N C E R N A S S U M P T I O N
Nuvo Research Inc. (Nuvo or the Company) was incorporated on August 22, 1983 under the laws of the Province
of Ontario as Clark Pharmaceutical Laboratories Ltd. On November 14, 1990, the articles were amended to
change the name of the Company from Clark Pharmaceutical Laboratories Ltd. to Dimethaid Research Inc.
On September 30, 2005, the articles were further amended to change the name of the Company from Dimethaid
Research Inc. to Nuvo Research Inc. On January 1, 2007, the Company completed a short-form amalgamation
with Akorn Pharmaceuticals Canada Limited, Excelpharm Inc., Femina Inc., Dimethaid Management Inc. and
Dimethaid Manufacturing Inc., certain of its subsidiaries. The amalgamated entity continues as Nuvo. No new
securities of the Company were issued in connection with the amalgamation and securities of the Company prior
to the amalgamation continue to represent securities of the amalgamated entity. The Company’s registered office
and principal place of business is located at 7560 Airport Road, Unit 10, Mississauga, Ontario L4T 4H4.
Nuvo is a publicly traded Canadian specialty pharmaceutical company with manufacturing operations. Nuvo is
building a portfolio of products for the treatment of pain through internal research and development (R&D) and
by in-licensing and acquisition. Three of the pain products in its portfolio have been commercialized and the others
are at varying stages of development. The Company’s pain products are primarily medications that are delivered
into and through the skin. Nuvo is also involved in R&D activities with WF10, a chlorite-based immunomodulating
drug, through Nuvo Research AG. The Company refers to and manages these activities as two distinct business
and research segments: the Pain Group and the Immunology Group.
Pain Group
The Pain Group is focused on the development and commercialization of the Company’s topically delivered pain
products. Pennsaid®, the Company’s first commercialized pain product, is used to treat the signs and symptoms
of osteoarthritis (OA) of the knee. Pennsaid, combines a transdermal carrier with diclofenac sodium, a leading
non-steroidal anti-inflammatory drug (NSAID), and delivers the active drug through the skin directly to the site of
pain. Pennsaid is approved and marketed in a number of countries, including the U.S., Canada, Greece, Italy and
the U.K. and is manufactured by the Company for sale to all global licensing and distribution partners.
In May 2011, the Company acquired ZARS Pharma, Inc. (ZARS). This acquisition expanded the Company’s pain
product portfolio by adding Synera® and Pliaglis®. Synera is used to provide rapid, local dermal analgesia prior to
potentially painful needle related procedures such as venous access, blood draws, needle injections and minor
dermatologic surgical procedures such as shave biopsy and excision. Synera uses a patented, Controlled Heat-Assisted
Drug Delivery (CHADD™) technology to facilitate drug delivery from a proprietary local anesthetic formulation
that contains lidocaine and tetracaine. Synera is approved and marketed in a number of countries in Europe by its
European-based licensee, Eurocept International B.V. (Eurocept) and in the U.S. is marketed by Nuvo. Synera is
manufactured by a third-party contract manufacturing organization (CMO) located in the U.S.
Pliaglis is a topical local anesthetic phase-changing cream that provides safe and effective local dermal anesthesia
on intact skin prior to painful cosmetic procedures, such as dermatologic laser surgery and dermal filler injections.
This product consists of a proprietary formulation of lidocaine and tetracaine that utilizes the Company’s Peel
technology. Worldwide marketing rights for Pliaglis have been licensed to Galderma S.A. (Galderma), a global
company dedicated to dermatology. While the U.S. Food and Drug Administration (FDA) approved Pliaglis, it has
not been marketed or sold in the U.S. for several years due to manufacturing issues that arose at the CMO that
previously produced the drug. Galderma and ZARS transferred production to Galderma prior to Nuvo’s acquisition
of ZARS. Galderma filed a supplementary New Drug Application (sNDA) with the FDA that addressed the
manufacturing issues, including the transfer of manufacturing to Galderma. On April 16, 2012, Galderma received
a Complete Response Letter from the FDA that outlined additional information the FDA required before it would
approve the sNDA for Pliaglis. In May 2012, Galderma submitted additional information that it believed
addressed all of the FDA’s issues. The additional information related to the manufacturing transfer of Pliaglis from
a third-party contract manufacturer to Galderma’s manufacturing facility and included additional stability data
and proposed labeling revisions. The Complete Response Letter did not require any new clinical or toxicology
studies. In October 2012, the FDA approved the sNDA. In Europe, Nuvo filed a Marketing Authorization
Application (MAA) for Pliaglis in 16 E.U. countries and on May 4, 2012 received a positive recommendation that
Pliaglis was approvable. The regulatory process then entered its final phase during which individual countries issue
marketing licenses that allow Pliaglis to be marketed in each country. By December 31, 2012, Galderma had
64 Nuvo Research Inc. Annual Report 2012
received twelve of sixteen marketing licenses. The first three marketing licenses entitled Nuvo to earn a total of
US$6.0 million of milestone payments from Galderma. The milestone payments were due on the earlier of the launch
of Pliaglis in the approved countries or six months from the date of marketing approval. At December 31, 2012,
the Company had received US$5.0 million and the balance was received in January 2013. Galderma launched
Pliaglis in the U.S. in early March and the Company expects Galderma to launch Pliaglis in the E.U. in the second
quarter of 2013.
Immunology Group
The immune system provides an essential defense to microorganisms, cancer and substances it sees as foreign and
potentially harmful. WF10, a proprietary solution of OXO-K993 (TCDO), focuses on supporting the immune
system. Oxoferin™, a diluted form of WF10, is a topical wound healing agent that has been commercialized in
several countries in Europe, Asia and South America. R&D activities surrounding WF10 for use in other indications
are ongoing. OXO-K993 is manufactured by the Company and WF10 and Oxoferin are manufactured by a CMO
for sale to all global partners.
Going Concern
These Consolidated Financial Statements have been prepared on a going-concern basis, which presumes that the
Company will be able to realize its assets and discharge its liabilities in the normal course of operations for the
foreseeable future. At December 31, 2012, the Company had an accumulated deficit of $221,151, including a net
loss of $13,563 for the year then ended which included $11,868 of non-cash charges related to the impairment of
intangible assets and goodwill. The Company’s ability to continue as a going concern depends on: the success of
its approved products – Pennsaid and Synera, as it earns revenue from these products in the form of royalties and
product sales and has the ability to earn milestone payments; the ability to gain marketing approval in the
remaining four European countries and successfully launch Pliaglis in both the U.S. and E.U. as the Company will
earn royalties on this product; the ability of Galderma to gain marketing approval for Pliaglis in South America as
the Company will earn a US$2.0 million milestone upon approval; the ability of Mallinckrodt Inc. (Mallinckrodt)
the pharmaceuticals business of Covidien plc to earn marketing approval for Pennsaid 2% in the U.S. and if
approved successfully launch the product; the potential entry of a generic version of Pennsaid into the U.S., as this
may trigger an event of default on the Paladin Debt (see Note 12) and may significantly reduce revenue and cash
flow; and, its ability to secure additional licensing fees, secure co-development agreements, obtain additional
capital, gain regulatory approval for other drugs and ultimately achieve profitable operations. Whether and when
the Company can achieve the above is uncertain.
There can be no assurance that the Company will have sufficient capital to fund its ongoing operations or develop
or commercialize any further products without future financings. There can be no assurance, especially considering
the current economic environment, that additional financing will be available on acceptable terms or at all. If
adequate funds are not available or Pennsaid is genericized in the U.S. or Pennsaid revenues in the U.S. decline or
if the revenues of Synera do not increase in the U.S. or if the launch of Synera in key E.U. markets is not successful
or if the launch of Pliaglis in both the U.S. and E.U. is not successful or if Pennsaid 2% is not approved in the U.S.
or if the Company is unable to avoid an event of default on the Paladin Debt (see Note 12), the Company may
have to substantially reduce or eliminate planned expenditures, discontinue its marketing efforts for Synera in the
U.S., terminate or delay clinical trials for its product candidates, curtail product development programs designed to
expand the product pipeline or discontinue certain operations such as the Immunology Group. If the Company is
unable to obtain additional financing when and if required, the Company may be unable to continue operations.
These material uncertainties cast significant doubt upon the Company’s ability to continue as a going concern.
These Consolidated Financial Statements do not include any adjustments to the amounts and classification of assets
and liabilities that would be necessary should the Company be unable to continue as a going concern.
2 . B A S I S O F P R E PA R AT I O N
Statement of Compliance
These Consolidated Financial Statements have been prepared by management in accordance with International
Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB).
The policies applied in these Consolidated Financial Statements are based on IFRS issued and outstanding as at
March 27, 2013, the date the Board of Directors approved these Consolidated Financial Statements.
Nuvo Research Inc. Annual Report 2012 65
Notes to Consolidated Financial Statements
Unless noted otherwise, all amounts shown are in thousands of Canadian dollars
3 . S U M M A RY O F S I G N I F I C A N T A C C O U N T I N G P O L I C I E S
Basis of Measurement
The Consolidated Financial Statements have been prepared under the historical cost convention, except for the
revaluation of certain financial assets and financial liabilities to fair value. Items included in the financial statements
of each consolidated entity in the Company are measured using the currency of the primary economic environment
in which the entity operates (the functional currency). The Consolidated Financial Statements are presented in
Canadian dollars, which is the Company’s functional currency.
Use of Estimates and Judgments
The preparation of financial statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the
Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from estimates and such differences could be material.
Key areas of estimation or use of managerial assumptions are as follows:
(i)
Business combinations, intangible assets and goodwill:
The amount of goodwill initially recognized as a result of a business combination and the determination of
the fair value of the identifiable assets acquired and the liabilities assumed is based, to a considerable extent,
on management’s judgment. The Company determines fair values based on discounted cash flows, market
information, independent valuations and management’s estimates. The values calculated for intangible assets
and goodwill involve significant estimates and assumptions, including those with respect to future cash flows,
discount rates and asset lives. These significant estimates and judgments could impact the Company’s future
results if the current estimates of future performance and fair values change and could affect the amount of
amortization expense on intangible assets in future periods.
(ii)
Cash-generating units (CGU):
The identification of cash-generating units within the Company requires considerable judgment. Under IFRS,
management must determine the smallest group of assets that generate independent cash inflows and allocate
goodwill acquired in a business combination to the CGU that is expected to benefit from synergies of the
combination. Management first considers the Company’s commercialized products, and then determines the
operations that contribute to each product’s revenue base and net cash inflows. Management has identified
three CGUs: the U.S. operations dedicated to generating cash inflows for Synera and Pliaglis; the manufacturing
facility in Quebec that generates cash inflows for Pennsaid and the Immunology Group that generates cash
inflows for WF10.
(iii)
Income taxes:
The Company recognizes deferred tax assets, related tax-loss carryforwards and other deductible temporary
differences where it is probable that sufficient future taxable income can be generated in order to fully utilize
such losses and deductions. This requires significant estimates and assumptions regarding future earnings and
the ability to implement certain tax planning opportunities in order to assess the likelihood of utilizing such
losses and deductions.
(iv)
Property, plant and equipment (PP&E):
Measurement of PP&E involves the use of estimates for determining the expected useful lives of depreciable
assets. Management’s judgment is also required to determine depreciation methods and an asset’s residual value
and whether an asset is a qualifying asset for the purposes of capitalizing borrowing costs.
(v)
Impairment of goodwill and non-financial assets:
The Company reviews the carrying value of goodwill and non-financial assets for potential impairment when
events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment
test on CGUs is carried out by comparing the carrying amount of the CGU and its recoverable amount. The
recoverable amount of a CGU is the higher of fair value, less costs to sell and its value in use. This complex
valuation process entails the use of methods such as the discounted cash flow method which requires numerous
assumptions to estimate future cash flows. The recoverable amount is impacted significantly by the discount
rate selected to be used in the discounted cash flow model, as well as the quantum and timing of expected
future cash flows and the growth rate used for the extrapolation.
66 Nuvo Research Inc. Annual Report 2012
(vi)
Provisions:
A provision is a liability of uncertain timing or amount. Provisions are recognized when the Company has a
present obligation (legal or constructive) as a result of a past event. It is probable that the Company will be
required to settle the obligation and a reliable estimate can be made of the amount of the obligation. A legal
obligation can arise through a contract, legislation or other operation of law. A constructive obligation arises
from an entity’s actions; whereby, through an established pattern of past practices, published policies or a
sufficiently specific current statement, the entity has indicated it will accept certain responsibilities and has thus
created a valid expectation that it will discharge those responsibilities. The amount recognized as a provision
is the best estimate, at each period end, of the expenditures required to settle the present obligation considering
the risks and uncertainties associated with the obligation. Judgment is necessary to determine the likelihood
that pending litigation or other claims will succeed or a liability will arise and then to quantify the amount.
(vii) Share-based payments:
The Company measures the cost of share-based payments, either equity or cash-settled, with employees by
reference to the fair value of the equity instrument or underlying equity instrument at the date on which they are
granted. In addition, cash-settled share-based payments are remeasured at fair value at every reporting date.
Estimating fair value for share-based payments requires management to determine the most appropriate
valuation model for a grant, which is dependent on the terms and conditions of each grant. In valuing certain
types of stock-based payments, such as incentive stock options, the Company uses the Black-Scholes option
pricing model.
Several assumptions are used in the underlying calculation of fair values of the Company’s stock options using
the Black-Scholes option pricing model, including the expected life of the option, stock price volatility and
forfeiture rates. Details of the assumptions used are included in Note 15.
(viii) Foreign currency translation:
The determination of functional currency for each of the Company’s entities requires considerable judgment.
The functional currency is determined based on the currency of the primary economic environment in which
that entity operates. As the Company generates and expends cash in a variety of currencies, management
considers several factors including: the currency in which it receives its various revenue streams and the
magnitude of each, the currency in which it purchases materials and pays its employees and the geographic
environments influencing each of its consolidated entities and its products.
(ix)
Revenue recognition
As is typical in the pharmaceutical industry, the Company’s royalty streams are subject to a variety of
deductions that generally are estimated and recorded in the same period that the revenues are recognized and
primarily represent rebates, discounts and incentives, and product returns. These deductions represent
estimates of the related obligations. Amounts recorded for sales deductions can result from a complex series
of judgments about future events and uncertainties and can rely on estimates and assumptions.
Basis of Consolidation
These Consolidated Financial Statements include the accounts of the Company and all of its subsidiaries
as follows:
% Ownership
December 31, 2012
December 31, 2011
Nuvo Research America, Inc. and its subsidiaries:
Nuvo Research US, Inc., ZARS Pharma, Inc., and ZARS (UK) Limited
100%
100%
Dimethaid (UK) Ltd.
100%
100%
Dimethaid Immunology Inc.
100%
100%
Nuvo Research AG and its subsidiaries:
Nuvo Manufacturing GmbH and Nuvo Research GmbH (see Note 5)
100%
100%
The Company controls the subsidiaries above by having the power to govern their financial and operating policies.
All significant inter-company balances and transactions have been eliminated upon consolidation.
Nuvo Research Inc. Annual Report 2010 67
Notes to Consolidated Financial Statements
Unless noted otherwise, all amounts shown are in thousands of Canadian dollars
Business Combinations
Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration for
each acquisition is measured at the aggregate of the fair values (at the date of exchange) of assets given, liabilities
incurred or assumed and equity instruments issued by the Company in exchange for control of the acquiree.
Acquisition-related costs are recognized in profit or loss as incurred.
Where applicable, the consideration for the acquisition includes any asset or liability resulting from a contingent
consideration arrangement, measured at its acquisition-date fair value. Subsequent changes in such fair values
are adjusted against the cost of the acquisition where they qualify as measurement-period adjustments (see below).
All other subsequent changes in the fair value of contingent consideration classified as an asset or liability are
accounted for in accordance with relevant IFRS sections.
Where a business combination is achieved in stages, the Company’s previously held interests in the acquired entity
are remeasured to fair value at the acquisition date (i.e. the date the Company attains control) and the resulting
gain or loss, if any, is recognized in profit or loss. Amounts arising from interests in the acquiree prior to the
acquisition date that have previously been recognized in other comprehensive income (OCI) are reclassified to
profit or loss, where such treatment would be appropriate if that interest were disposed of.
The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under
IFRS 3 Business Combinations are recognized at their fair value at the acquisition date, except that:
• deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements are recognized
and measured in accordance with IAS 12 Income Taxes and IAS 19 Employee Benefits;
• liabilities or equity instruments related to the replacement by the Company of an acquiree’s share-based
payment awards are measured in accordance with IFRS 2 Share-based Payment; and
• assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets
Held for Sale and Discontinued Operations are measured in accordance with that Standard.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which
the combination occurs, the Company reports provisional amounts for the items for which the accounting is
incomplete. Those provisional amounts are adjusted during the measurement period (see below) or additional
assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed
as of the acquisition date that, if known, would have affected the amounts recognized as of that date.
The measurement period is the period from the date of acquisition to the date the Company obtains complete
information about facts and circumstances that existed as of the acquisition date and is subject to a maximum
period of one year.
Non-Controlling Interests
Non-controlling interests represent equity interests in subsidiaries owned by outside parties. The share of net
assets of subsidiaries attributable to non-controlling interests is presented as a component of equity. Their share of
net loss and comprehensive loss is recognized directly in equity. Changes in the Company’s ownership interest in
subsidiaries that do not result in a loss of control are accounted for as equity transactions.
Foreign Currency Translation
The Company and its subsidiary companies each determine their functional currency based on the currency of the
primary economic environment in which they operate. The Company’s functional currency is the Canadian dollar,
while subsidiary companies’ functional currencies are either the Canadian or U.S. dollar or the euro.
(i)
Transactions
Transactions denominated in a currency other than the functional currency of an entity are translated at
exchange rates prevailing at the time the transaction occurred. The resulting exchange gains and losses are
included in each entity’s net loss in the period in which they arise.
68 Nuvo Research Inc. Annual Report 2012
(ii)
Translation into presentation currency
The Company’s foreign operations are translated to the Company’s presentation currency, which is the
Canadian dollar, for inclusion in the Consolidated Financial Statements. Foreign denominated monetary and
non-monetary assets and liabilities of foreign operations are translated at exchange rates in effect at the end
of the reporting period and revenue and expenses are translated at the average exchange rate for the period
(as this is considered a reasonable approximation to actual rates). The resulting translation gains and losses are
included in OCI with the cumulative gain or loss reported in accumulated other comprehensive income (AOCI).
When the Company disposes of its entire interest in a foreign operation or loses control or influence over a foreign
operation, the foreign currency gains or losses in AOCI related to the foreign operation are recognized in profit
or loss. If the Company disposes of part of an interest in a foreign operation which remains a subsidiary, the
proportionate amount of foreign currency gains or losses in AOCI related to the subsidiary are reallocated between
controlling and non-controlling interests.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash on hand and current balances with banks and similar institutions.
They are readily convertible into known amounts of cash and have an insignificant risk of changes in value.
Cost approximates fair value.
Inventories
Inventories are comprised of raw materials, work-in-process and finished goods. Raw materials are stated at the
lower of cost and replacement cost with cost determined on a first-in, first-out basis. Manufactured inventory
(finished goods and work-in-process) is valued at the lower of cost and net realizable value determined on a
first-in, first-out basis. Manufactured inventory cost includes the cost of raw materials, direct labour, an allocation
of overhead and the cost to acquire finished goods. The Company monitors the shelf life and expiry of finished
goods to determine when inventory values are not recoverable and a write-down is necessary.
Property, Plant and Equipment
PP&E is recorded at cost. Assets acquired under finance leases are carried at cost which is the present value of
minimum lease payments after deduction of any executory costs.
The Company allocates the amount initially recognized in respect of an item of PP&E to its significant parts and
amortizes separately each such part. Depreciation of PP&E is provided for over the estimated useful lives from the
date the asset becomes available for use as follows:
Buildings
Leasehold improvements
Furniture and fixtures
Computer equipment and software
Production, laboratory and other equipment
10 to 25 years
Term of lease
5 years
1 to 3 years
3 to 5 years
Straight
Straight
Straight
Straight
Straight
line
line
line
line
line
Residual values, method of depreciation and useful lives of the assets are reviewed annually and adjusted if appropriate.
Intangible Assets
Intangible assets acquired in a business combination are recognized separately from goodwill at their fair value at
the date of acquisition, which is considered to be cost. Intangible assets consist of the costs to acquire intellectual
property under a business acquisition. Amortization commences when the intangible asset is available for use and
for patented assets is computed on a straight-line basis over the intangible asset’s estimated useful life, which
cannot exceed the lesser of the remaining patent life and 20 years.
Nuvo Research Inc. Annual Report 2010 69
Notes to Consolidated Financial Statements
Unless noted otherwise, all amounts shown are in thousands of Canadian dollars
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Company’s acquired
identifiable assets and liabilities at the date of acquisition. Recognized goodwill is tested annually for impairment
and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the
carrying amount of goodwill relating to the entity sold. Goodwill is allocated to the CGU that is expected to
benefit from the business combination in which the goodwill arose for the purpose of impairment testing.
Impairment of Non-Financial Assets
The Company reviews the carrying value of non-financial assets for potential impairment when events or changes
in circumstances indicate that the carrying amount may not be recoverable. For the purpose of measuring recoverable
amounts, assets are grouped at the lowest levels for which there are separately identifiable cash flows (or CGUs).
The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use (being the present
value of the expected future cash flows of the relevant asset or CGU). An impairment loss is recognized for the
amount by which the asset’s carrying value exceeds its recoverable amount.
Borrowing Costs
Borrowing costs attributable to the acquisition, construction or production of qualifying assets are added to the
cost of those assets, until such time as the assets are substantially ready for their intended use. All other borrowing
costs are recognized as interest expense in profit or loss in the period in which they are incurred.
Leases
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and
rewards of ownership to the Company. All other leases are classified as operating leases. The capitalized finance
lease obligation reflects the present value of future lease payments, discounted at the appropriate interest rate.
Assets under finance leases are amortized over the term of the lease. All other leases are accounted for as operating
leases with rental payments being expensed on a straight-line basis.
Financial Instruments
All financial instruments are classified into one of the following five categories: fair value through profit or loss
(FVTPL), held-to-maturity investments, loans and receivables, available-for-sale assets or other financial liabilities.
All financial instruments, including derivatives, are included on the Consolidated Statements of Financial Position
and are measured at fair market value upon inception. Subsequent measurement and recognition of changes in the
fair value of financial instruments depends on their initial classification. FVTPL financial investments are measured
at fair value and all gains and losses are included in operations in the period in which they arise. Available-for-sale
financial instruments are measured at fair value with revaluation gains and losses included in OCI until the asset is
removed from the Consolidated Statements of Financial Position. Loans and receivables, instruments held to maturity
and other financial liabilities are measured at amortized cost using the effective interest method. Gains and losses
upon inception, impairment write-downs and foreign exchange translation adjustments are recognized immediately.
The Company classifies its financial instruments as follows:
• Cash and cash equivalents and accounts receivable are classified as loans and receivables and are measured at
amortized cost. Interest income is recorded in net income (loss), as applicable.
• Accounts payable, accruals, long-term obligations and finance lease obligations are classified as other financial
liabilities and are measured at amortized cost using the effective interest method. Interest expense is recorded in
net income (loss), as applicable.
Financing costs associated with the issuance of debt are netted against the related debt and are deferred and
amortized over the term of the related debt using the effective interest method.
70 Nuvo Research Inc. Annual Report 2012
Impairment of Financial Assets
At each reporting date, the Company assesses whether there is objective evidence that a financial asset is impaired.
If such evidence exists, the Company recognizes an impairment loss. For financial assets carried at amortized cost,
the loss is the difference between the amortized cost of the loan or receivable and the present value of the estimated
future cash flows, discounted using the instrument’s original effective interest rate. The carrying value of the asset
is reduced by this amount either directly or indirectly through the use of an allowance account.
Comprehensive Income (Loss)
Comprehensive income (loss) is the change in equity from transactions and other events and circumstances from
non-shareholder sources. Other comprehensive income (loss) refers to items recognized in comprehensive income
(loss), but that are excluded from net income (loss) calculated in accordance with IFRS. The resulting changes from
translating the financial statements of foreign operations to the Company’s presentation currency of Canadian
dollars are recognized in comprehensive income (loss) for the year.
Revenue Recognition
The Company recognizes revenue from product sales, R&D collaborations and licensing arrangements which may
include multiple elements. Revenue arrangements with multiple elements are reviewed in order to determine
whether the multiple elements can be divided into separate units of accounting, if certain criteria are met. If separable,
the consideration received is allocated among the separate units of accounting based on their respective fair values
and the applicable revenue recognition criteria are applied to each of the separate units. If not separable, the
applicable revenue recognition criteria are applied to combined elements as a single unit of accounting.
Revenue from product sales is recognized upon shipment of the product to the customer, provided transfer of
title to the customer occurs upon shipment and provided the Company has not retained any significant risks of
ownership or future obligations with respect to the product shipped, the price is fixed and determinable and
collection is reasonably assured. Where applicable, revenue from product sales is recognized net of reserves for
estimated sales discounts and allowances, returns, rebates and chargebacks.
For upfront, non-refundable payments received in accordance with the execution of licensing and collaboration
agreements, distribution agreements and supply agreements, revenue is deferred and recognized over the performance
period – the period over which the Company maintains substantive contractual obligations. Amounts the Company
expects to earn in the current year are included in the current portion of deferred revenue and amounts expected to
be earned in subsequent periods are included in deferred revenue. The term over which upfront fees are recognized
is revised if the period over which the Company maintains substantive contractual obligations changes.
Milestone payments are immediately recognized as licensing revenue when the condition is met, if the milestone is
not a condition to future deliverables and collectability is reasonably assured. Otherwise, they are recognized over
the remaining term of the agreement or the performance period.
Revenue arising from royalties is recognized when reasonable assurance exists regarding measurement and
collectability. Royalties are typically calculated as a percentage of net sales realized by the Company’s licensees of
its products (including their sublicensees), as specifically defined in each agreement. The licensees’ sales generally
consist of revenues from product sales of the Company’s pharmaceutical products and net sales are determined
by deducting the following: estimates for chargebacks, rebates, sales incentives and allowances, returns and losses
and other customary deductions in each region where the Company has licensees. While the Company receives
royalty payments quarterly, it can only recognize the amounts as revenue when reasonable assurance exists regarding
measurement and collectability. Royalty revenue from the launch of a product in a new territory, for which the
Company or its licensee are unable to develop the requisite historical data on which to base estimates of returns,
may be deferred until such time that a reasonable estimate can be made and once the product has achieved market
acceptance. Any royalty payments received or receivable in advance of when they would be recognized as revenue
are recorded in deferred revenue.
Revenues from R&D collaborations are generally recognized as the contracted services are performed and the related
expenditures are incurred pursuant to the terms of the agreement and provided collectability is reasonably assured.
Nuvo Research Inc. Annual Report 2012 71
Notes to Consolidated Financial Statements
Unless noted otherwise, all amounts shown are in thousands of Canadian dollars
Research and Development
Research costs, other than capital expenditures, are charged to operations as incurred. Expenditures on internally
developed products are capitalized if it can be demonstrated that:
•
•
•
•
•
•
it is technically feasible to develop the product for it to be sold;
adequate resources are available to complete the development;
there is an intention to complete and sell the product;
the Company is able to sell the product;
sale of the product will generate future economic benefits; and
expenditure on the project can be measured reliably.
Development expenses are charged to operations as incurred unless such costs meet the criteria for deferral and
amortization. No development costs have been deferred to-date.
Government Assistance
Government assistance received under incentive programs, including investment tax credits for qualifying R&D
activities, is accounted for using the cost reduction method; whereby, the assistance is netted against the related
expense or capital expenditure to which it relates when there is reasonable assurance that the credits will be realized.
Government assistance received under reimbursement or funding programs are accounted for using the cost
reduction method; whereby, a receivable is set-up as the costs are incurred based on the terms of reimbursement
or funding program and the expected recoveries are netted against the related expense.
Net Income or Loss Per Common Share
Basic net income or loss per common share is calculated using the weighted average number of common shares
outstanding during the year.
Diluted net income or loss per common share is calculated assuming the weighted average number of common
shares outstanding during the year is increased to include the number of additional common shares that would
have been outstanding if the dilutive potential shares had been issued. The dilutive effect of warrants and stock
options is determined using the treasury-stock method. The treasury-stock method assumes that the proceeds
from the exercise of warrants and options are used to purchase common shares at the volume weighted average
market price during the year. The dilutive effect of convertible securities is determined using the “if-converted”
method. The “if-converted” method assumes that the convertible securities are converted into common shares at
the beginning of the year and all income charges related to the convertible securities are added back to income.
Income Taxes
Income taxes on profit or loss include current and deferred taxes. Income taxes are recognized in profit or loss
except to the extent that they relate to business combinations or items recognized directly in equity or in OCI.
Current tax is the expected tax payable or receivable on the taxable income or loss for the period, using tax rates
enacted or substantively enacted at the reporting date and any adjustment to tax payable in respect of previous
years. The Company is subject to withholding taxes on certain forms of income earned under its in-licensing
agreements from foreign jurisdictions.
Deferred tax is generally recognized in respect of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is
measured at the tax rates that are expected to be applied to temporary differences when they reversed, based on
the laws that have been enacted or substantively enacted in the relevant jurisdiction by the reporting date.
Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liability in the
Consolidated Statements of Financial Position differs from its tax base, except for differences arising on:
• the initial recognition of goodwill;
• the initial recognition of an asset or liability in a transaction which is not a business combination and at the
time of the transaction affects neither accounting or taxable profit; and
• investments in subsidiaries, branches and associates, and interests in joint ventures where the Company is able
to control the timing of the reversal of the difference and it is probable that the difference will not reverse in
the foreseeable future.
72 Nuvo Research Inc. Annual Report 2012
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the
extent probable that future taxable income will be available against which they can be utilized. Deferred tax assets
are reviewed at each reporting date and are reduced to the extent it is no longer probable the related tax benefit
will be realized.
Stock-Based Compensation and Other Stock-Based Payments
The Company has four stock-based compensation plans: the Share Option Plan, the Share Purchase Plan and the
Share Bonus Plan, are each a component of the Company’s Amended and Restated Share Incentive Plan and the
fourth is the Deferred Share Unit Plan. All are described in Note 15.
Share Incentive Plan
The Company measures and recognizes compensation expense for the Share Incentive Plan based on the fair value
of the common shares or options issued.
Under the Share Option Plan, the Company issues either fixed awards or performance based options. Options
vest either immediately upon grant or over a period of one to four years or upon the achievement of certain
performance related measures or milestones. Each tranche in an award is considered a separate award with its
own vesting period and grant date fair value. Fair value of each tranche is measured at the date of grant using the
Black-Scholes option pricing model. Compensation expense is recognized over the tranche’s vesting period based
on the number of awards expected to vest, by increasing contributed surplus. When options are exercised, the
proceeds received by the Company, together with the fair value amount in contributed surplus, are credited to
common shares.
Under the Share Purchase Plan, consideration paid by employees on the purchase of common shares is credited to
common shares when the shares are issued. The fair value of the Company’s matching contribution, determined
based upon the trading price of the common shares, is recorded as compensation expense. These expenses are
included in stock-based compensation expense and credited to common shares.
Under the Share Bonus Plan, the fair value of the direct award of common shares, determined based upon the
trading price of the common shares, is recorded as compensation expense. These expenses are included in stock-based
compensation expense and credited to common shares.
Deferred Share Unit (DSU) Plan
Under the DSU Plan, the Company issues DSUs to non-employee directors based on value of services provided.
DSUs that are intended to be settled in cash are recorded as liabilities and included in accounts payable and
accrued liabilities. Upon issuance, the fair value of the DSUs is recorded as compensation expense and a
corresponding liability (the DSU Accrual) is established. At all subsequent reporting dates, the DSU Accrual is
adjusted for movements in fair value, with the amount of the adjustment charged to compensation expense.
Performance Share Unit (PSU) Plan
A PSU issued to an employee under the Share Bonus Plan, provides an employee with an opportunity to earn
common shares of the Company, if certain predefined annual corporate non-market performance objectives
(PSU Objectives) are achieved. If these PSU Objectives are achieved, the PSUs are earned by the employee
(Earned PSUs). Each Earned PSU then vests over the two calendar years subsequent to the year in which the PSU
Objectives were achieved in three equal installments. At each vesting date, one Nuvo common share is issued to
the employee for each vesting PSU.
Upon the issuance of PSUs to an employee, the Company must calculate the fair value of the grant (PSU Grant
Value) by estimating the number of PSUs that will become Earned PSUs and determine the fair value of each of
these PSUs. For each PSU that is anticipated to become an Earned PSU, the fair value is determined using the
market price of the underlying common shares on the grant date. This value is amortized to income as compensation
expense over the relevant vesting period with the corresponding credit recorded as contributed surplus. At each
subsequent reporting date prior to final determination of whether a PSU becomes an Earned PSU, management
must make an estimate of the number of PSUs expected to be earned by the employees based on the PSU
Objectives and, if necessary, adjust the PSU Grant Value accordingly. When a PSU vests and common shares are
issued to the employee, the PSU Grant Value related to the vesting PSUs is transferred from contributed surplus
to common shares.
Nuvo Research Inc. Annual Report 2012 73
Notes to Consolidated Financial Statements
Unless noted otherwise, all amounts shown are in thousands of Canadian dollars
Issuance Costs of Equity Instruments
The Company records issuance costs of equity instruments against the equity instrument that was issued.
Accounting Standards Issued But Not Yet Applied
Certain new standards, interpretations, amendments and improvements to existing standards were issued by the
IASB or IFRS Interpretations Committee (IFRIC) that are mandatory for fiscal periods beginning July 1, 2012 or
later. The standards impacted that may be applicable to the Company are as follows:
IFRS 9 – Financial Instruments
In October 2010, the IASB issued IFRS 9 Financial Instruments which replaces IAS 39 Financial Instruments:
Recognition and Measurement. IFRS 9 establishes principles for the financial reporting of financial assets and
financial liabilities that will present relevant and useful information to users of financial statements for their
assessment of the amounts, timing and uncertainty of an entity’s future cash flows. This new standard is effective
for the Company’s interim and annual consolidated financial statements commencing January 1, 2015.
IFRS 10 – Consolidated Financial Statements
In May 2011, the IASB issued IFRS 10 Consolidated Financial Statements, which replaces IAS 27 Consolidation
and Separate Financial Statements and SIC-12 Consolidation – Special Purpose Entities. IFRS 10 establishes
principles for the presentation and preparation of consolidated financial statements when an entity controls one
or more entities. This new standard is effective for the Company’s interim and annual consolidated financial
statements commencing January 1, 2013.
IFRS 12 – Disclosure of Interests in Other Entities
In May 2011, the IASB issued IFRS 12 Disclosure of Interests in Other Entities. IFRS 12 is a comprehensive
new standard on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint
arrangements, associates and unconsolidated structured entities. This new standard is effective for the Company’s
interim and annual consolidated financial statements commencing January 1, 2013.
IFRS 13 – Fair Value Measurement
In June 2011, the IASB issued new guidance on IFRS 13 Fair Value Measurement. IFRS 13 aims to improve
consistency and reduce complexity by providing a single source of guidance for all fair value measurements across
all IFRS, clarifying the definition of fair value and enhancing disclosure requirements about fair value measurements.
This new guidance is effective for the Company’s interim and annual consolidated financial statements commencing
January 1, 2013.
IAS 1 – Presentation of Financial Statements: Other Comprehensive Income
In June 2011, the IASB issued amendments to IAS 1 Presentation of Financial Statements to improve the
consistency and clarity of the presentation of items of comprehensive income by requiring that items presented
in OCI be grouped on the basis of whether they are at some point reclassified from OCI to net earnings or not.
The amendments require companies preparing financial statements in accordance with IFRS to group together
items within OCI that may be reclassified to the profit or loss section of the income statement. The amendments
also reaffirm existing requirements that items in OCI and profit or loss should be presented as either a single
statement or two consecutive statements. These amendments are effective for annual periods beginning on or
after July 1, 2012.
The Company is assessing the impact of the adoption of these standards on its Consolidated Financial
Statements, but it does not anticipate significant changes in 2013.
74 Nuvo Research Inc. Annual Report 2012
4. ACQUISITION OF ZARS PHARMA, INC.
On May 12, 2011 (the Acquisition Date), the Company obtained control of ZARS by acquiring all of the issued
and outstanding shares of ZARS. ZARS was a U.S. based specialty pharmaceutical company focused on the
development and commercialization of topically administered drugs, primarily with respect to pain. The ZARS
acquisition significantly broadened the Company’s pain pipeline by adding two approved products, Synera and
Pliaglis, a pipeline of pain products in various stages of development and two important drug delivery platforms;
thereby, advancing the Company’s step-by-step approach to transforming the Pain Group into a leader in the
topical pain space.
The following summarizes the Acquisition Date fair value of the major classes of consideration transferred:
$
Cash consideration
99,822,136 common shares issued
ZARS Contingent Consideration
149
9,488
5,084
Total consideration
Less: cash acquired
14,721
1,626
Total consideration, net of cash acquired
13,095
The fair value of the common shares issued was based on the Company’s listed share price of $0.105 at the
Acquisition Date, less an adjustment to reflect that the recipients of these shares were subject to a “lock-up
Covenant”, such that they could not sell or transfer the shares until December 31, 2011. In addition to the total
consideration, the Company incurred acquisition related costs of approximately $1.1 million for external consulting,
professional and legal fees and costs related to conducting due diligence. These costs have been included in general
and administrative (G&A) expenses in the Company’s Consolidated Statements of Comprehensive Loss for the year
ended December 31, 2011. In addition, the Company incurred $67 in costs directly related to issuing the shares
to ZARS. These costs were directly recorded as a reduction to common shares in equity. The Company received net
cash of $1,477 on the acquisition of ZARS representing acquired cash and cash equivalents of $1,626, net of $149
of cash consideration paid on closing.
The purchase cost was allocated to the underlying assets acquired and liabilities assumed based upon their fair
value at the Acquisition Date.
Identifiable assets, liabilities and goodwill:
$
Total consideration
Cash
Non-cash working capital
Property and equipment
Intangible assets
Bank debt
Deferred revenue
Net identifiable assets and liabilities
Residual purchase price allocated to goodwill
14,721
1,626
(2,621)
457
16,007
(3,022)
(1,982)
10,465
4,256
On the Acquisition Date, the Company only recognized identifiable assets and liabilities at fair value against the
Acquisition Date fair value of consideration. The fair value of drug pipeline opportunities, on a risk-adjusted basis,
were not identifiable assets that were recognized. Therefore, the Acquisition Date consideration, net of identifiable
assets and liabilities, resulted in residual goodwill.
Nuvo Research Inc. Annual Report 2012 75
Notes to Consolidated Financial Statements
Unless noted otherwise, all amounts shown are in thousands of Canadian dollars
The terms of the acquisition include a mechanism to reimburse the Company for certain working capital adjustments that occur subsequent to the Acquisition Date. Under this mechanism, the Company could elect to be reimbursed for the amount of any adjustment in cash or could compel the former ZARS shareholders to return a
sufficient number of Nuvo common shares to satisfy the obligation. During the year ended December 31, 2011, a
$32 adjustment was calculated and 415,385 common shares with a value of $32 were returned to the Company
and subsequently cancelled. The value of these cancelled common shares was recorded as a reduction to common
shares in equity in 2011.
The fair value of the total consideration was directly impacted by management’s estimates, at the Acquisition Date,
of the probability of the Company achieving certain milestones related to Pliaglis, Synera and Pennsaid, which if
achieved or in some cases not achieved, would result in the issuance of up to 114.6 million additional common
shares (Milestone Shares) to the former ZARS shareholders (ZARS Contingent Consideration). The ZARS
Contingent Consideration consisted of:
• 74,870,000 Nuvo shares which only become payable if the Company, prior to December 31, 2012, achieves
both (i) the re-approval of Pliaglis by the FDA and the first commercial sale of Pliaglis in the U.S. by Galderma
after such re-approval, and (ii) the approval of Pliaglis by the Germany’s Federal Institute for Drugs and
Medical Devices (Bundesinstitut für Arzneimittel und Medizinprodukte) BfArM and the first commercial sale of
Pliaglis in Europe by Galderma (Pliaglis Milestone); and
• 39,750,000 (three separate milestones of 13,250,000) Nuvo shares payable upon certain future events.
The ZARS Contingent Consideration was originally structured as promissory notes payable to the former
shareholders of ZARS, but allowed the Company to seek shareholder approval for the issuance of additional
shares, in lieu of the promissory notes. The Company’s shareholders approved the issuance of contingent shares
at the Company’s Annual and Special Meeting of Shareholders on June 21, 2011. See Note 26 for discussion
regarding the accounting for, and restatement of, ZARS Contingent Consideration.
In October 2011, one of the milestones relating to the ZARS Contingent Consideration was achieved and in
November 2011, the Company issued an additional 13,034,191 common shares and paid cash of $16 to the
former ZARS shareholders, for a total fair value of $137 of this milestone.
Through December 31, 2012, the Company issued a total of 112,440,942 common shares related to the ZARS
Acquisition as follows: 99,822,136 common shares issued on the Acquisition Date, 13,034,191 issued upon
the achievement of one of the milestones relating to the ZARS Contingent Consideration, less 415,385 that were
returned to the Company in satisfaction of the working capital adjustment and subsequently cancelled.
5. ACQUISITION OF NON-CONTROLLING INTEREST
On December 13, 2011, the Company increased its ownership in Nuvo Research AG to 100% by acquiring the
40% interest held by the minority owner. In accordance with IAS 27, as there was no change in control of Nuvo
Research AG, the difference between the amount which the non-controlling interest was adjusted and the fair
value of the consideration paid, was recognized directly in equity and attributed to the owners of the parent.
The following summarizes the fair value of the $2,256 in consideration transferred to the non-controlling interest:
• 31,947,668 common shares representing an agreed price of US$1.7 million and the settlement of a loan of
68 euro for R&D services performed by the former minority shareholder, totalled $1,728; and
• A 5-year, US$150 per annum consulting agreement with the former minority shareholder, discounted at 15.5%
and fair valued at US$519 ($528) (see Note 12 (ii)).
76 Nuvo Research Inc. Annual Report 2012
The following summarizes the difference between the amount by which the non-controlling interest was adjusted
and the fair value of the consideration paid to acquire the non-controlling interest which is the amount recognized
directly in equity and attributed to the owners of the parent in December 2011:
$
Accumulated losses attributed to non-controlling interest
AOCI attributed to non-controlling interest
Transferred consideration
Accrued acquisition costs and other
2,004
92
2,256
20
Total decrease in equity attributable to the owners of the parent
4,372
6. INVENTORIES
Inventories consist of the following as at:
Raw materials
Work in process
Finished goods
December 31, 2012
$
December 31, 2011
$
669
194
293
1,189
101
554
1,156
1,844
During the year ended December 31, 2012, inventories in the amount of $6.5 million [2011 – $6.5 million] were
recognized in cost of goods sold. During the year ended December 31, 2012, $134 of raw materials in the Pain
Group was written down. During the year ended December 31, 2011, $109 of finished goods in the Immunology
Group was written down, of which $11 was reversed in 2012.
7. OTHER CURRENT ASSETS
Other current assets consist of the following as at:
Prepaid expenses
Other receivables (i)
Deposits
December 31, 2012
$
December 31, 2011
$
696
248
112
824
363
120
1,056
1,307
(i) Includes $181 [2011 – $76] related to R&D expenditures for which the Company is eligible for reimbursement under funding
agreements with the Development Bank of Saxony (SAB) for the development of WF10 related projects, but for which the
Company has not yet filed a claim. As at December 31, 2012, the Company had received reimbursements of $273 (€208)
[2011 – $241 (€177)] related to claims made by the Company for eligible expenditures incurred in 2009 through 2012 under
the same agreements. The amounts reimbursed are included in R&D expenses.
Nuvo Research Inc. Annual Report 2012 77
Notes to Consolidated Financial Statements
Unless noted otherwise, all amounts shown are in thousands of Canadian dollars
8 . P R O P E RT Y, P L A N T A N D E Q U I P M E N T
Property, plant and equipment (PP&E) consist of:
Cost
Balance, January 1, 2011
Land
Leasehold
Buildings Improvements
Furniture
& Fixtures
Computer
Equipment
& Software
Production
Laboratory
& Other
Equipment(i)
Total
$
$
$
$
$
$
$
7,224
124
1,956
180
301
907
3,756
Foreign exchange movements
–
(8)
–
(1)
(1)
80
70
Additions
–
28
19
1
70
43
161
Acquisition of ZARS
–
–
–
–
–
457
457
Disposals
–
–
(25)
(28)
(19)
(1,116)
(1,188)
124
1,976
174
273
957
3,220
6,724
Foreign exchange movements
–
(5)
(1)
–
–
(2)
(8)
Additions
–
6
–
3
47
93
149
Disposals
–
–
–
–
–
(35)
(35)
124
1,977
173
276
1,004
3,276
6,830
Balance, January 1, 2011
–
1,200
126
272
769
2,841
5,208
Foreign exchange movements
–
(10)
–
(1)
(1)
79
67
Additions
–
139
30
18
72
352
611
Disposals
–
–
(25)
(28)
(19)
(1,050)
(1,122)
Balance, December 31, 2011
–
1,329
131
261
821
2,222
4,764
Balance, December 31, 2011
Balance, December 31, 2012
Accumulated depreciation
Foreign exchange movements
–
(4)
–
–
–
(1)
(5)
Additions
–
91
19
6
75
295
486
Disposals
–
–
–
–
–
(29)
(29)
Balance, December 31, 2012
–
1,416
150
267
896
2,487
5,216
NBV at December 31, 2011
124
647
43
12
136
998
1,960
NBV at December 31, 2012
124
561
23
9
108
789
1,614
(i) Production, laboratory and other equipment at December 31, 2012, included costs of $56 [2011 – $56] and accumulated
depreciation of $50 [2011 – $48] for assets under finance leases. Depreciation of PP&E for the year ended December 31, 2012,
included $2 [2011 – $26] related to assets under finance leases.
78 Nuvo Research Inc. Annual Report 2012
9 . I N TA N G I B L E A S S E T S
Pliaglis
Intellectual Property
$
Synera
Intellectual Property
$
Total
$
Acquisition of ZARS
Foreign exchange movements
14,604
830
1,403
79
16,007
909
Balance, December 31, 2011
15,434
1,482
16,916
Foreign exchange movements
(337)
(33)
(370)
Balance, December 31, 2012
15,097
1,449
16,546
Foreign exchange movements
Amortization expense
–
–
2
93
2
93
Balance, December 31, 2011
–
95
95
Foreign exchange movements
Impairment charge
Amortization expense
37
7,176
–
(4)
315
188
33
7,491
188
Balance, December 31, 2012
7,213
594
7,807
15,434
1,387
16,821
7,884
855
8,739
Cost
Accumulated amortization
Net carrying amount as at December 31, 2011
Net carrying amount as at December 31, 2012
Intangible assets were acquired from the acquisition of ZARS (see Note 4). The fair values of these assets at the
time of acquisition were determined through third-party appraisals.
Synera received regulatory approval and is commercialized in the U.S. and many European countries: therefore,
amortization of its intellectual property commenced on the Acquisition Date and will continue until July 2019
when its current patents expire. As at December 31, 2012, the Pliaglis intellectual property is not being amortized.
Although the product has been approved in the U.S. and in 14 of 16 European countries, amortization will
commence when the product is commercially launched. Amortization of intangible assets is included in G&A
expenses in the Consolidated Statements of Loss and Comprehensive Loss.
The Company reviewed the carrying values of the intangible assets for potential impairment at December 31, 2012
as commercial efforts for Synera and the launch timing of Pliaglis did not meet expectations. Indications for
impairment did exist, and management determined that each asset was impaired, such that recoverable amounts
were lower than the carrying amounts. The recoverable amount and value in use (being the present value of
expected future cash flows) was calculated using licensing partner revenue forecasts, net of direct costs forecasted
by management, discounted at an after-tax rate of 15% which approximates the Company’s current weighted
average cost of capital. As at December 31, 2012, the Company recorded an impairment charge for Synera of
$315 and an impairment charge for Pliaglis of $7,176 in impairment of intangible assets and goodwill in the
Consolidated Statement of Loss and Comprehensive Loss.
Nuvo Research Inc. Annual Report 2012 79
Notes to Consolidated Financial Statements
Unless noted otherwise, all amounts shown are in thousands of Canadian dollars
10. GOODWILL
Cost
$
Acquisition of ZARS
Foreign exchange movements
4,256
242
Balance, December 31, 2011
4,498
Foreign exchange movements
Impairment charge
(121)
(4,377)
Balance, December 31, 2012
–
Goodwill was generated on the acquisition of ZARS as total consideration of $14,721 exceeded the net identifiable
assets acquired of $10,465 (see Note 4).
The U.S. operations dedicated to generating cash inflows for Synera and Pliaglis are considered to be the CGU for
recorded goodwill for the purposes of impairment testing. Under the impairment test, the recoverable amount of
the CGU is determined at its value in use, based on a discounted cash flow model and tested for impairment annually
at December 31. The value in use calculation considered forecasted cash flows during the patent life of Synera and
Pliaglis based on the current commercialization plans for these products. Cash from product sales and royalties,
net of labour and infrastructure costs were included and an after-tax discount rate of 15% was applied, which
approximates the Company’s current weighted average cost of capital. As at December 31, 2012, the recoverable
amount was less than its carrying amount, and the entire goodwill was written off in impairment of intangible
assets and goodwill in the Consolidated Statement of Loss and Comprehensive Loss.
11. DEFERRED REVENUE
Deferred revenue is as follows:
Balance, beginning of the year
Royalties earned under the U.S. Licensing Agreement (ii)
Acquisition of ZARS (i)
Effects of movement in foreign exchange
less:
Amortization of license and supply agreements (i), (iii)
Recognition of royalty revenue (ii)
Balance, end of period
Amount to be recognized within one year
Long-term balance
December 31, 2012
$
December 31, 2011
$
1,892
5,802
–
(17)
1,832
4,236
1,982
50
7,677
8,100
1,092
6,187
1,641
4,567
398
341
1,892
1,494
57
398
(i) Acquisition of ZARS
For the year ended December 31, 2012, $0.8 million was recognized as licensing fees in income. Included in deferred revenue at
December 31, 2012 was $nil [2011 – $0.8 million] of deferred licensing fees.
(ii) U.S. Licensing Agreement
On June 15, 2009 (the Effective Date), the Company entered into a License and Development Agreement (U.S. Licensing
Agreement) with Mallinckrodt, granting Mallinckrodt exclusive rights to market and sell Pennsaid in the U.S. through the transfer
of the Pennsaid New Drug Application (Pennsaid NDA) to Mallinckrodt upon FDA approval in the U.S.
Under the terms of the U.S. Licensing Agreement, Nuvo earns royalties on U.S. net sales of Pennsaid based upon a formula. Under
the formula, Nuvo earned royalties of $5.8 million for the year ended December 31, 2012 [2011 – $4.2 million]. Based on dispensed
prescription data and other information obtained during the year, the Company recorded royalty revenue for the year ended
December 31, 2012 of $6.2 million [2011 – $4.6 million]. The Company believes it has sufficient historical experience to assess
80 Nuvo Research Inc. Annual Report 2012
inventory levels and the relative risk of potential product returns; therefore, royalty revenue from the U.S. licensing agreements are
no longer deferred. Included in deferred revenue at December 31, 2012 was $nil [2011 – $0.4 million] of deferred royalties.
Under the terms of the U.S. Licensing Agreement, Mallinckrodt assumed all responsibility for managing, planning, executing and
paying for all development activities for Pennsaid’s follow-on product Pennsaid 2% subsequent to the Effective Date. If Pennsaid
2% is approved by the FDA, Nuvo will be entitled to receive royalties and escalating sales milestone payments.
(iii) Canadian Licensing Agreements
Under the Canadian licensing arrangements with Paladin Labs Inc. in 2005 and 2006, certain payments were received for the
Canadian marketing rights to Pennsaid. All amounts were amortized to income systematically based on the expected performance
period. During the year ended December 31, 2012, the Company recorded licensing revenue of $0.3 million [2011 – $0.3 million]
pertaining to amounts received in 2005 and at December 31, 2012, $0.4 million remains unamortized and will continue to be
amortized systematically over the remaining expected performance period [2011 – $0.7 million].
1 2 . F I N A N C E L E A S E A N D O T H E R O B L I G AT I O N S
Finance lease and other obligations consist of the following as at:
December 31, 2012
$
December 31, 2011
$
2,779
–
471
8
534
10
Less amounts due within one year
3,258
1,900
544
55
Long-term balance
1,358
489
Other loan (i)
Long-term consulting agreement from acquisition
of non-controlling interest (ii)
Finance lease obligations (iii)
(i) Other loan
In May 2012, the Company signed an agreement to borrow up to $8.0 million from its Canadian licensing partner in two equal
tranches of $4.0 million each (Paladin Debt). The first tranche was advanced on closing and the second tranche can be drawn by
the Company, at its option, upon the achievement of predefined milestones. The loan bears interest at a rate of 15% per annum
and matures on May 25, 2016. The loan was collateralized by a charge over the assets of Nuvo’s Pain Group.
The Company is required to make principal repayments on the first tranche of debt when certain circumstances occur. Under
the terms of the loan agreement, the Company must pay 10% of all royalty payments received by the Company on the sale of
Pennsaid in the U.S.; 10% of all royalty payments and milestones received by the Company on the sale of Pliaglis; however, the
US$6.0 million in Pliaglis milestone payments were received prior to the commercial launch in Europe; therefore, the 10%
payment related to the milestone payments will be applied to the second tranche of debt if drawn. In addition, Paladin will offset
and retain 100% of the royalties payable to the Company on Canadian distribution of Pennsaid and Synera when approved and
launched in Canada.
The terms of the loan agreement include standard default provisions, one of which is if a generic version of Pennsaid becomes
available for commercial sale in the U.S., amounts owing may become due and payable.
The timing of the future payments of the loan is based on management’s best estimate of future royalty revenue. Changes in these
estimates could significantly affect the outstanding value of the loan at each reporting date.
The estimated future payments on the loan, including interest, are as follows for the years ending December 31:
$
2013
2014
2,115
1,014
Total payments
Less: amount representing interest (approximately 15%)
3,129
350
Present value of obligation
Current portion
2,779
1,809
Long-term balance
970
Nuvo Research Inc. Annual Report 2012 81
Notes to Consolidated Financial Statements
Unless noted otherwise, all amounts shown are in thousands of Canadian dollars
(ii) Long-term consulting agreement from acquisition of non-controlling interest
The Company has a long-term consulting agreement with the former minority shareholder in Nuvo Research AG (Note 5).
The future payments of the five-year consulting obligation are as follows for the years ending December 31:
$
2013
2014
2015
2016
2017
149
149
149
149
25
Total payments
Less: amount representing interest (approximately 15.5%)
621
150
Present value of obligation, including accretion
Current portion
471
89
Long-term balance
382
(iii) Finance lease obligations
The Company leases office equipment under finance leases expiring at various dates through December 2015. The minimum
future lease payments are as follows for the years ending December 31:
$
2013
2014
2015
3
3
3
Total minimum lease payments
Less: amount representing interest (approximately 6.15%)
9
1
Present value of minimum lease payments
Current portion
8
2
Long-term balance
6
For the year ended December 31, 2012, interest paid on finance lease obligations was under $1 [2011 – $3].
13. LICENSING FEES
The Company has a license agreement with Galderma, its worldwide marketing partner for Pliaglis. As at
December 31, 2012, Galderma had received twelve of sixteen Pliaglis marketing licenses from E.U. countries of
which the first three entitled Nuvo to earn a total of US$6.0 million of milestone payments (CDN$6.2 million).
The milestone payments were due on the earlier of the launch of Pliaglis in the approved countries or six months
from the date of marketing approval, and as of December 31, 2012, the Company received US$5.0 million and
the balance was received in January 2013.
1 4 . C A P I TA L S T O C K
Authorized
• Unlimited first and second preferred shares, non-voting, non-participating, issuable in series, number, designation,
rights, privileges, restrictions and conditions are determinable by the Company’s Board of Directors.
• Unlimited common shares, voting, without par value.
Shareholders’ Rights Plan
The Company initially instituted a shareholder rights plan (the Rights Plan) in 1992. Since that time, the Rights Plan
has been amended, restated and continued from time-to-time. Most recently, in May 2008, the shareholders
approved certain amendments to the Rights Plan, including continuing it until the annual meeting of shareholders in
2013. The Rights Plan is intended to provide some protection to shareholders of the Company from unfair take-over
strategies, including the acquisition of control of the Company by a bidder in a transaction or series of transactions
82 Nuvo Research Inc. Annual Report 2012
that does not treat all shareholders equally or fairly or afford all shareholders an equal opportunity to share in the
premium paid upon an acquisition of control. One right is, or will be, issued in respect of each outstanding common
share. The rights become exercisable only when an acquiring person acquires or announces its intention to acquire
20% or more of the Company’s outstanding common shares without complying with the “permitted bid” provisions
of the Rights Plan. Subject to the terms of the Rights Plan, each right will entitle the holder thereof, to purchase a
common share of the Company at a 50% discount to the market price.
1 5 . S T O C K - B A S E D C O M P E N S AT I O N A N D O T H E R S T O C K - B A S E D PAY M E N T S
The Company has four stock-based compensation plans: the Share Option Plan, the Share Purchase Plan and the
Share Bonus Plan, each a component of the Company’s Share Incentive Plan and the DSU Plan.
Share Incentive Plan
Under the Company’s Share Incentive Plan, there are three sub plans: the Share Purchase Plan, the Share Option
Plan and the Share Bonus Plan. The original plan was amended and restated effective September 21, 2005, when
shareholders of the Company approved an amendment changing the maximum number of common shares that
may be issued under the plan from a fixed maximum number to a fixed maximum percentage. The amendment
changes the maximum number of common shares that may be issued under the Share Incentive Plan to a fixed
maximum percentage of 15% of the Company’s outstanding common shares (on a fully-diluted basis other than
stock options) from time-to-time. The common shares that may be issued under the plan are allocated to the three
sub-plans as follows: Share Option Plan 10%, Share Purchase Plan 3% and Share Bonus Plan 2%. As the Share
Incentive Plan is a “rolling plan”, the Toronto Stock Exchange (TSX) requires that it, along with any unallocated
options, rights or other entitlements receive shareholder approval at the Company’s annual meeting every three
years. At the Annual and Special Meeting of Shareholders of the Company held on June 21, 2011, the common
shareholders approved an ordinary resolution affirming, ratifying and approving the Share Incentive Plan and
approving all of the unallocated common shares issuable pursuant to the Share Incentive Plan.
Share Option Plan
Under the Share Option Plan, the Company may grant options to purchase common shares to officers, directors,
employees or consultants of the Company or its affiliates. Options issued under the Share Option Plan are granted
for a term not exceeding ten years from the date of grant. All options issued to-date have a life of 10 years. In general,
options have vested either immediately upon grant or over a period of one to four years or upon the achievement
of certain performance related measures or milestones. Under the provisions of the Share Option Plan, the exercise
price of all stock options shall not be less than the closing price of the common shares on the last trading date
immediately preceding the grant date of the option.
As at December 31, 2012, the number of unoptioned shares available to be reserved was 7,649,964.
The following is a schedule of the options outstanding as at:
Number
of Options
(000s)
Range of
Exercise Price
$
Weighted Average
Exercise Price
$
Balance, January 1, 2011
Granted
Exercised (i)
Forfeited
Expired
38,445
7,123
(250)
(2,617)
(33)
0.10 – 5.95
0.085
0.10 – 0.125
0.10 – 3.10
5.95
0.20
0.09
0.12
0.21
5.95
Balance, December 31, 2011
Granted
Forfeited
Expired
42,668
11,225
(4,724)
(40)
0.085 – 3.10
0.08 – 0.10
0.085 – 2.01
3.10
0.18
0.10
0.19
3.10
Balance, December 31, 2012
49,129
0.08 – 2.01
0.15
(i) The weighted average share price on the exercise date was $0.153.
Nuvo Research Inc. Annual Report 2012 83
Notes to Consolidated Financial Statements
Unless noted otherwise, all amounts shown are in thousands of Canadian dollars
The following table summarizes the outstanding and exercisable options held by directors, officers, employees and
consultants at December 31, 2012:
Outstanding
Exercisable
Number
of Options
(000s)
Remaining
Contractual
Life
(years)
Weighted
Average
Exercise Price
$
Vested
Options
(000)
Weighted
Average
Exercise Price
$
0.08 – 0.135
0.17 – 0.25
0.30 – 2.01
32,774
11,894
4,461
7.2
4.3
2.0
0.11
0.21
0.33
18,178
10,008
4,461
0.12
0.20
0.33
0.08 – 2.01
49,129
6.0
0.15
32,647
0.18
Exercise Price
Range
$
Fair value of each tranche is measured at the date of grant using the Black-Scholes option pricing model. Options
are valued with a calculated forfeiture rate of 7.0% [December 31, 2011 – 7.0%], and the remaining model inputs
for options granted during the year ended December 31, 2012 were:
Options
(000s)
Grant Date
Share
Price
$
650
10,575
March 6, 2012
March 29, 2012
0.085
0.095
Exercise
Price
$
Risk-free
Interest
Rate
%
Expected
Life
(years)
Volatility
Factor
%
Fair Values
$
0.08
0.10
1.1 – 1.3
1.1 – 1.3
2–5
2–5
59 – 73
60 – 73
0.027 – 0.048
0.033 – 0.059
Share Purchase Plan
Under the Share Purchase Plan, eligible officers, employees or consultants of the Company or its affiliates may
contribute up to 10% of their annual base salary to the plan to purchase Nuvo common shares. The Company
matches each participant’s contribution by issuing Nuvo common shares having a value equal to the aggregate
amount contributed by each participating employee.
During 2012, employees contributed $61 [2011 – $18] to the plan and the Company matched these contributions
by issuing 922,046 common shares [2011 – 250,930] with a fair value of $61 [2011 – $18] that was recorded as
compensation expense. The total number of shares issued under this plan during the year ended December 31, 2012
was 1,844,092 [2011 – 501,860].
Share Bonus Plan
Performance Share Unit Plan
A PSU provides an employee with an opportunity to earn common shares of the Company if certain PSU Objectives
are achieved. If these PSU Objectives are achieved, the PSUs are Earned PSUs. Each Earned PSU then vests over the
subsequent two calendar years in three equal installments. One PSU has a value equal to one Nuvo common share.
2012 PSUs
In the first quarter of 2013, the Board of Directors assessed the PSU Objectives at the end of the performance period,
December 31, 2012 and determined that 2,116,728 of the 3,102,432 PSUs granted on March 29, 2012 were Earned
PSUs (2012 PSUs). These 2012 PSUs have an aggregate value of $201. During the year ended December 31, 2012,
$99 of the aggregate value of the expected Earned PSUs was recognized as compensation expense with a
corresponding credit to contributed surplus. The remaining aggregate value of $102 will be amortized over the
remaining vesting periods.
2011 PSUs
In 2012, the Board of Directors assessed the PSU Objectives at the end of the performance period, December 31, 2011
and determined that 1,813,354 of the 2,479,800 PSUs granted on February 4, 2011 were Earned PSUs (2011 PSUs).
These 2011 PSUs have an aggregate value of $281. During the year ended December 31, 2012, $56 of the aggregate
84 Nuvo Research Inc. Annual Report 2012
value of the 2011 PSUs was recognized as compensation expense with a corresponding credit to contributed surplus
[$196 for the year ended December 31, 2011]. As at December 31, 2012, 1,208,900 of the 2011 PSUs had vested
and were issued in common shares with $188 transferred from contributed surplus to common shares. The remaining
aggregate value for the 2011 PSUs of $29 will be amortized over the remaining vesting period.
2010 PSUs
In 2010, the Board of Directors assessed the PSU Objectives at the end of the performance period, December 31, 2010
and determined that 918,820 of the 1,312,600 PSUs granted on May 26, 2010 were Earned PSUs (2010 PSUs).
These 2010 PSUs had an aggregate value of $197. During the year ended December 31, 2012, $25 of the aggregate
value of the 2010 PSUs was recognized as compensation expense with a corresponding credit to contributed surplus
[$83 for the year ended December 31, 2011]. As at December 31, 2012, 876,545 of the 2010 PSUs had vested and
were issued in common shares with $64 transferred from contributed surplus to common shares. In addition, 42,280
PSU’s were forfeited. The 2010 PSUs are now fully amortized and issued in 2012.
Number of PSUs
(000s)
Balance, December 31, 2011
Common shares issued
Unearned units
Granted
2,765
(1,494)
(1,652)
3,102
Balance, December 31, 2012
2,721
Deferred Share Unit Plan
On January 1, 2009, the Company established the DSU Plan, a share-based compensation plan for non-employee
directors. Under the DSU Plan, non-employee directors can be allotted and can elect to receive a portion of their
annual retainers and other Board-related compensation in the form of DSUs. One DSU has a cash value equal to the
market price of one of the Company’s common shares and the number of DSUs issued to a director’s DSU account
for any payment is determined using the five-day volume weighted average price of the Company’s common shares
immediately preceding the payment date. Upon issuance, the fair value of the DSUs is recorded as compensation
expense and the DSU Accrual is established. At all subsequent reporting dates, the DSU Accrual is adjusted to the
market value of the underlying shares and the adjustment is recorded as compensation cost. Within a specified time
after retirement, non-employee directors receive a cash payment equal to the market value of their DSUs. For the
year ended December 31, 2012, $129 was recorded in G&A expenses as compensation expense related to DSUs.
The charge for the year ended December 31, 2012 consisted of $100 for the fair value of the DSU’s issued to
directors as a portion of their annual director fees, combined with a $29 increase in the aggregate DSU Accrual to
the market value of the underlying shares at December 31, 2012. The DSU accrual is included in accounts payable
and accrued liabilities.
The following table summarizes the outstanding DSUs and related accrual held by directors:
Number
of DSUs
(000s)
Average
Market Value
$
Accural
$
Balance, January 1, 2011
Issued for directors’ fees
Adjustment to market value
916
537
–
0.150
0.141
–
137
76
(140)
Balance, December 31, 2011
Issued for directors’ fees
Adjustment to market value
1,453
1,920
–
0.050
0.052
–
73
100
29
Balance, December 31, 2012
3,373
0.060
202
Nuvo Research Inc. Annual Report 2012 85
Notes to Consolidated Financial Statements
Unless noted otherwise, all amounts shown are in thousands of Canadian dollars
Summary of Stock-Based Compensation
Year ended
December 31, 2012
$
Year ended
December 31, 2011
$
Stock option compensation expense under the Share Option Plan
DSUs – issued for settlement of directors’ fees
DSUs – adjustment to market value
Shares issued to employees under the Share Purchase Plan
PSU compensation expense under the Share Bonus Plan
Professional fees settled in shares
339
100
29
61
180
25
209
76
(140)
18
279
–
Stock-based compensation expense
734
442
Recorded in the Consolidated Statement of Loss
and Comprehensive Loss as follows:
Cost of goods sold
Research and development expenses
Selling and marketing expenses
General and administrative expenses
17
128
23
566
14
134
6
288
734
442
16. NET LOSS PER COMMON SHARE
The following table presents the maximum number of shares that would be outstanding if all dilutive and
potentially dilutive instruments were exercised or converted as at:
Common shares issued and outstanding
ZARS Contingent Consideration of common shares (note 4)
Stock options outstanding (note 15)
PSUs outstanding (note 15)
86 Nuvo Research Inc. Annual Report 2012
December 31, 2012
(000s)
December 31, 2011
(000s)
567,792
–
49,129
2,721
563,954
101,370
42,668
2,765
619,642
710,757
1 7 . E X P E N S E S B Y N AT U R E
The Consolidated Statements of Loss and Comprehensive Loss include the following expenses by nature:
(a) Employee costs:
Year ended
December 31, 2012
$
Year ended
December 31, 2011
$
9,723
577
51
38
10,275
474
20
653
10,389
11,422
1,951
3,668
691
4,079
2,130
4,531
468
4,293
10,389
11,422
Year ended
December 31, 2012
$
Year ended
December 31, 2011
$
Cost of goods sold
Research and development expenses
General and administrative expenses (i)
244
150
280
319
179
206
Total depreciation and amortization
674
704
Short-term employee wages, bonuses and benefits
Share-based payments
Post-employment benefits
Termination benefits
Total employee costs
Included in:
Cost of goods sold
Research and development expenses
Selling and marketing expenses
General and administrative expenses
Total employee costs
(b) Depreciation and amortization:
(i) G&A expenses include $188 of amortization of intangible assets for the year ended December 31, 2012 [2011 – $93].
1 8 . N E T C H A N G E I N N O N - C A S H W O R K I N G C A P I TA L
The net change in non-cash working capital consists of:
Year ended
December 31, 2012
$
Year ended
December 31, 2011
$
Accounts receivable
Inventories
Other current assets
Accounts payable and accrued liabilities
(233)
553
243
(1,911)
(467)
152
1,118
(2,721)
Net change in non-cash working capital
(1,348)
(1,918)
Nuvo Research Inc. Annual Report 2012 87
Notes to Consolidated Financial Statements
Unless noted otherwise, all amounts shown are in thousands of Canadian dollars
1 9 . I N C O M E TA X E S
Deferred Tax Assets and Liabilities
Deferred income taxes represent the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following
represents deferred tax assets which have not been recognized in these Consolidated Financial Statements:
Year ended
December 31, 2012
$
Year ended
December 31, 2011
$
Non-capital loss carryforwards
U.S. Federal and State research and development credits
Canadian Scientific Research and Experimental
Development (SR&ED) expenditure pool carryforward
Investment tax credits
Financing costs
Tax basis of property, plant and equipment and intangibles
in excess of accounting value
Deferred revenue
Other
25,039
1,047
23,604
1,070
2,097
1,784
24
2,032
1,879
16
2,365
53
10
282
196
27
Deferred tax assets not recognized
32,419
29,106
A reconciliation between the Company’s statutory and effective tax rates is presented below:
Year ended
December 31, 2012
%
Statutory rate
Items not deducted for tax
Impact of foreign income tax rate differential
Revaluation of future taxes as a result of enacted tax rate changes
Unrecognized benefit of current year’s tax loss and other
Other
88 Nuvo Research Inc. Annual Report 2012
Year ended
December 31, 2011
%
26.6
(4.4)
17.5
4.4
(44.1)
(1.5)
28.3
9.0
0.7
(1.9)
(36.1)
(1.4)
(1.5)
(1.4)
Loss Carryforwards and Canadian SR&EDs
The Company and its subsidiaries have non-capital losses available for carryforward to reduce future years’ taxable
income, the benefit of which has not been recorded. These losses and the related future tax asset by jurisdiction are
as follows:
Canada
Canada
United States (i)
United States (ii)
United States
Switzerland
Germany
Expiry Period
Non-capital losses
$
Future tax asset
$
2013 to 2015
2026 to 2032
2025
2023 to 2029
2026 to 2032
2013 to 2019
Indefinite
3,110
46,825
21
6,720
18,640
8,138
2,897
827
12,474
7
2,677
7,425
789
840
86,351
25,039
(i) These U.S. losses carried forward relate to losses acquired upon the purchase of fqubed in 2005. Due to the acquisition of control
of this entity, there are restrictions imposed on the use of these losses.
(ii) These U.S. losses carried forward relate to losses acquired upon the purchase of ZARS in 2011. Due to the acquisition of control
of this entity, there are restrictions imposed on the use of these losses.
The Company has approximately $7.9 million of Canadian SR&ED expenditures for federal tax purposes that are
available to reduce taxable income in future years and have an unlimited carryforward period, the benefit of which
has not been reflected in these financial statements. SR&ED expenditures are subject to audit by the tax authorities
and accordingly, these amounts may vary.
The Company has net capital losses of $6.2 million in Canada available to offset net taxable capital gains in future
years which have not been recognized.
Government Assistance
A portion of the Company’s R&D expenditures are eligible for Canadian federal investment tax credits that it may
carryforward to offset any future Canadian federal income tax payable as follows:
Year of credit
December
December
December
December
December
31,
31,
31,
31,
31,
2005
2006
2007
2008
2009
Amount
$
Year of Expiry
438
688
335
420
323
2015
2026
2027
2028
2029
2,204
The benefits of these non-refundable Canadian federal investment tax credits have not been recognized in the
financial statements.
Nuvo Research Inc. Annual Report 2012 89
Notes to Consolidated Financial Statements
Unless noted otherwise, all amounts shown are in thousands of Canadian dollars
20. COMMITMENTS
Commitments
The Company has commitments under research and other service contracts and minimum future rental payments
under operating leases for the years ending December 31 as follows:
Research and Other
Service Contracts (i)
$
2013
2014
2015
2016
2017 and thereafter
Operating Leases
$
Total
$
1,628
114
–
–
–
213
68
43
24
24
1,841
182
43
24
24
1,742
372
2,114
(i) Included under the caption “Research and Other Service Contracts” are commitments totaling $159 that the Company made for
services that are reimbursable under the terms of the U.S. Licensing Agreement with Mallinckrodt.
For the year ended December 31, 2012, payments under operating leases totaled $215 [2011 – $343].
Under the terms of a 2009 agreement to purchase rights to reference proprietary research, the Company may be
required to make a future payment not exceeding US$500, if a specific milestone is achieved. Under the terms of
the U.S. Licensing Agreement, Covidien must reimburse the Company for this payment.
In three separate transactions, the first of which closed on August 16, 2005, the Company completed the sale of
100% of the common shares of Dimethaid Health Care Limited to Paladin and the transfer of Canadian sales and
marketing rights for Pennsaid to Paladin. Among other things, as part of these arrangements, Nuvo is contractually
obligated to manufacture Pennsaid for Paladin. Paladin is also entitled to receive a 0.5% royalty from Nuvo on all
U.S. Pennsaid revenue the Company receives until February 28, 2014, including royalties and any future milestone
payments, if any.
Under the terms of the U.S. Licensing Agreement, the Company manufactures and supplies Pennsaid to
Mallinckrodt. The price is subject to semi-annual price adjustments based upon raw material increases and changes
in the level of an agreed upon price index subject to an annual cap.
The Company has a long-term supply agreement with a third-party manufacturer for the supply of dimethyl
sulfoxide, one of its key raw materials, for an initial term which extended through October 31, 2012. The agreement automatically renews for successive three-year terms, unless terminated in writing by either party at least
12 months prior to the expiration of the initial term or any successive term. The agreement was not terminated
by either party so it has automatically renewed through October 31, 2015. The agreement obligates the Company
to purchase 100% of its dimethyl sulfoxide requirements from the third party at specified pricing, but does not
contain any minimum purchase commitments.
The Company has a long-term supply agreement with a third-party manufacturer for the supply of diclofenac
sodium, one of its key raw materials, for an initial term extending through October 31, 2012. The agreement
obligates the Company to purchase a declining fixed percentage of its annual U.S. requirements for diclofenac
sodium from the third party at specified pricing, but does not contain any minimum purchase commitments.
Under the terms of a government reimbursement agreement in Europe, the Company has committed to maintain a
minimum employee level over three years commencing with its first claim for reimbursement under the agreement.
Under certain licensing agreements, the Company may be required to make payments upon the achievement of
specific developmental, regulatory or commercial milestones. As it is uncertain if, and when, these milestones will
be achieved, the Company did not accrue for any of these payments at December 31, 2012 or 2011.
Under certain licensing agreements, the Company is required to make royalty payments to two companies for a
combined 2.5% of annual net sales of Synera and Pliaglis.
90 Nuvo Research Inc. Annual Report 2012
Under the terms of the 2004 agreement and as reiterated in the 2011 agreement to purchase the non-controlling
interest in Nuvo Research AG (see Note 5), the Company is obligated to pay 6% of future WF10 licensing and
royalty revenue and 6% of proceeds received from the sale of any portion of Nuvo Research AG. No amounts
have been paid or are payable.
Guarantees
The Company periodically enters into research, licensing, distribution or supply agreements with third parties that
include indemnification provisions that are customary in the industry. These guarantees generally require the
Company to compensate the other party for certain damages and costs incurred as a result of third-party intellectual
property claims or damages arising from these transactions. In some cases, the maximum potential amount of
future payments that could be required under these indemnification provisions is unlimited. These indemnification
provisions generally survive termination of the underlying agreements. The nature of the intellectual property
indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential
amount it could be required to pay. Historically, the Company has not made any indemnification payments under
such agreements and no amount has been accrued in the accompanying Consolidated Financial Statements with
respect to these indemnification obligations.
21. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Fair Values
IFRS 7 Financial Instruments: Disclosures requires disclosure of a three-level hierarchy that reflects the significance
of the inputs used in making fair value measurements. Fair values of assets and liabilities included in Level 1 are
determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities
in Level 2 include those where valuations are determined using inputs other than quoted prices for which all
significant outputs are observable, either directly or indirectly. Level 3 valuations are those based on inputs that
are unobservable and significant to the overall fair value measurement. The Company assessed its financial
instruments that are reported at market value, cash and cash equivalents of $12.1 million and determined that they
are based on Level 1 inputs.
The Company has determined the estimated fair values of its financial instruments based on appropriate valuation
methodologies. However, considerable judgment is required to develop these estimates. Accordingly, these estimated
values are not necessarily indicative of the amounts the Company could realize in a current market exchange. The
estimated fair value amounts can be materially affected by the use of different assumptions or methodologies. The
methods and assumptions used to estimate the fair value of each class of financial instruments are discussed below.
The fair values of short-term financial assets and liabilities, including cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities as presented in the Consolidated Statements of Financial
Position approximate their carrying amounts due to the short period to maturity of these financial instruments.
Rates currently available to the Company for long-term obligations, with similar terms and remaining maturities,
have been used to estimate the fair value of the finance lease and other obligations. These fair values approximate
the carrying values for all instruments.
FINANCIAL RISK MANAGEMENT
Risk Factors
The following is a discussion of credit, liquidity, interest and currency risks and related mitigation strategies that have
been identified. This is not an exhaustive list of all risks nor will the mitigation strategies eliminate all risks listed.
Credit Risk
The Company’s cash and cash equivalents subject the Company to a significant concentration of credit risk.
At December 31, 2012, the Company had $10.7 million invested with one financial institution in various bank
accounts as per its practice of protecting its capital rather than maximizing investment yield through additional
risk. This financial institution is a major Canadian bank which the Company believes lessens the degree of credit
risk. The remaining $1.4 million of cash and cash equivalent balances are held in bank accounts in various
geographic regions outside of Canada.
Nuvo Research Inc. Annual Report 2012 91
Notes to Consolidated Financial Statements
Unless noted otherwise, all amounts shown are in thousands of Canadian dollars
The Company, in the normal course of business, is exposed to credit risk from its global customers most of whom
are in the pharmaceutical industry. The accounts receivable are subject to normal industry risks in each geographic
region in which the Company operates. In addition, the Company is exposed to credit related losses on sales to its
customers outside North America and the E.U. due to potentially higher risks of enforceability and collectability.
The Company attempts to manage these risks prior to the signing of distribution or licensing agreements by dealing
with creditworthy customers; however, due to the limited number of potential customers in each market, this is
not always possible. In addition, a customer’s creditworthiness may change subsequent to becoming a licensee or
distributor and the terms and conditions in the agreement may prevent the Company from seeking new licensees
or distributors in these territories during the term of the agreement. At December 31, 2012, the Company’s four
largest customers located in North America and the E.U. represent 79% [2011 – 85%], of accounts receivable, and
accounts receivable from customers located outside of North America and the E.U. represent 12% [2011 – 7%],
of accounts receivable.
Pursuant to their collective terms, accounts receivable were aged as follows:
Year ended
December 31, 2012
$
Year ended
December 31, 2011
$
2,938
543
208
82
3,301
162
226
11
3,771
3,700
Current
0-30 days past due
31-60 days past due
61-90 days past due
As at March 27, 2013, $486 of the past due amounts have been collected.
Liquidity Risk
While the Company has $12.1 million in cash and cash equivalents at December 31, 2012, it continues to have an
ongoing need for substantial capital resources to research, develop, commercialize and manufacture its products
and technologies. Other than in the U.S. and Canada, the Company has limited participation in Pennsaid sales
revenues in countries where it is currently marketed. In Canada, the Company receives royalties based on
Canadian net sales, but the market is relatively small. These funds are used entirely towards repayment of the
Paladin Debt. In the U.S., the Company receives royalties based on U.S. net sales at rates consistent with industry
standards and has the opportunity to earn up to $100 million in sales milestones. However, Pennsaid is subject to
generic risk in the U.S. as three companies have filed ANDAs in the U.S. (one in early 2013) for approval to
market a generic version of Pennsaid. Although the Company and Mallinckrodt have filed patent infringement
complaints with the courts against two of the generic companies and settled with one, a launch of a generic in the
U.S. would materially impact revenues and as described in Note 12(i). A generic version of Pennsaid available for
commercial sale in the U.S. may trigger an event of default on the Paladin Debt.
In addition, minimal revenues are being generated by Synera and Pliaglis, the two key products added through the
acquisition of ZARS. The commercial success for Synera has been limited, as are the royalties generated by the
European marketing partner. While the Company has licensed Pliaglis’ worldwide rights to Galderma, Pliaglis was
recently approved in 2012 in a number of European countries and the U.S. and just recently launched in the U.S.
and the European launch will occur in the second quarter of 2013. Pliaglis is not yet generating any significant
royalty revenue for the Company. As a result, the Company’s revenues may not be sufficient to provide the capital
required for the Company to be self-sustaining without the need for future financings.
The Company has contractual obligations related to accounts payable and accrued liabilities, purchase commitments
and finance lease and other obligations of $7.1 million that are due in less than a year and $1.8 million of
contractual obligations that are payable from 2014 to 2015.
92 Nuvo Research Inc. Annual Report 2012
Interest Rate Risk
All finance lease and other obligations are at fixed interest rates.
Currency Risk
The Company operates globally, which gives rise to a risk that earnings and cash flows may be adversely affected
by fluctuations in foreign currency exchange rates. The Company is primarily exposed to the U.S. dollar and euro,
but also transacts in other foreign currencies. The Company currently does not use financial instruments to hedge
these risks. The significant balances in foreign currencies are as follows:
Euros
Cash and cash equivalents
Accounts receivable
Other current assets
Accounts payable and accrued liabilities
Finance lease and other obligations
U.S. Dollars
2012
€
2011
€
2012
$
2011
$
1,620
523
138
(287)
–
2,248
726
192
(475)
–
6,360
2,579
–
(1,220)
(473)
4,482
2,260
623
(2,562)
(525)
1,994
2,691
7,246
4,278
Based on the aforementioned net exposure as at December 31, 2012, and assuming that all other variables remain
constant, a 10% appreciation or depreciation of the Canadian dollar against the U.S. dollar and euro would have
resulted in (decreases) increases in total comprehensive loss as follows:
Comprehensive Loss (Income)
Canadian Dollar
Versus U.S. dollar
Versus euro
Appreciates
10%
Depreciates
10%
655
238
(801)
(291)
In terms of the euro, the Company has three significant exposures: its net investment and net cash flows in its
European operations, its euro denominated cash and cash equivalents held in its Canadian operations and sales of
Pennsaid by the Canadian operations to European distributors. In terms of the U.S. dollar, the Company has five
significant exposures: its net investment and net cash flows in its U.S. operations, its U.S. dollar denominated cash
and cash equivalents held in its Canadian operations, the cost of running trials and other studies at U.S. sites, the
cost of purchasing raw materials either priced in U.S. dollars or sourced from U.S. suppliers that are needed to
produce Pennsaid or other products at the Canadian manufacturing facility and revenue generated in U.S. dollars,
including royalties and milestone payments received from licensing agreements with Mallinckrodt, Galderma and
Eurocept and product sales to Mallinckrodt.
The Company does not actively hedge any of its foreign currency exposures given the relative risk of currency
versus other risks the Company faces and the cost of establishing the necessary credit facilities and purchasing
financial instruments to mitigate or hedge these exposures. As a result, the Company does not attempt to hedge
its net investment in foreign subsidiaries.
The Company does not currently hedge its euro cash flows. Sales to European distributors for Pennsaid are primarily
contracted in euros. The Company receives payments from the distributors in its euro bank accounts and uses these
funds to pay euro denominated expenditures and to fund the net outflows of the European operations as required.
Periodically, the Company reviews the amount of euros held, and if they are excessive compared to the Company’s
projected future euro cash flows, they may be converted into U.S. or Canadian dollars.
The Company does not currently hedge its U.S. dollar cash flows. The Company’s U.S. operations have net cash
outflows and currently these are funded using the Company’s U.S. dollar denominated cash and cash equivalents
and payments received under the terms of the U.S. Licensing Agreement. Periodically, the Company reviews its
projected future U.S. dollar cash flows and if the U.S. dollars held are insufficient, the Company may convert a
portion of its other currencies into U.S. dollars. If the amount of U.S. dollars held is excessive, they may be
converted into Canadian dollars or other currencies as needed for the Company’s other operations.
Nuvo Research Inc. Annual Report 2012 93
Notes to Consolidated Financial Statements
Unless noted otherwise, all amounts shown are in thousands of Canadian dollars
2 2 . C A P I TA L M A N A G E M E N T
The Company’s objectives in managing capital are to ensure sufficient liquidity to pursue the Company’s
commercialization plans for Synera and its development plans for each of its other drug candidates and to
maintain its ongoing operations. Product revenues from the Company’s approved drug products are not yet
significant enough to fund ongoing operations. As a result, to secure the capital necessary to pursue its
commercialization and development plans and fund ongoing operations, the Company will need to raise additional
funds through the issuance of debt or equity, by entering into distribution and license agreements or by entering
into co-development agreements.
The Company currently defines its capital to include its cash and cash equivalents, finance lease obligations and
shareholders’ equity excluding accumulated other comprehensive income. In the past, the Company has financed its
operations primarily through the net proceeds received from the sale of common shares and warrants, issuance of
secured debt and convertible debentures, finance lease obligations, proceeds from collaborative relationships and
investment income earned on cash balances and short-term investments.
The Company expects to utilize its cash and cash equivalents which were $12.1 million at December 31, 2012,
revenue from its product sales and royalty payments and milestone payments relating to the approval and launch
of Pliaglis in South America to fund its operations. The Company currently anticipates that its cash and cash
equivalents, together with the revenues it expects to generate from product sales of Pennsaid and Synera, royalty
payments from its Canadian and U.S. Pennsaid licensing agreements, milestone and royalty payments relating to
Pliaglis will be sufficient to fund operations through 2013. Nonetheless, companies in the pharmaceutical industry
typically require periodic funding in order to continue developing their drug candidate pipelines until they have
successfully commercialized at least one of their drug candidates and receive sufficient ongoing revenue to fund
their operations. Nuvo has not yet reached this stage and; therefore, the Company monitors on a regular basis,
its liquidity position, the status of its commercialization efforts and those of its partners, the status of its drug
development programs, including cost estimates for completing various stages of development, the scientific
progress on each drug candidate, the potential to license or co-develop each drug candidate and continues to
actively pursue fund-raising possibilities through various means, including the sale of its equity securities. There
can be no assurance, especially considering the economic environment, that additional financing would be available
on acceptable terms, or at all, when and if required. If adequate funds are not available when required, the
Company may have to substantially reduce or eliminate planned expenditures, discontinue its marketing efforts
for Synera in the U.S., terminate or delay clinical trials for its product candidates, curtail product development
programs designed to expand the product pipeline or discontinue certain operations such as the Immunology
Group. If the Company is unable to obtain additional financing when and if required, the Company may be unable
to continue operations.
94 Nuvo Research Inc. Annual Report 2012
2 3 . S E G M E N T E D I N F O R M AT I O N
Segments
From a financial perspective, executive management uses the net loss before income taxes to assess the performance
of each segment.
The following tables show certain information with respect to operating segments:
Year ended December 31, 2012
Total revenue (i)
Depreciation of property, plant and equipment
and amortization of intangibles
Interest income
Interest expense
Net loss before income taxes (iii) (iv)
Total assets
Property, plant and equipment
Additions to property, plant and equipment
Year ended December 31, 2011
Total revenue (i)
Depreciation of property, plant and equipment
and amortization of intangibles
Interest income
Interest expense
Net loss before income taxes (iii)
Total assets
Property, plant and equipment
Additions to property, plant and equipment (ii)
(i)
(ii)
(iii)
(iv)
Pain
$
Immunology
$
Total
$
23,986
664
24,650
620
761
381
(10,295)
26,370
1,560
141
54
(745)
–
(3,072)
2,115
54
8
674
16
381
(13,367)
28,485
1,614
149
$
$
$
16,026
707
16,733
604
577
8
(2,806)
43,728
1,859
600
100
(425)
–
(3,921)
1,126
101
18
704
152
8
(6,727)
44,854
1,960
618
The Immunology segment currently derives all of its revenue from product sales.
Additions to PP&E include equipment acquired through the ZARS Acquisition.
The gain on ZARS Contingent Consideration restated in both 2011 and 2012 is included in the Pain segment.
The impairment charge of intangible assets and goodwill is included in the Pain segment.
Geographic Information
The Company’s revenue is derived from sales to and licensing revenue derived from external customers located in
the following geographic areas:
United States
Europe
Canada
Other foreign countries
Year ended
December 31, 2012
$
Year ended
December 31, 2011
$
12,298
9,217
2,493
642
9,237
4,534
2,285
677
24,650
16,733
Nuvo Research Inc. Annual Report 2012 95
Notes to Consolidated Financial Statements
Unless noted otherwise, all amounts shown are in thousands of Canadian dollars
The geographic location of the Company’s PP&E is as follows as at:
Canada
United States
Europe
December 31, 2012
$
December 31, 2011
$
1,515
45
54
1,785
75
100
1,614
1,960
Significant Customers
For the year ended December 31, 2012, the Company’s four largest customers, all of which are customers of
the Pain segment, represent 89% [2011 – 83%] of total revenue and the Company’s largest customer represents
42% [2011 – 51%] of total revenue.
2 4 . R E L AT E D PA RT Y T R A N S A C T I O N S
Key Management Compensation
Key management personnel are those persons having authority and responsibility for planning, directing and
controlling the activities of the Company, including directors. Key management includes seven executive officers
and five non-employee directors. Compensation for the Company’s key management personnel was as follows:
Year ended
December 31, 2012
$
Year ended
December 31, 2011
$
Short-term wages, bonuses and benefits
Post-employment benefits
Share-based payments
Termination benefits
2,917
12
483
–
3,356
7
465
297
Total key management compensation
3,412
4,125
Included in:
Research and development
General and administrative expenses
500
2,912
1,089
3,036
Total key management compensation
3,412
4,125
Other transactions
The Company has a consulting arrangement with one of its independent directors. During 2012, consulting
expenses totaled $37 (2011 – $68).
96 Nuvo Research Inc. Annual Report 2012
25. CONTINGENCIES
Leadenhall
In July 2003, a $2.0 million short-term loan was extended to the Company by Leadenhall Bank & Trust Company
Limited (the Mortgagee). The terms of this loan were for interest to accrue at 2% per month and for full repayment
to occur on May 31, 2004. The repayment date was extended on two occasions; first to September 30, 2004
and subsequently to February 28, 2005. The loan was collateralized by a subsidiary of the Company through a
$2.0 million mortgage charge (the Mortgage) on the Company’s former head office.
In 2005 a dispute surrounding the Mortgage arose between the parties. The Mortgage dispute centered on the
calculation and amount of interest owing and was the subject of an Ontario court action (the Ontario Action)
commenced by the Mortgagee in April 2005. The Mortgagee’s position was that interest should be calculated
monthly at a rate of 2% per month, including interest on late payments and costs. The Company’s position was
that the Mortgage was null and void and should be discharged or alternatively, that the interest payable was
limited to 5% per annum pursuant to the provisions of the Interest Act (Canada). Subsequent to the filing by
the Mortgagee of its Statement of Claim and the Company of its Statement of Defense and Counterclaim, the
Mortgagee was placed into voluntary liquidation by its shareholders and a liquidator (the Liquidator) was
appointed in the Bahamas, where the Mortgagee is situated to settle the affairs on the Mortgage. The Ontario
Action was subsequently dismissed by the courts for delay.
In November of 2005, the Company negotiated a written agreement (the Settlement Agreement) with the
Liquidator to settle all claims pursuant to the Ontario Action for US$1.1 million (the Settlement Amount) payable
out of closing funds received on the sale of the Company’s former head office. The Settlement Agreement was
subject to the approval of the Bahamian court that appointed the Liquidator. The Liquidator agreed to seek court
approval as soon as possible after signing the Settlement Agreement. The Liquidator did not seek court approval
prior to the completion of the head office sale, and in order to allow the sale to proceed, the Liquidator and
the Company entered into an escrow arrangement (the Escrow Agreement). Pursuant to the Escrow Agreement,
the Liquidator agreed that upon payment of US$1.4 million (the Escrow Amount) to the Liquidator, to be held in
escrow pending court approval of the Settlement Agreement, the Liquidator would deliver a discharge of the
Mortgage. It was further agreed that upon approval of the Settlement Agreement by the Bahamian Court the
Settlement Amount would be released from escrow and paid to the Liquidator and the balance, US$303, would be
released to the Company (the Excess Amount). In January 2006, the Liquidator discharged the mortgage, the
Company completed the sale of its head office and it paid the Escrow Amount into escrow with the Liquidator’s
Bahamian counsel.
Subsequent to receipt of the Escrow Amount, the Liquidator continually delayed seeking court approval of the
Settlement Agreement and has not yet presented it to the Bahamian court for approval. Since April 2006, the
Liquidator indicated that while still intending to present the Settlement Agreement to the court for its consideration,
it would not recommend that the court approve it. In addition, in its February 2007 Affidavit, the Liquidator
indicated that if the Court did not approve the Settlement Agreement, it would request that the Bahamian court
order that all escrowed funds, including the Excess Amount be released to it and not to the Company. The
Liquidator further stated that the full amount in escrow was insufficient to retire the mortgage principal, plus
interest at the alleged interest rate of 2% per month and that it may pursue the Company for the deficiency. The
Company retained legal counsel in the Bahamas to assist it in securing court approval of the Settlement Agreement
and to ensure that if the Settlement Agreement was not approved, that the escrow continues in accordance with
the terms of the Escrow Agreement.
A hearing in the Bahamian court was held in March 2007. At this hearing, the Liquidator submitted additional
arguments to the Bahamian court requesting that all matters, including those that form the basis of the Ontario
Action, be decided by the Bahamian court. While this request was not ruled upon, the judge issued an order that
the escrow funds continue to be held in escrow for at least 90 days to provide the Company the opportunity to
bring an action in the Bahamian courts for the release of the funds based upon the non-ratification of the
Settlement Agreement. The judge retired shortly thereafter and the case was not reassigned to another judge for
over a year.
Nuvo Research Inc. Annual Report 2012 97
Notes to Consolidated Financial Statements
Unless noted otherwise, all amounts shown are in thousands of Canadian dollars
As a result, the Company was not able to bring its action to release the escrow funds to it before the Bahamian
courts. In June 2007, the Company’s Bahamian legal counsel filed a summons in the Leadenhall liquidation
proceedings requesting that the Company be granted leave to join the liquidation as an interested party. The
Summons was served on the Liquidator in June 2007 and required that the Company be notified if the Liquidator
intended to make application to have the escrow funds released to it. Since June 2007, the shortage of commercial
judges available to hear the case and a lack of co-operation by the Liquidator hindered the Company’s Bahamian
legal counsel’s efforts to obtain a date for a hearing at which a judge could consider the Settlement Agreement.
Late in 2008, the Company’s Bahamian legal counsel informed the Company that a commercial court judge had
been assigned to handle all aspects of the Leadenhall liquidation; however, early in 2009, prior to obtaining a
hearing, this judge resigned from the Bench and the case had not yet been assigned to another judge.
Given these delays, the Company through its Bahamian legal counsel, reinitiated dialogue with the Liquidator’s
counsel in 2009 and presented a proposal aimed at resolving all outstanding matters between the Company and
the Liquidator, if acceptable, the parties would jointly approach the courts to seek its approval. The Company did
not receive a response to its proposal from the Liquidator’s counsel and subsequently learned that the Liquidator
had switched legal counsel (Liquidator’s New Counsel). In November 2010, the Company, the Liquidator and
the Liquidator’s New Counsel restarted discussions aimed at resolving all outstanding matters between the
Company and the Liquidator and in 2011 were able to reach a settlement agreement (2011 Settlement Agreement).
In December 2011, the Bahamian court approved the 2011 Settlement Agreement. Under the terms of the 2011
Settlement Agreement, the funds remaining in escrow were split between the Company and the Liquidator with the
Company’s apportionment estimated at approximately $0.3 million (Settlement Amount).
In 2012, the Court signed an Order that approved settlement terms agreed to by the Company and the Liquidator.
The Company and the Liquidator executed a mutual release agreement and the Settlement Amount was received
and recorded in income.
2 6 . R E S TAT E M E N T O F Z A R S C O N T I N G E N T C O N S I D E R AT I O N
The Company recognized a liability for contingent consideration with a fair value of $5,084 in relation to the
acquisition of ZARS on May 12, 2011, the acquisition date. The contingent consideration was originally structured
as promissory notes payable to the former shareholders of ZARS, contingent on achievement of certain separate
milestones as described in the merger agreement. The structure allowed the Company to seek shareholder approval
for the issuance of additional shares, in lieu of promissory notes.
The Company’s shareholders approved the conversion of the promissory notes payable into contingent shares at
the Company’s Annual and Special Meeting of Shareholders on June 21, 2011. The Company accounted for this
conversion by derecognizing the liability and recording the value of the potentially issuable shares in contributed
surplus, a component of equity. The Company revalued the consideration at $3,314, based on the Company’s
share price on the date of shareholder approval. This resulted in a gain of $1,770 representing the difference
between the fair value of the ZARS Contingent Consideration derecognized as a liability, in the amount of $5,084,
and the fair value of the equity recorded in contributed surplus, in the amount of $3,314.
The Company; therefore, incorrectly applied IAS 32 Financial Instruments: Presentation, because upon conversion
to contingent shares, the contingent consideration continued to meet the definition of a financial liability.
Management had interpreted the separate milestones as discrete targets, independent of one another, issuing a fixed
number of the Company’s common shares per milestone. However, the merger agreement, as legally written,
required the achievement of the Pliaglis milestone to be complete in order for the achievement of the triggering
mechanisms in each of certain other milestones to warrant delivery of their respective contingent shares. As these
milestones are interdependent, a variable number of shares may be delivered. Accordingly, the classification of the
obligation should be based on the overall arrangement, and since the arrangement calls for a variable number of
shares to be delivered, IAS 32 deems the arrangement to be classified as a financial liability and revalued at each
reporting period thereafter.
98 Nuvo Research Inc. Annual Report 2012
As at June 21, 2011, the Company restated the contributed surplus of $3,314 as a liability, and recorded changes
in income (loss) based on changes in the Company’s share price in future reporting periods and the corresponding
probability to achieving the milestones. When one of the milestones was achieved in October 2011, as noted
above, the $137 debit to contributed surplus would have reduced the liability from $3,314 to $3,177. Therefore,
the effect of the restatement on the Company’s Consolidated Financial Statements as at, and for year ended
December 31, 2011 was as follows:
December 31, 2011
ZARS Contingent Consideration liability
Contributed surplus
Deficit
Gain on ZARS Contingent Consideration
Net loss
Net loss per common share
– basic and diluted
Previously presented
$
Adjustment
$
Restated
$
–
16,405
(208,465)
(1,770)
(7,708)
2,300
(3,177)
877
(877)
877
2,300
13,228
(207,588)
(2,647)
(6,831)
(0.016)
0.002
(0.014)
As at December 31, 2012, the remaining milestones for the ZARS Contingent Consideration were not achieved,
and the liability was derecognized resulting in an accumulated gain of $2,300 for the year then ended. Accordingly,
the respective fiscal 2011 and 2012 gains recorded on the ZARS Contingent Consideration were non-cash, and by
the end of the year ended December 31, 2012 total equity remained unchanged.
Nuvo Research Inc. Annual Report 2012 99
Corporate Information
HEAD OFFICE
TRANSFER AGENT/REGISTRAR
C O R P O R AT E G O V E R N A N C E
7560 Airport Road, Unit 10
Mississauga, Ontario, Canada L4T 4H4
Tel. (905) 673-6980
Fax. (905) 673-1842
Email: [email protected]
Website: www.nuvoresearch.com
Common Shares
CIBC Mellon Trust Company
c/o Canadian Stock Transfer Company Inc.
P.O. Box 700, Station B
Montreal, QC
H3B 3K3
Canada
Telephone: 1 (800) 387-0825 or (416) 682-3860
Fax: 1 (888) 249-6189
Email: [email protected]
Website: www.canstockta.com
A statement of the Company’s current
corporate governance practices is contained in
the management information circular and proxy
statement for the June 18, 2013 Annual and
Special Meeting of Shareholders. The Company’s
website www.nuvoresearch.com contains the
Company’s corporate governance documents
including Code of Conduct and Business Ethics,
Corporate Disclosure Policy, Insider Trading
Policy and Audit Committee Charter.
STOCK EXCHANGE LISTING
The Toronto Stock Exchange
Symbol: NRI
We invite you to the Annual
and Special Meeting of Shareholders
AUDITORS
Ernst & Young LLP
Chartered Accountants
Toronto, Canada
I N V E S T O R R E L AT I O N S
Email: [email protected]
LEGAL COUNSEL
Tuesday, June 18, 2013
9:00 a.m. ET
DoubleTree by Hilton Toronto Airport
655 Dixon Road, Toronto, Ontario
Goodmans LLP
Toronto, Canada
Board of Directors and Executive Officers
Daniel N. Chicoine BComm, CA
Chairman & Co-Chief Executive Officer
Stephen L. Lemieux BA, MMPA, CA
Vice President & Chief Financial Officer
John C. London LLB, LLM
Director
President & Co-Chief Executive Officer
Tina K. Loucaides MSc, LLB
Vice President, Secretary & General Counsel
Bradley S. Galer MD
President, Pain Group
Henrich R.K. Guntermann MD, MSc
Director
President, Europe & Immunology Group
100 Nuvo Research Inc. Annual Report 2012
David A. Copeland BMath, CA
Director – Chair of the Audit Committee
Anthony E. Dobranowski
Director
Jacques Messier DVM, MBA
Director – Chair of the Compensation
& Corporate Governance Committee
Theodore H. Stanley
Director
MD
Klaus von Lindeiner
Dr en droit (University of Geneva)
BSc, MBA, CA
Director
F O R WA R D - L O O K I N G S TAT E M E N T S
Certain information in this document may constitute forward-looking statements and information within the meaning of applicable
securities legislation. These forward-looking statements reflect the current beliefs of Nuvo’s management and are based on
assumptions and information currently available to the management team of Nuvo. In some cases, forward-looking statements
can be identified by terminology such as “may”, “will”, “expect”, “plan”, “anticipate”, “believe”, “intend”, “estimate”, “predict”,
“forecast”, “outlook”, “potential”, “continue”, “should”, “likely”, or the negative of these terms or other comparable terminology.
Although management of Nuvo believes that the anticipated future results, performance or achievements expressed or implied by
the forward-looking statements and information in this document are based upon reasonable assumptions and expectations,
readers of this document and prospective investors should not place undue reliance on such forward-looking statements and
information because they involve assumptions, known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of Nuvo to differ materially from anticipated future results, performance or
achievements expressed or implied by such forward-looking statements and information.
Various factors, in addition to those discussed elsewhere in this document, that could affect the future results of Nuvo and could
cause actual results to differ materially from those expressed in the forward-looking statements and information include, but are
not limited to: the need for additional financing; the current economic environment; the dependence on sales and marketing
partnerships; generic drug manufacturers; the regulatory environment; obtaining governmental and regulatory approvals; changes
in government regulation; competitive developments; healthcare reform in the United States; sales, marketing and distribution of
Synera® in the United States; manufacturing and supply risks; the availability of government assistance; the protection of patents,
trademarks and proprietary technology; the ability to protect know how and trade secrets; the inability to achieve drug development
goals within expected time frames; the uncertainty of drug and research development; risks related to clinical trials; patient
enrolment not being adequate for current trials or future clinical trials; rapid technological change making products or drug
delivery technologies obsolete; reliance on third parties to conduct clinical and preclinical studies; prolonged development time;
competition for Pennsaid®; competition for Synera®; competition for Pliaglis®; competition for WF10™; products failing to achieve
market acceptance; publications of negative study or clinical trial results; reimbursement and product pricing; the “off-label”
promotion of drugs; potential product liability; hazardous materials and environmental risks; operating losses; quarterly fluctuations;
impairment of goodwill and intangible assets; loss of personnel; failure of information technology infrastructure; litigation and
regulation risks; the acquisition and integration of complementary technologies or businesses; the inability to realize the anticipated
benefits from the acquisition of ZARS Pharma, Inc. (“ZARS”); the inability to achieve expected savings from restructurings;
losses due to foreign currency fluctuations; business risks relating to international operations; tax-related risks; public company
requirements straining resources; volatility of share price; dilution from further equity financings and declining share price; the
issuance of preferred shares; the absence of dividends; the availability of an active trading market for the common shares; the
Company’s shareholders’ rights plan; securities industry analyst research reports; compliance with laws and regulations affecting
public companies; the failure to effectively manage growth; and other risks and factors described from time-to-time in the
documents filed by Nuvo with Canadian securities regulatory agencies and commissions, including the risk factors described in
our annual information form dated March 27, 2013 (the “AIF”) under the heading “Risks Factors”.
The forward-looking statements and information contained in this document are expressly qualified by this cautionary
statement. Nuvo undertakes no obligation to publicly update or revise any forward-looking statements or information
contained in this document, whether as a result of new information, future events or otherwise, except as required by law.
7560 Airport Road, Unit 10, Mississauga, Ontario, Canada L4T 4H4 Tel: (905) 673-6980 Fax: (905) 673-1842 www.nuvoresearch.com