AEZS 20-F 2012


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________ 
FORM 20-F
¨
Registration Statement Pursuant to Section 12(b) or 12(g) of The Securities Exchange Act of 1934
OR
ý
Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the fiscal year ended December 31, 2012
OR
¨
Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
OR
¨
Shell Company Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Commission file number 0-30752
AETERNA ZENTARIS INC.
(Exact Name of Registrant as Specified in its Charter)
Not Applicable
(Translation of Registrant's Name into English)
Canada
(Jurisdiction of Incorporation)
1405 du Parc-Technologique Blvd.
Quebec City, Quebec
Canada, G1P 4P5
(Address of Principal Executive Offices)
Dennis Turpin
Telephone: 418-652-8525
E-mail: dturpin@aezsinc.com
1405 du Parc-Technologique Blvd.
Quebec City, Quebec
Canada, G1P 4P5
(Name, Telephone, E-mail and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class                
  
Name of Each Exchange on Which Registered                
Common Shares
  
NASDAQ Global Market
Toronto Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act: NONE
Securities for which there is a reporting obligation pursuant to Section 15(d) of the ACT: NONE
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as at the close of the period covered by the annual report: 25,329,288 common shares as at December 31, 2012.
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨      No  ý
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  Yes  ¨      No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý     No  ¨ 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ¨      No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or, or a non-accelerated filer. See definitions of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer    ¨    Accelerated filer     ý    Non-accelerated filer     ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
US GAAP    ¨    International Financial Reporting Standards as issued by the     Other    ¨
International Accounting Standards Board    ý
If "other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17  ¨    Item 18  ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨      No  ý




Basis of Presentation
General
Except where the context otherwise requires, all references in this annual report on Form 20-F to the "Company", "Aeterna Zentaris Inc.", "we", "us", "our" or similar words or phrases are to Aeterna Zentaris Inc. and its subsidiaries, taken together. In this annual report on Form 20-F, references to "$" and "US$" are to United States dollars, references to "CAN$" are to Canadian dollars and references to "EUR" are to euros. Unless otherwise indicated, the statistical and financial data contained in this annual report on Form 20-F are presented as at December 31, 2012.
On October 2, 2012, Aeterna Zentaris completed a consolidation of its issued and outstanding common shares on a 6-to-1 basis ("Share Consolidation"). All references in this annual report on Form 20-F to common shares and options for periods prior to the effective date of the Share Consolidation have been retroactively adjusted to reflect the Share Consolidation.
This annual report on Form 20-F also contains certain information regarding products or product candidates that may potentially compete with our products and product candidates, and such information has been primarily derived from information made publicly available by the companies developing such potentially competing products and product candidates and has not been independently verified by Aeterna Zentaris Inc.
Forward-Looking Statements
This annual report on Form 20-F contains forward-looking statements made pursuant to the safe harbor provisions of the U.S. Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: "intend," "believe," "designed to," "vision," "aimed at," "expect," "may," "should," "would," "will" and similar references. Such statements include, but are not limited to, statements about the progress of our research, development and clinical trials and the timing of, and prospects for, regulatory approval and commercialization of our product candidates, the timing of expected results of our studies and anticipated results of these studies, and estimates regarding our capital requirements and our needs for, and our ability to obtain, additional financing. Forward-looking statements involve known and unknown risks and uncertainties, which could cause the Company's actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, among others, the availability of funds and resources to pursue our research and development ("R&D") projects, the successful and timely completion of clinical studies, the degree of market acceptance once our products are approved for commercialization, the ability of the Company to take advantage of business opportunities in the pharmaceutical industry, the ability of the Company to protect its intellectual property, uncertainties related to the regulatory process and general changes in economic conditions. Investors should consult the Company's quarterly and annual filings with the Canadian and U.S. securities commissions for additional information on risks and uncertainties relating to the forward-looking statements. Investors are cautioned not to rely on these forward-looking statements. The Company does not undertake to update these forward-looking statements and disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forwards-looking statements contained herein to reflect future results, events or developments except if required to do so by a governmental authority or applicable law.




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




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




PART I

Item 1.
Identity of Directors, Senior Management and Advisers
A.
Directors and senior management
Not applicable.
B.
Advisors
Not applicable.
C.
Auditors
Not applicable.
Item 2.
Offer Statistics and Expected Timetable
A.
Offer statistics
Not applicable.
B.
Method and expected timetable
Not applicable.
Item 3.
Key Information
A.
Selected financial data
The consolidated statement of comprehensive loss data set forth in this Item 3.A with respect to the years ended December 31, 2012, 2011 and 2010 and the consolidated statement of financial position data as at December 31, 2012 and 2011 have been derived from the audited consolidated financial statements listed in Item 18, which have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB"). The consolidated statement of financial position as at December 31, 2010 set forth in this Item 3.A have been derived from our previous consolidated financial statements not included herein, and have been prepared in accordance with IFRS. The selected financial data should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F, as well as "Item 5. – Operating and Financial Review and Prospects" of this annual report on Form 20-F.

1


Consolidated Statements of Comprehensive Loss Data
(in thousands of US dollars, except share and per share data)
Derived from financial statements prepared in accordance with IFRS
 
Years ended December 31,
 
2012
 
2011
 
2010
 
$
 
$
 
$
Revenues
 
 
 
 
 
Sales and royalties
31,538

 
31,306

 
24,857

License fees and other
2,127

 
4,747

 
2,846

 
33,665

 
36,053

 
27,703

Operating expenses
 
 
 
 
 
Cost of sales
26,820

 
27,560

 
18,700

Research and development costs, net of refundable tax credits and grants
20,604

 
24,517

 
21,257

Selling, general and administrative expenses
13,245

 
16,170

 
12,552

 
60,669

 
68,247

 
52,509

Loss from operations
(27,004
)
 
(32,194
)
 
(24,806
)
Finance income
6,974

 
6,231

 
1,792

Finance costs
(382
)
 
—

 
(5,437
)
Net finance (costs) income
6,592

 
6,231

 
(3,645
)
Loss before income taxes
(20,412
)
 
(25,963
)
 
(28,451
)
Income tax expense
—

 
(1,104
)
 
—

Net loss
(20,412
)
 
(27,067
)
 
(28,451
)
Other comprehensive loss:
 
 
 
 
 
Items that may be reclassified subsequently to profit or loss
 
 
 
 
 
Foreign currency translation adjustments
(504
)
 
(789
)
 
1,001

Items that will not be reclassified to profit or loss
 
 
 
 
 
Actuarial loss on defined benefit plans
(3,705
)
 
(1,335
)
 
191

Comprehensive loss
(24,621
)
 
(29,191
)
 
(27,259
)
Net loss per share
 
 
 
 
 
Basic
(1.03
)
 
(1.72
)
 
(2.26
)
Diluted
(1.03
)
 
(1.72
)
 
(2.26
)
Weighted average number of shares outstanding
 
 
 
 
 
Basic
19,775,073

 
15,751,331

 
12,609,902

Diluted
19,775,073

 
15,751,331

 
12,609,902






2


Consolidated Statement of Financial Position Data
(in thousands of US dollars)
Derived from financial statements prepared in accordance with IFRS.
 
 
As at December 31,
 
 
2012
 
2011
 
2010
 
 
$
 
$
 
$
Cash and cash equivalents
 
39,521

 
46,881

 
31,998

Short-term investments
 
—

 
—

 
1,934

Working capital
 
42,925

 
47,695

 
34,497

Restricted cash
 
826

 
806

 
827

Total assets
 
67,665

 
75,369

 
61,448

Warrant liability short-term
 
—

 
42

 
955

Warrant liability long-term
 
6,176

 
9,162

 
13,412

Long-term payable
 
—

 
29

 
90

Share capital
 
122,791

 
101,884

 
60,900

Shareholders' (deficiency) equity
 
(6,695
)
 
(4,546
)
 
(17,575
)

B.
Capitalization and indebtedness
Not applicable.
C.
Reasons for the offer and use of proceeds
Not applicable.
D.
Risk factors
Risks Relating to Us and Our Business
Investments in biopharmaceutical companies are generally considered to be speculative.
The prospects for companies operating in the biopharmaceutical industry may generally be considered to be uncertain, given the very nature of the industry and, accordingly, investments in biopharmaceutical companies should be considered to be speculative.
We have a history of operating losses and we may never achieve or maintain operating profitability.
Our product candidates remain at the development stage, and we have incurred substantial expenses in our efforts to develop products. Consequently, we have incurred recurrent operating losses and, as disclosed in our audited consolidated financial statements as at December 31, 2012 and December 31, 2011 and for the years ended December 31, 2012, 2011 and 2010, we had an accumulated deficit of $213.1 million as at December 31, 2012. Our operating losses have adversely impacted, and will continue to adversely impact, our working capital, total assets and shareholders' deficiency. We do not expect to reach operating profitability in the immediate future, and our expenses are likely to increase as we continue to expand our R&D and clinical study programs and our sales and marketing activities and seek regulatory approval for our product candidates. Even if we succeed in developing new commercial products, we expect to incur additional operating losses for at least the next several years. If we do not ultimately generate sufficient revenue from commercialized products and achieve or maintain operating profitability, an investment in our common shares could result in a significant or total loss.

3


Our clinical trials may not yield results which will enable us to obtain regulatory approval for our products, and a setback in any of our clinical trials would likely cause a drop in the price of our common shares.
We will only receive regulatory approval for a product candidate if we can demonstrate in carefully designed and conducted clinical trials that the product candidate is both safe and effective. We do not know whether our pending or any future clinical trials will demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals or will result in marketable products. Unfavorable data from those studies could result in the withdrawal of marketing approval for approved products or an extension of the review period for developmental products. Clinical trials are inherently lengthy, complex, expensive and uncertain processes and have a high risk of failure. It typically takes many years to complete testing, and failure can occur at any stage of testing. Results attained in preclinical testing and early clinical studies, or trials, may not be indicative of results that are obtained in later studies.
None of our product candidates has to date received regulatory approval for its intended commercial sale. We cannot market a pharmaceutical product in any jurisdiction until it has completed rigorous preclinical testing and clinical trials and passed such jurisdiction's extensive regulatory approval process. In general, significant research and development and clinical studies are required to demonstrate the safety and efficacy of our product candidates before we can submit regulatory applications. Preclinical testing and clinical development are long, expensive and uncertain processes. Preparing, submitting and advancing applications for regulatory approval is complex, expensive and time-consuming and entails significant uncertainty. Data obtained from preclinical and clinical tests can be interpreted in different ways, which could delay, limit or prevent regulatory approval. It may take us many years to complete the testing of our product candidates and failure can occur at any stage of this process. In addition, we have limited experience in conducting and managing the clinical trials necessary to obtain regulatory approval in the United States, in Canada and abroad and, accordingly, may encounter unforeseen problems and delays in the approval process. Though we may engage a contract research organization (a "CRO") with experience in conducting regulatory trials, errors in the conduct, monitoring and/or auditing could invalidate the results from a regulatory perspective. Even if a product candidate is approved by the United States Food and Drug Administration (the "FDA"), the Canadian Therapeutic Products Directorate or any other regulatory authority, we may not obtain approval for an indication whose market is large enough to recoup our investment in that product candidate. In addition, there can be no assurance that we will ever obtain all or any required regulatory approvals for any of our product candidates.
We are currently developing our product candidates based on R&D activities, preclinical testing and clinical trials conducted to date, and we may not be successful in developing or introducing to the market these or any other new products or technology. If we fail to develop and deploy new products successfully and on a timely basis, we may become non-competitive and unable to recoup the R&D and other expenses we incur to develop and test new products.
Interim results of preclinical or clinical studies do not necessarily predict their final results, and acceptable results in early studies might not be obtained in later studies. Safety signals detected during clinical studies and preclinical animal studies may require us to do additional studies, which could delay the development of the drug or lead to a decision to discontinue development of the drug. Product candidates in the later stages of clinical development may fail to show the desired safety and efficacy traits despite positive results in initial clinical testing. Results from earlier studies may not be indicative of results from future clinical trials and the risk remains that a pivotal program may generate efficacy data that will be insufficient for the approval of the drug, or may raise safety concerns that may prevent approval of the drug. Interpretation of the prior preclinical and clinical safety and efficacy data of our product candidates may be flawed and there can be no assurance that safety and/or efficacy concerns from the prior data were overlooked or misinterpreted, which in subsequent, larger studies appear and prevent approval of such product candidates.
Furthermore, we may suffer significant setbacks in advanced clinical trials, even after promising results in earlier studies. Based on results at any stage of clinical trials, we may decide to repeat or redesign a trial or discontinue development of one or more of our product candidates. Further, actual results may vary once the final and quality-controlled verification of data and analyses has been completed. If we fail to adequately demonstrate the safety and efficacy of our products under development, we will not be able to obtain the required regulatory approvals to commercialize our product candidates.
Clinical trials are subject to continuing oversight by governmental regulatory authorities and institutional review boards and:
•
must meet the requirements of these authorities;
•
must meet requirements for informed consent; and
•
must meet requirements for good clinical practices.
We may not be able to comply with these requirements in respect of one or more of our product candidates.

4


In addition, we rely on third parties, including CROs and outside consultants, to assist us in managing and monitoring clinical trials. Our reliance on these third parties may result in delays in completing, or in failing to complete, these trials if one or more third parties fails to perform with the speed and level of competence we expect.
A failure in the development of any one of our programs or product candidates could have a negative impact on the development of the others. Setbacks in any phase of the clinical development of our product candidates would have an adverse financial impact (including with respect to any agreements and partnerships that may exist between us and other entities), could jeopardize regulatory approval and would likely cause a drop in the price of our common shares.
If we are unable to successfully complete our clinical trial programs, or if such clinical trials take longer to complete than we project, our ability to execute our current business strategy will be adversely affected.
Whether or not and how quickly we complete clinical trials is dependent in part upon the rate at which we are able to engage clinical trial sites and, thereafter, the rate of enrollment of patients, and the rate we collect, clean, lock and analyze the clinical trial database. Patient enrollment is a function of many factors, including the design of the protocol, the size of the patient population, the proximity of patients to and availability of clinical sites, the eligibility criteria for the study, the perceived risks and benefits of the drug under study and of the control drug, if any, the efforts to facilitate timely enrollment in clinical trials, the patient referral practices of physicians, the existence of competitive clinical trials, and whether existing or new drugs are approved for the indication we are studying. Certain clinical trials are designed to continue until a pre-determined number of events have occurred to the patients enrolled. Such trials are subject to delays stemming from patient withdrawal and from lower than expected event rates and may also incur increased costs if enrollment is increased in order to achieve the desired number of events. If we experience delays in identifying and contracting with sites and/or in patient enrollment in our clinical trial programs, we may incur additional costs and delays in our development programs, and may not be able to complete our clinical trials on a cost-effective or timely basis. In addition, conducting multi-national studies adds another level of complexity and risk as we are subject to events affecting countries outside Canada. Moreover, negative or inconclusive results from the clinical trials we conduct or adverse medical events could cause us to have to repeat or terminate the clinical trials. Accordingly, we may not be able to complete the clinical trials within an acceptable time frame, if at all. If we or any third party have difficulty enrolling a sufficient number of patients to conduct our clinical trials as planned, we may need to delay or terminate ongoing clinical trials.
Additionally, we have never filed a New Drug Application ("NDA"), or similar application for approval in the United States or in any country for our current product candidates, which may result in a delay in, or the rejection of, our filing of an NDA or similar application. During the drug development process, regulatory agencies will typically ask questions of drug sponsors. While we endeavor to answer all such questions in a timely fashion, or in the NDA filing, some questions may not be answered by the time we file our NDA. Unless the FDA waives the requirement to answer any such unanswered questions, submission of an NDA may be delayed or rejected.
We are and will be subject to stringent ongoing government regulation for our products and our product candidates, even if we obtain regulatory approvals for the latter.
The manufacture, marketing and sale of our products and product candidates are and will be subject to strict and ongoing regulation, even if regulatory authorities approve any of the latter. Compliance with such regulation will be expensive and consume substantial financial and management resources. For example, an approval for a product may be conditioned on our agreement to conduct costly post-marketing follow-up studies to monitor the safety or efficacy of the products. In addition, as a clinical experience with a drug expands after approval because the drug is used by a greater number and more diverse group of patients than during clinical trials, side effects or other problems may be observed after approval that were not observed or anticipated during pre-approval clinical trials. In such a case, a regulatory authority could restrict the indications for which the product may be sold or revoke the product's regulatory approval.
We and our contract manufacturers will be required to comply with applicable current Good Manufacturing Practice ("cGMP") regulations for the manufacture of our products. These regulations include requirements relating to quality assurance, as well as the corresponding maintenance of rigorous records and documentation. Manufacturing facilities must be approved before we can use them in the commercial manufacturing of our products and are subject to subsequent periodic inspection by regulatory authorities. In addition, material changes in the methods of manufacturing or changes in the suppliers of raw materials are subject to further regulatory review and approval.
If we, or any future marketing collaborators or contract manufacturers, fail to comply with applicable regulatory requirements, we may be subject to sanctions including fines, product recalls or seizures and related publicity requirements, injunctions, total or partial suspension of production, civil penalties, suspension or withdrawals of previously granted regulatory approvals, warning or untitled letters, refusal to approve pending applications for marketing approval of new products or of supplements

5


to approved applications, import or export bans or restrictions, and criminal prosecution and penalties. Any of these penalties could delay or prevent the promotion, marketing or sale of our products and product candidates.
If our products do not gain market acceptance, we may be unable to generate significant revenues.
Even if our products are approved for commercialization, they may not be successful in the marketplace. Market acceptance of any of our products will depend on a number of factors including, but not limited to:
•
demonstration of clinical efficacy and safety;
•
the prevalence and severity of any adverse side effects;
•
limitations or warnings contained in the product's approved labeling;
•
availability of alternative treatments for the indications we target;
•
the advantages and disadvantages of our products relative to current or alternative treatments;
•
the availability of acceptable pricing and adequate third-party reimbursement; and
•
the effectiveness of marketing and distribution methods for the products.
If our products do not gain market acceptance among physicians, patients, healthcare payers and others in the medical community, which may not accept or utilize our products, our ability to generate significant revenues from our products would be limited and our financial conditions will be materially adversely affected. In addition, if we fail to further penetrate our core markets and existing geographic markets or successfully expand our business into new markets, the growth in sales of our products, along with our operating results, could be negatively impacted.
Our ability to further penetrate our core markets and existing geographic markets in which we compete or to successfully expand our business into additional countries in Europe, Asia or elsewhere is subject to numerous factors, many of which are beyond our control. Our products, if successfully developed, may compete with a number of drugs and therapies currently manufactured and marketed by major pharmaceutical and other biotechnology companies. Our products may also compete with new products currently under development by others or with products which may be less expensive than our products. There can be no assurance that our efforts to increase market penetration in our core markets and existing geographic markets will be successful. Our failure to do so could have an adverse effect on our operating results and would likely cause a drop in the price of our common shares.
We may require significant additional financing, and we may not have access to sufficient capital.
We may require additional capital to pursue planned clinical trials, regulatory approvals, as well as further R&D and marketing efforts for our product candidates and potential products. Except as expressly described in this annual report on Form 20-F, we do not anticipate generating significant revenues from operations in the near future and we currently have no committed sources of capital.
We may attempt to raise additional funds through public or private financings, collaborations with other pharmaceutical companies or financing from other sources. Additional funding may not be available on terms which are acceptable to us. If adequate funding is not available to us on reasonable terms, we may need to delay, reduce or eliminate one or more of our product development programs or obtain funds on terms less favorable than we would otherwise accept. To the extent that additional capital is raised through the sale of equity securities or securities convertible into or exchangeable for equity securities, the issuance of those securities could result in dilution to our shareholders. Moreover, the incurrence of debt financing could result in a substantial portion of our future operating cash flow, if any, being dedicated to the payment of principal and interest on such indebtedness and could impose restrictions on our operations. This could render us more vulnerable to competitive pressures and economic downturns.
We anticipate that our existing working capital, including the proceeds from any sale of common shares and anticipated revenues, will be sufficient to fund our development programs, clinical trials and other operating expenses for the near future. However, our future capital requirements are substantial and may increase beyond our current expectations depending on many factors including:
•
the duration and results of our clinical trials for our various product candidates going forward;
•
unexpected delays or developments in seeking regulatory approvals;
•
the time and cost involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;
•
other unexpected developments encountered in implementing our business development and commercialization strategies;
•
the outcome of litigation, if any; and
•
further arrangements, if any, with collaborators.

6


In addition, global economic and market conditions as well as future developments in the credit and capital markets may make it even more difficult for us to raise additional financing in the future.
If we are unsuccessful in increasing our revenues and/or raising additional funding, we may possibly cease to continue operating as we currently do.
We have had sustained losses, accumulated deficits and negative cash flows from operations since our inception and we expect that this will continue throughout 2013.
Although our audited consolidated financial statements as at December 31, 2012 and December 31, 2011 and for the years ended December 31, 2012, 2011 and 2010 have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities during the normal course of operations, our ability to continue as a going concern is dependent on the successful execution of our business plan, which will require an increase in revenue and/or additional funding to be provided by potential investors as well as non-traditional sources of financing. Although we stated in our audited consolidated financial statements as at December 31, 2012 and December 31, 2011 and for the years ended December 31, 2012, 2011 and 2010 that management believed that the Company had, as at December 31, 2012, sufficient financial resources to fund planned expenditures and other working capital needs for at least, but not limited to, the 12-month period following such date, there can be no assurance that management will be able to reiterate such belief in the future, particularly in the event that we do not or are unable to raise additional capital, as we do not expect our operations to generate sufficient cash flow to fund our obligations.
Additional funding may be in the form of debt or equity or a hybrid instrument depending on the needs of the investor. In light of present and future global economic and credit market conditions, we may not be able to raise additional cash resources through these traditional sources of financing. Although we are also pursuing non-traditional sources of financing with third parties, the global credit markets may adversely affect the ability of potential third parties to pursue such transactions with us. Accordingly, as a result of the foregoing, we continue to review traditional sources of financing, such as private and public debt or various equity financing alternatives, as well as other alternatives to enhance shareholder value including, but not limited to, non-traditional sources of financing, such as alliances with strategic partners, the sale of assets or licensing of our technology or intellectual property, a combination of operating and related initiatives or a substantial reorganization of our business.
There can be no assurance that we will achieve profitability or positive cash flows or be able to obtain additional funding or that, if obtained, they will be sufficient, or whether any other initiatives will be successful, such that we may continue as a going concern. There could also be material uncertainties related to certain adverse conditions and events that could impact our ability to remain a going concern.
We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications for which there may be a greater likelihood of success.
Because we have limited financial and managerial resources, we are currently focusing our efforts on our later-stage clinical research programs and product candidates, AEZS-108 and AEZS-130, for specific indications. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications for which there may be a greater likelihood of success or may prove to have greater commercial potential. Notwithstanding our investment to date and anticipated future expenditures on AEZS-108, AEZS-130 and our earlier-stage programs, we have not yet developed, and may never successfully develop, any marketed treatments using these products. Research programs to identify new product candidates or pursue alternative indications for current product candidates require substantial technical, financial and human resources. These activities may initially show promise in identifying potential product candidates or indications, yet fail to yield product candidates or indications for further clinical development.
We may not achieve our projected development goals in the time-frames we announce and expect.
We set goals and make public statements regarding the timing of the accomplishment of objectives material to our success, such as the commencement, enrollment and anticipated completion of clinical trials, anticipated regulatory submission and approval dates and time of product launch. The actual timing of these events can vary dramatically due to factors such as delays or failures in our clinical trials, the uncertainties inherent in the regulatory approval process and delays in achieving manufacturing or marketing arrangements sufficient to commercialize our products. There can be no assurance that our clinical trials will be completed, that we will make regulatory submissions or receive regulatory approvals as planned or that we will be able to adhere to our current schedule for the launch of any of our products. If we fail to achieve one or more of these milestones as planned, the price of our common shares would likely decline.

7


If we fail to obtain acceptable prices or adequate reimbursement for our products, our ability to generate revenues will be diminished.
The ability for us and/or our partners to successfully commercialize our products will depend significantly on our ability to obtain acceptable prices and the availability of reimbursement to the patient from third-party payers, such as governmental and private insurance plans. These third-party payers frequently require companies to provide predetermined discounts from list prices, and they are increasingly challenging the prices charged for pharmaceuticals and other medical products. Our products may not be considered cost-effective, and reimbursement to the patient may not be available or sufficient to allow us or our partners to sell our products on a competitive basis. It may not be possible to negotiate favorable reimbursement rates for our products.
In addition, the continuing efforts of third-party payers to contain or reduce the costs of healthcare through various means may limit our commercial opportunity and reduce any associated revenue and profits. We expect proposals to implement similar government control to continue. In addition, increasing emphasis on managed care will continue to put pressure on the pricing of pharmaceutical and biopharmaceutical products. Cost control initiatives could decrease the price that we or any current or potential collaborators could receive for any of our products and could adversely affect our profitability. In addition, in the United States, in Canada and in many other countries, pricing and/or profitability of some or all prescription pharmaceuticals and biopharmaceuticals are subject to government control.
If we fail to obtain acceptable prices or an adequate level of reimbursement for our products, the sales of our products would be adversely affected or there may be no commercially viable market for our products.
Competition in our targeted markets is intense, and development by other companies could render our products or technologies non-competitive.
The biomedical field is highly competitive. New products developed by other companies in the industry could render our products or technologies non-competitive. Competitors are developing and testing products and technologies that would compete with the products that we are developing. Some of these products may be more effective or have an entirely different approach or means of accomplishing the desired effect than our products. We expect competition from biopharmaceutical and pharmaceutical companies and academic research institutions to increase over time. Many of our competitors and potential competitors have substantially greater product development capabilities and financial, scientific, marketing and human resources than we do. Our competitors may succeed in developing products earlier and in obtaining regulatory approvals and patent protection for such products more rapidly than we can or at a lower price.
We may not obtain adequate protection for our products through our intellectual property.
We rely heavily on our proprietary information in developing and manufacturing our product candidates. Our success depends, in large part, on our ability to protect our competitive position through patents, trade secrets, trademarks and other intellectual property rights. The patent positions of pharmaceutical and biopharmaceutical firms, including us, are uncertain and involve complex questions of law and fact for which important legal issues remain unresolved. Applications for patents and trademarks in Canada, the United States and in other foreign territories have been filed and are being actively pursued by us. Pending patent applications may not result in the issuance of patents and we may not be able to obtain additional issued patents relating to our technology or products. Even if issued, patents to us or our licensing partners may be challenged, narrowed, invalidated, held to be unenforceable or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection. The patents issued or to be issued to us may not provide us with any competitive advantage or protect us against competitors with similar technology. In addition, it is possible that third parties with products that are very similar to ours will circumvent our patents by means of alternate designs or processes. We may have to rely on method of use and new formulation protection for our compounds in development, and any resulting products, which may not confer the same protection as claims to compounds per se.
In addition, our patents may be challenged by third parties in patent litigation, which is becoming widespread in the biopharmaceutical industry. There may be prior art of which we are not aware that may affect the validity or enforceability of a patent claim. There may also be prior art of which we are aware, but which we do not believe affects the validity or enforceability of a claim, which may, nonetheless, ultimately be found to affect the validity or enforceability of a claim. No assurance can be given that our patents would, if challenged, be held by a court to be valid or enforceable or that a competitor's technology or product would be found by a court to infringe our patents. Our granted patents could also be challenged and revoked in opposition or nullity proceedings in certain countries outside the United States. In addition, we may be required to disclaim part of the term of certain patents.

8


Patent applications relating to or affecting our business have been filed by a number of pharmaceutical and biopharmaceutical companies and academic institutions. A number of the technologies in these applications or patents may conflict with our technologies, patents or patent applications, and any such conflict could reduce the scope of patent protection which we could otherwise obtain. Because patent applications in the United States and many other jurisdictions are typically not published until eighteen months after their first effective filing date, or in some cases not at all, and because publications of discoveries in the scientific literature often lag behind actual discoveries, neither we nor our licensing partners can be certain that we or they were the first to make the inventions claimed in our or their issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in these patent applications. If a third party has also filed a patent application in the United States covering our product candidates or a similar invention, we may have to participate in an adversarial proceeding, known as an interference, declared by the United States Patent and Trademark Office to determine priority of invention in the United States. The costs of these proceedings could be substantial and it is possible that our efforts could be unsuccessful, resulting in a loss of our U.S. patent position.
In addition to patent protection, we may utilize orphan drug regulations, pediatric exclusivity or other provisions of the United States Food, Drug and Cosmetic Act of 1938, as amended, such as new chemical entity exclusivity or new formulation exclusivity, to provide market exclusivity for a drug candidate. Orphan drug regulations provide incentives to pharmaceutical and biotechnology companies to develop and manufacture drugs for the treatment of rare diseases, currently defined as diseases that exist in fewer than 200,000 individuals in the U.S., or, diseases that affect more than 200,000 individuals in the U.S. but that the sponsor does not realistically anticipate will generate a net profit. Under these provisions, a manufacturer of a designated orphan drug can seek tax benefits, and the holder of the first FDA approval of a designated orphan product will be granted a seven-year period of marketing exclusivity for such FDA-approved orphan product. In the U.S., the FDA has the authority to grant additional data protection for approved drugs where the sponsor conducts specified testing in pediatric or adolescent populations. If granted, this pediatric exclusivity provides an additional six months which are added to the term of data protection as well as to the term of any relevant patents, to the extent these protections have not already expired. We may also seek to utilize market exclusivities in other territories, such as in the EU. We cannot assure that any of our drug candidates will obtain such orphan drug designation, pediatric exclusivity, new chemical entity exclusivity or any other market exclusivity in the U.S., EU or any other territory, or that we will be the first to receive the respective regulatory approval for such drugs so as to be eligible for any market exclusivity protection.
We also rely on trade secrets and proprietary know-how to protect our intellectual property. If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected. We seek to protect our unpatented proprietary information in part by requiring our employees, consultants, outside scientific collaborators and sponsored researchers and other advisors to enter into confidentiality agreements. These agreements provide that all confidential information developed or made known to the individual during the course of the individual's relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of our employees, the agreements provide that all of the technology which is conceived by the individual during the course of employment is our exclusive property. These agreements may not provide meaningful protection or adequate remedies in the event of unauthorized use or disclosure of our proprietary information. In addition, it is possible that third parties could independently develop proprietary information and techniques substantially similar to ours or otherwise gain access to our trade secrets. If we are unable to protect the confidentiality of our proprietary information and know-how, competitors may be able to use this information to develop products that compete with our products and technologies, which could adversely impact our business.
We currently have the right to use certain patents and technologies under license agreements with third parties. Our failure to comply with the requirements of material license agreements could result in the termination of such agreements, which could cause us to terminate the related development program and cause a complete loss of our investment in that program.
As a result of the foregoing factors, we may not be able to rely on our intellectual property to protect our products in the marketplace.
We may infringe the intellectual property rights of others.
Our commercial success depends significantly on our ability to operate without infringing the patents and other intellectual property rights of third parties. There could be issued patents of which we are not aware that our products or methods may be found to infringe, or patents of which we are aware and believe we do not infringe but which we may ultimately be found to infringe. Moreover, patent applications and their underlying discoveries are in some cases maintained in secrecy until patents are issued. Because patents can take many years to issue, there may be currently pending applications of which we are unaware that may later result in issued patents that our products or technologies are found to infringe. Moreover, there may be published pending applications that do not currently include a claim covering our products or technologies but which nonetheless provide support for a later drafted claim that, if issued, our products or technologies could be found to infringe.

9


If we infringe or are alleged to infringe intellectual property rights of third parties, it will adversely affect our business. Our research, development and commercialization activities, as well as any product candidates or products resulting from these activities, may infringe or be accused of infringing one or more claims of an issued patent or may fall within the scope of one or more claims in a published patent application that may subsequently be issued and to which we do not hold a license or other rights. Third parties may own or control these patents or patent applications in the United States and abroad. These third parties could bring claims against us or our collaborators that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us or our collaborators, we or they could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit.
The biopharmaceutical industry has produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types of products. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. In the event of infringement or violation of another party's patent or other intellectual property rights, we may not be able to enter into licensing arrangements or make other arrangements at a reasonable cost. Any inability to secure licenses or alternative technology could result in delays in the introduction of our products or lead to prohibition of the manufacture or sale of products by us or our partners and collaborators.
Patent litigation is costly and time consuming and may subject us to liabilities.
Our involvement in any patent litigation, interference, opposition or other administrative proceedings will likely cause us to incur substantial expenses, and the efforts of our technical and management personnel will be significantly diverted. In addition, an adverse determination in litigation could subject us to significant liabilities.
We may not obtain trademark registrations.
We have filed applications for trademark registrations in connection with our product candidates in various jurisdictions, including the United States. We intend to file further applications for other possible trademarks for our product candidates. No assurance can be given that any of our trademark applications will be registered in the United States or elsewhere, or that the use of any registered or unregistered trademarks will confer a competitive advantage in the marketplace. Furthermore, even if we are successful in our trademark registrations, the FDA and regulatory authorities in other countries have their own process for drug nomenclature and their own views concerning appropriate proprietary names. The FDA and other regulatory authorities also have the power, even after granting market approval, to request a company to reconsider the name for a product because of evidence of confusion in the marketplace. No assurance can be given that the FDA or any other regulatory authority will approve of any of our trademarks or will not request reconsideration of one of our trademarks at some time in the future. The loss, abandonment, or cancellation of any of our trademarks or trademark applications could negatively affect the success of the product candidates to which they relate.
Our revenues and expenses may fluctuate significantly, and any failure to meet financial expectations may disappoint securities analysts or investors and result in a decline in the price of our common shares.
We have a history of operating losses. Our revenues and expenses have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our share price to decline. Some of the factors that could cause our revenues and expenses to fluctuate include but are not limited to:
•
the inability to complete product development in a timely manner that results in a failure or delay in receiving the required regulatory approvals to commercialize our product candidates;
•
the timing of regulatory submissions and approvals;
•
the timing and willingness of any current or future collaborators to invest the resources necessary to commercialize our product candidates;
•
the revenue available from royalties derived from our strategic partners;
•
licensing fees revenues;
•
tax credits and grants (R&D);
•
the outcome of litigation, if any;
•
changes in foreign currency fluctuations;
•
the timing of achievement and the receipt of milestone payments from current or future collaborators; and
•
failure to enter into new or the expiration or termination of current agreements with collaborators.
Due to fluctuations in our revenues and expenses, we believe that period-to-period comparisons of our results of operations are not necessarily indicative of our future performance. It is possible that in some future quarter or quarters, our revenues and expenses will be above or below the expectations of securities analysts or investors. In this case, the price of our common shares could fluctuate significantly or decline.

10


We will not be able to successfully commercialize our product candidates if we are unable to make adequate arrangements with third parties for such purposes.
We currently have a lean sales and marketing staff. In order to commercialize our product candidates successfully, we need to make arrangements with third parties to perform some or all of these services in certain territories.
We contract with third parties for the sales and marketing of our products. Our revenues will depend upon the efforts of these third parties, whose efforts may not be successful. If we fail to establish successful marketing and sales capabilities or to make arrangements with third parties for such purposes, our business, financial condition and results of operations will be materially adversely affected.
If we had to resort to developing a sales force internally, the cost of establishing and maintaining a sales force would be substantial and may exceed its cost effectiveness. In addition, in marketing our products, we would likely compete with many companies that currently have extensive and well-funded marketing and sales operations. Despite our marketing and sales efforts, we may be unable to compete successfully against these companies.
We are currently dependent on strategic partners and may enter into future collaborations for the research, development and commercialization of our product candidates. Our arrangements with these strategic partners may not provide us with the benefits we expect and may expose us to a number of risks.
We are dependent on, and rely upon, strategic partners to perform various functions related to our business, including, but not limited to, the research, development and commercialization of some of our product candidates. Our reliance on these relationships poses a number of risks.
We may not realize the contemplated benefits of such agreements nor can we be certain that any of these parties will fulfill their obligations in a manner which maximizes our revenue. These arrangements may also require us to transfer certain material rights or issue our equity, voting or other securities to corporate partners, licensees and others. Any license or sublicense of our commercial rights may reduce our product revenue.
These agreements also create certain risks. The occurrence of any of the following or other events may delay product development or impair commercialization of our products:
•
not all of our strategic partners are contractually prohibited from developing or commercializing, either alone or with others, products and services that are similar to or competitive with our product candidates and, with respect to our strategic partnership agreements that do contain such contractual prohibitions or restrictions, prohibitions or restrictions do not always apply to our partners' affiliates and they may elect to pursue the development of any additional product candidates and pursue technologies or products either on their own or in collaboration with other parties, including our competitors, whose technologies or products may be competitive with ours;
•
our strategic partners may under-fund or fail to commit sufficient resources to marketing, distribution or other development of our products;
•
we may not be able to renew such agreements;
•
our strategic partners may not properly maintain or defend certain intellectual property rights that may be important to the commercialization of our products;
•
our strategic partners may encounter conflicts of interest, changes in business strategy or other issues which could adversely affect their willingness or ability to fulfill their obligations to us (for example, pharmaceutical companies historically have re-evaluated their priorities following mergers and consolidations, which have been common in recent years in this industry);
•
delays in, or failures to achieve, scale-up to commercial quantities, or changes to current raw material suppliers or product manufacturers (whether the change is attributable to us or the supplier or manufacturer) could delay clinical studies, regulatory submissions and commercialization of our product candidates; and
•
disputes may arise between us and our strategic partners that could result in the delay or termination of the development or commercialization of our product candidates, resulting in litigation or arbitration that could be time-consuming and expensive, or causing our strategic partners to act in their own self-interest and not in our interest or those of our shareholders or other stakeholders.
In addition, our strategic partners can terminate our agreements with them for a number of reasons based on the terms of the individual agreements that we have entered into with them. If one or more of these agreements were to be terminated, we would be required to devote additional resources to developing and commercializing our product candidates, seek a new partner or abandon this product candidate which would likely cause a drop in the price of our common shares.

11


We have entered into important strategic partnership agreements relating to certain of our product candidates for various indications. Detailed information on our research and collaboration agreements is available in our various reports and disclosure documents filed with the Canadian securities regulatory authorities and filed with or furnished to the United States Securities and Exchange Commission ("SEC"), including the documents incorporated by reference into this annual report on Form 20-F. See, for example, Note 5 to our audited consolidated financial statements as at December 31, 2012 and December 31, 2011 and for the years ended December 31, 2012, 2011 and 2010 included in this annual report on Form 20-F.
We have also entered into a variety of collaboration agreements with various universities and institutes under which we are obligated to support some of the research expenses incurred by the university laboratories and pay royalties on future sales of the products. In turn, we have retained exclusive rights for the worldwide exploitation of results generated during the collaborations.
In particular, we have entered into an agreement with the Tulane Educational Fund ("Tulane"), which provides for the payment by us of single-digit royalties on future worldwide net sales of cetrorelix and including Cetrotide®. Tulane is also entitled to receive a low double-digit participation payment on any lump-sum, periodic or other cash payments received by us from sub-licensees.
We rely on third parties to conduct, supervise and monitor our clinical trials, and those third parties may not perform satisfactorily.
We rely on third parties such as CROs, medical institutions and clinical investigators to enroll qualified patients and conduct, supervise and monitor our clinical trials. Our reliance on these third parties for clinical development activities reduces our control over these activities. Our reliance on these third parties, however, does not relieve us of our regulatory responsibilities, including ensuring that our clinical trials are conducted in accordance with Good Clinical Practice guidelines and the investigational plan and protocols contained in an Investigational New Drug ("IND") application, or comparable foreign regulatory submission. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. In addition, they may not complete activities on schedule, or may not conduct our preclinical studies or clinical trials in accordance with regulatory requirements or our trial design. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, our efforts to obtain regulatory approvals for, and commercialize, our product candidates may be delayed or prevented.
In carrying out our operations, we are dependent on a stable and consistent supply of ingredients and raw materials.
There can be no assurance that we, our contract manufacturers or our partners, will be able, in the future, to continue to purchase products from our current suppliers or any other supplier on terms similar to current terms or at all. An interruption in the availability of certain raw materials or ingredients, or significant increases in the prices paid by us for them, could have a material adverse effect on our business, financial condition, liquidity and operating results.
The failure to perform satisfactorily by third parties upon which we rely to manufacture and supply products may lead to supply shortfalls.
We rely on third parties to manufacture and supply marketed products. We also have certain supply obligations vis à vis our licensing partners who are responsible for the marketing of the products. To be successful, our products have to be manufactured in commercial quantities in compliance with quality controls and regulatory requirements. Even though it is our objective to minimize such risk by introducing alternative suppliers to ensure a constant supply at all times, we cannot guarantee that we will not experience supply shortfalls and, in such event, we may not be able to perform our obligations under contracts with our partners.
We are subject to intense competition for our skilled personnel, and the loss of key personnel or the inability to attract additional personnel could impair our ability to conduct our operations.
We are highly dependent on our management and our clinical, regulatory and scientific staff, the loss of whose services might adversely impact our ability to achieve our objectives. Recruiting and retaining qualified management and clinical, scientific and regulatory personnel is critical to our success. Competition for skilled personnel is intense, and our ability to attract and retain qualified personnel may be affected by such competition.
Our strategic partners' manufacturing capabilities may not be adequate to effectively commercialize our product candidates.
Our manufacturing experience to date with respect to our product candidates consists of producing drug substance for clinical studies. To be successful, these product candidates have to be manufactured in commercial quantities in compliance with regulatory requirements and at acceptable costs. Our strategic partners' current manufacturing facilities have the capacity to produce projected product requirements for the foreseeable future, but we will need to increase capacity if sales continue to

12


grow. Our strategic partners may not be able to expand capacity or to produce additional product requirements on favorable terms. Moreover, delays associated with securing additional manufacturing capacity may reduce our revenues and adversely affect our business and financial position. There can be no assurance that we will be able to meet increased demand over time.
We are subject to the risk of product liability claims, for which we may not have or be able to obtain adequate insurance coverage.
The sale and use of our products, in particular our biopharmaceutical products, involve the risk of product liability claims and associated adverse publicity. Our risks relate to human participants in our clinical trials, who may suffer unintended consequences, as well as products on the market whereby claims might be made directly by patients, healthcare providers or pharmaceutical companies or others selling, buying or using our products. We manage our liability risks by means of insurance. We maintain liability insurance covering our liability for our preclinical and clinical studies and for our pharmaceutical products already marketed. However, we may not have or be able to obtain or maintain sufficient and affordable insurance coverage, including coverage for potentially very significant legal expenses, and without sufficient coverage any claim brought against us could have a materially adverse effect on our business, financial condition or results of operations.
Our business involves the use of hazardous materials which requires us to comply with environmental and occupational safety laws regulating the use of such materials. If we violate these laws, we could be subject to significant fines, liabilities or other adverse consequences.
Our discovery and development processes involve the controlled use of hazardous and radioactive materials. We are subject to federal, provincial and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. The risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of an accident or a failure to comply with environmental or occupational safety laws, we could be held liable for any damages that result, and any such liability could exceed our resources. We may not be adequately insured against this type of liability. We may be required to incur significant costs to comply with environmental laws and regulations in the future, and our operations, business or assets may be materially adversely affected by current or future environmental laws or regulations.
We are a holding company, and claims of creditors of our subsidiaries will generally have priority as to the assets of such subsidiaries over our claims and those of our creditors and shareholders.
Aeterna Zentaris Inc. is a holding company and a substantial portion of our assets is the share capital of our subsidiaries. AEZS GmbH, our principal operating subsidiary, based in Frankfurt, Germany, holds most of our intellectual property rights, which represent the principal assets of our business.
Because Aeterna Zentaris Inc. is a holding company, our obligations to our creditors are structurally subordinated to all existing and future liabilities of our subsidiaries. Therefore, our rights and the rights of our creditors to participate in any distribution of the assets of any subsidiary in the event that such subsidiary were to be liquidated or reorganized or in the event of any bankruptcy or insolvency proceeding relating to or involving such subsidiary, and therefore the rights of the holders of our common shares to participate in those assets, are subject to the prior claims of such subsidiary's creditors. To the extent that we may be a creditor with recognized claims against any such subsidiary, our claims would still be subject to the prior claims of our subsidiary's creditors to the extent that they are secured or senior to those held by us.
Holders of our common shares are not creditors of our subsidiaries. Claims to the assets of our subsidiaries will derive from our own ownership interest in those operating subsidiaries. Claims of our subsidiaries' creditors will generally have priority as to the assets of such subsidiaries over our own ownership interest claims and will therefore have priority over the holders of our common shares. Our subsidiaries' creditors may from time to time include general creditors, trade creditors, employees, secured creditors, taxing authorities, and creditors holding guarantees.
Accordingly, in the event of any foreclosure, dissolution, winding-up, liquidation or reorganization, or a bankruptcy or insolvency proceeding relating to us or our property, or any subsidiary, there can be no assurance as to the value, if any, that would be available to holders of our common shares.
In addition, any distributions to us by our subsidiaries could be subject to monetary transfer restrictions in the jurisdictions in which our subsidiaries operate.
Our subsidiaries may incur additional indebtedness and other liabilities.

13


All existing and futures shares of our subsidiary holding rights to Cetrotide® have been pledged to an affiliate of HRP (as defined below). If we were to default on certain payments or other material obligations owed to HRP, or upon the commencement of insolvency proceedings by or against us, HRP could realize its interest and we would lose our ability to derive revenues from royalties derived indirectly from net sales of Cetrotide®.
The Company's revenues are derived primarily from sales and royalties as well as from license fees. Sales are derived from Cetrotide® (cetrorelix acetate solution for injection), marketed globally (ex-Japan) by ARES Trading S.A. ("Merck Serono") for reproductive health assistance for in vitro fertilization, as well as from active pharmaceutical ingredients. Royalties are derived indirectly from Merck Serono's net sales of Cetrotide® and represent the periodic amortization, under the units-of-revenue method, of the proceeds received in connection with the 2008 sale (or monetization) by IVF of the underlying future royalty stream to Healthcare Royalty Partners L.P. (formerly Cowen Healthcare Royalty Partners L.P.) ("HRP").
On November 11, 2008, IVF, AEZS GmbH and the Company signed a purchase agreement (the "Purchase Agreement") with HRP for the sale to HRP of IVF's rights to royalties on future net sales of Cetrotide®, covered by a license agreement with Merck Serono.
Pursuant to the Purchase Agreement, AEZS GmbH entered into a pledge agreement with an affiliate of HRP granting a pledge to such affiliate (the "Pledge") over all existing and future shares of the capital of IVF and all ancillary rights pertaining thereto (other than voting rights), including monetary claims (the "Pledged Shares"). The Pledge will expire when all obligations which are or become due, owing or payable to HRP or its assignee under or in connection with the Purchase Agreement have been fully and finally satisfied and discharged.
In the event we were to default on certain of our payment or other material obligations owed to HRP under the Purchase Agreement, or in the event any bankruptcy, insolvency, reorganization, liquidation, dissolution, or similar proceeding, domestic or foreign, is instituted by or against Aeterna Zentaris Inc., or if any of Aeterna Zentaris Inc., AEZS GmbH or IVF becomes insolvent as described in the Purchase Agreement, or if any corporate action, legal proceeding or other proceeding is taken in relation to the suspension of payments, winding-up, dissolution, administration or reorganization of Aeterna Zentaris Inc. or any subsidiary, HRP's affiliate could realize its interest in the Pledged Shares, subject to prior compliance with the German Civil Code with regard to the enforcement of pledges, and it may sell the Pledged Shares or otherwise dispose of such shares. If such affiliate were to realize its interest in the Pledged Shares, it would have a material adverse impact on our business, as we would lose our ability to derive revenues from royalties derived from Merck Serono's net sales of Cetrotide®. In addition, in the event of any bankruptcy or insolvency event relating to or involving any of Aeterna Zentaris Inc., AEZS GmbH or IVF, the rights related to Cetrotide® would not be available to either Aeterna Zentaris Inc. or our common shareholders as IVF would no longer be a subsidiary of Aeterna Zentaris Inc.
It may be difficult for U.S. investors to obtain and enforce judgments against us because of our Canadian incorporation and German presence.
We are a Company existing under the laws of Canada. Most of our directors and officers are residents of Canada or otherwise reside outside the U.S., and all or a substantial portion of their assets, and a substantial portion of our assets, are located outside the U.S. Consequently, although we have appointed an agent for service of process in the U.S., it may be difficult for investors in the United States to bring an action against such directors or officers or to enforce against those persons or us a judgment obtained in a United States court predicated upon the civil liability provisions of federal securities laws or other laws of the United States. Investors should not assume that foreign courts (1) would enforce judgments of U.S. courts obtained in actions against us or such directors, officers or experts predicated upon the civil liability provisions of the U.S. federal securities laws or the securities or "blue sky" laws of any state within the U.S. or (2) would enforce, in original actions, liabilities against us or such directors, officers or experts predicated upon the U.S. federal securities laws or any such state securities or "blue sky" laws. In addition, we have been advised by our Canadian counsel that in normal circumstances, only civil judgments and not other rights arising from U.S. securities legislation (for example, penal or similar awards made by a court in a regulatory prosecution or proceeding) are enforceable in Canada and that the protections afforded by Canadian securities laws may not be available to investors in the U.S.
Health care reform measures could adversely affect our business
The business prospects and financial condition of pharmaceutical and biotechnology companies are affected by the efforts of governmental and third-party payers to contain or reduce the costs of health care. In the U.S. and in foreign jurisdictions there have been, and we expect that there will continue to be, a number of legislative and regulatory proposals aimed at changing the health care system, such as proposals relating to the pricing of healthcare products and services in the U.S. or internationally, the reimportation of drugs into the U.S. from other countries (where they are then sold at a lower price), and the amount of reimbursement available from governmental agencies or other third party payers. For example, drug manufacturers are required to have a national rebate agreement with the Department of Health and Human Services in order to obtain state Medicaid

14


coverage, which requires manufacturers to pay a rebate on drugs dispensed to Medicaid patients. On January 27, 2012, the Centers for Medicare and Medicaid Services ("CMS") issued a proposed regulation covering the calculation of Average Manufacturer Price ("AMP") which is the key variable in the calculation of these rebates.
Furthermore, in the U.S., health care reform legislation titled the Patient Protection and Affordable Care Act ("PPACA") was signed into law in March 2010. The impact of this legislation on our business is inherently difficult to predict as many of the details regarding the implementation of this legislation have not been determined. In a decision issued on June 29, 2012, the United States Supreme Court upheld the majority of PPACA. The Court's decision allows implementation of key provisions impacting the pharmaceutical industry, including drug and device manufacturers. This includes PPACA changes to the Medicare Part D Program (including closing the "donut hole"), Medicaid Drug Rebate Program (including the definition of AMP), and expansion of the 340B Drug Discount Program. The decision also allows the FDA and CMS to continue with implementation efforts, including related to the Biologics Price Competition and Innovation Act and the Physician Payments Sunshine Act, both of which were enacted as part of the PPACA. Regulations to implement PPACA could result in a decrease in our stock price or limit our ability to raise capital or to obtain strategic partnerships or licenses. Government-financed comparative efficacy research could also result in new practice guidelines, labeling or reimbursement policies that discourages use of our products.
In addition, on September 27, 2007, the Food and Drug Administration Amendments Act of 2007 was enacted, giving the FDA enhanced post-market authority, including the authority to require post-marketing studies and clinical trials, labeling changes based on new safety information, and compliance with risk evaluations and mitigation strategies approved by the FDA. The FDA's exercise of this authority may result in delays or increased costs during the period of product development, clinical trials and regulatory review and approval, which may also increase costs related to complying with new post-approval regulatory requirements, and increase potential FDA restrictions on the sale or distribution of approved products.
We are subject to additional reporting requirements under applicable Canadian securities laws and the Sarbanes-Oxley Act in the United States. We can provide no assurance that we will at all times in the future be able to report that our internal controls over financial reporting are effective.
As a public company, we are required to comply with Section 404 of the Sarbanes-Oxley Act ("Section 404") and National Instrument 52-109 - Certification of Disclosure in Issuers' Annual and Interim Filings, and we are required to obtain an annual attestation from our independent auditors regarding our internal control over financial reporting. In any given year, we cannot be certain as to the time of completion of our internal control evaluation, testing and remediation actions or of their impact on our operations. Upon completion of this process, we may identify control deficiencies of varying degrees of severity under applicable SEC and Public Company Accounting Oversight Board rules and regulations. As a public company, we are required to report, among other things, control deficiencies that constitute material weaknesses or changes in internal controls that, or that are reasonably likely to, materially affect internal controls over financial reporting. A "material weakness" is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual consolidated financial statements will not be prevented or detected on a timely basis. If we fail to comply with the requirements of Section 404, Canadian requirements or report a material weakness, we might be subject to regulatory sanction and investors may lose confidence in our consolidated financial statements, which may be inaccurate if we fail to remedy such material weakness.
It is possible that we may be a passive foreign investment company, which could result in adverse tax consequences to U.S. investors.
Adverse U.S. federal income tax rules apply to "U.S. Holders" (as defined in "Item 10.E – Taxation – Certain Material U.S. Federal Income Tax Considerations" in this annual report on Form 20-F) that directly or indirectly hold common shares of a passive foreign investment company ("PFIC"). We will be classified as a PFIC for U.S. federal income tax purposes for a taxable year if (i) at least 75% of our gross income is “passive income” or (ii) at least 50% of the average value of our assets, including goodwill (based on annual quarterly average), is attributable to assets which produce passive income or are held for the production of passive income.
We believe that we were not a PFIC for the 2012 taxable year. However, the PFIC determination depends on the application of complex U.S. federal income tax rules concerning the classification of our assets and income for this purpose, and these rules are uncertain in some respects. In addition, the fair market value of our assets may be determined in large part by the market price of our common shares, which is likely to fluctuate, and the composition of our income and assets will be affected by how, and how quickly, we spend any cash that is raised in any financing transaction. No assurance can be provided that we will not be classified as a PFIC for the 2013 taxable year and for any future taxable year.
PFIC characterization could result in adverse U.S. federal income tax consequences to U.S. Holders. In particular, absent certain elections, a U.S. Holder would generally be subject to U.S. federal income tax at ordinary income tax rates, plus a

15


possible interest charge, in respect of a gain derived from a disposition of our common shares, as well as certain distributions by us. If we are treated as a PFIC for any taxable year, a U.S. Holder may be able to make an election to "mark to market" common shares each taxable year and recognize ordinary income pursuant to such election based upon increases in the value of the common shares. In addition, U.S. Holders may mitigate the adverse tax consequences of the PFIC rules by making a "qualified electing fund" ("QEF") election; however, the Company does not expect to provide the information regarding its income that would be necessary for a U.S. Holder to make a QEF election.
Under U.S. tax legislation and subject to future guidance, if the Company is a PFIC, U.S. Holders will be required to file an annual information return with the Internal Revenue Service (the "IRS") (on IRS Form 8621, which PFIC shareholders will be required to file with their U.S. federal income tax or information returns) relating to their ownership of common shares. Pursuant to IRS Notice 2011-55, the IRS has suspended this new filing requirement for U.S. Holders that are not otherwise required to file the current version of the IRS Form 8621 until the IRS releases a subsequent revision of IRS Form 8621, modified to reflect the recently enacted U.S. tax legislation. Guidance has not yet been issued regarding the information required to be included on such form. This new filing requirement is in addition to any preexisting reporting requirements that apply to a U.S. Holder's interest in a PFIC (which the recently enacted tax legislation and IRS Notice 2011-55 do not affect).
For a more detailed discussion of the potential tax impact of us being a PFIC, see "Item 10.E – Taxation – Certain Material U.S. Federal Income Tax Considerations" in this annual report on Form 20-F. The PFIC rules are complex. U.S. Holders should consult their tax advisors regarding the potential application of the PFIC regime and any reporting obligations to which they may be subject under that regime.
We may incur losses associated with foreign currency fluctuations.
Our operations are in many instances conducted in currencies other than the euro, our functional currency. Fluctuations in the value of currencies could cause us to incur currency exchange losses. We do not currently employ a hedging strategy against exchange rate risk. We cannot assert with any assurance that we will not suffer losses as a result of unfavorable fluctuations in the exchange rates between the United States dollar, the euro, the Canadian dollar and other currencies. For more information, see "Item 11. – Quantitative and Qualitative Disclosures About Market Risk" in this annual report on Form 20-F.
We may not be able to successfully integrate acquired businesses.
Future acquisitions may not be successfully integrated. The failure to successfully integrate the personnel and operations of businesses which we may acquire in the future with ours could have a material adverse effect on our operations and results.
Legislative actions, new accounting pronouncements and higher insurance costs are likely to impact our future financial position or results of operations.
Changes in financial accounting standards or implementation of accounting standards may cause adverse, unexpected revenue or expense fluctuations and affect our financial position or results of operations. New pronouncements and varying interpretations of pronouncements have occurred with greater frequency and are expected to occur in the future, and we may make or be required to make changes in our accounting policies in the future. Compliance with changing regulations of corporate governance and public disclosure, notably with respect to internal controls over financial reporting, may result in additional expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for companies such as ours, and insurance costs are increasing as a result of this uncertainty.
Risks Relating to our Common Shares
Our share price is volatile, which may result from factors outside of our control. If our common shares were to be delisted from NASDAQ Global Market ("NASDAQ") or Toronto Stock Exchange (the "TSX"), investors may have difficulty in disposing of our common shares held by them.
Our common shares are currently listed and traded only on NASDAQ and TSX. Our valuation and share price since the beginning of trading after our initial listings, first in Canada and then in the United States, have had no meaningful relationship to current or historical financial results, asset values, book value or many other criteria based on conventional measures of the value of shares.
As adjusted for and giving effect to our 6-to-1 Share Consolidation on October 2, 2012, the closing price of our common shares ranged from $1.87 to $12.90 on NASDAQ and from C$1.87 to C$12.84 per share on TSX between January 1 and December 31, 2012. Our share price may be affected by developments directly affecting our business and by developments out of our control or unrelated to us. The stock market generally, and the biopharmaceutical sector in particular, are vulnerable to abrupt changes in investor sentiment. Prices of shares and trading volume of companies in the biopharmaceutical industry can swing

16


dramatically in ways unrelated to, or that bear a disproportionate relationship to, operating performance. Our share price and trading volume may fluctuate based on a number of factors including, but not limited to:
•
clinical and regulatory developments regarding our product candidates;
•
delays in our anticipated development or commercialization timelines;
•
developments regarding current or future third-party collaborators;
•
other announcements by us regarding technological, product development or other matters;
•
arrivals or departures of key personnel;
•
governmental or regulatory action affecting our product candidates and our competitors' products in the United States, Canada and other countries;
•
developments or disputes concerning patent or proprietary rights;
•
actual or anticipated fluctuations in our revenues or expenses;
•
general market conditions and fluctuations for the emerging growth and biopharmaceutical market sectors; and
•
economic conditions in the United States, Canada or abroad.
Our listing on both NASDAQ and TSX may increase price volatility due to various factors, including different ability to buy or sell our common shares, different market conditions in different capital markets and different trading volumes. In addition, low trading volume may increase the price volatility of our common shares. A thin trading market could cause the price of our common shares to fluctuate significantly more than the stock market as a whole.
A period of large price decline in our common shares could increase the risk that securities class action litigation could be initiated against us. Litigation of this type and other litigation could result in substantial costs and diversion of management's attention and resources, which would adversely affect our business. Any adverse determination in litigation could also subject us to significant liabilities.
We must meet continuing listing requirements to maintain the listing of our common shares on NASDAQ and TSX. For continued listing, NASDAQ requires, among other things, that listed securities maintain a minimum closing bid price of not less than $1.00 per share.
If our common shares trade for 30 consecutive business days below the required $1.00 minimum closing bid price, we expect that NASDAQ would then send us a deficiency notice and provide us with a period of 180 calendar days to regain compliance with the minimum bid price requirement. In order to regain compliance, the closing bid price of our common shares would have to be at least US$1.00 for a minimum of 10 consecutive business days. If we did not regain compliance within the initial 180-day period, but otherwise met the continued listing requirement for market value of publicly held shares and all other initial listing standards for the NASDAQ Capital Market, except for the bid price requirement, and we provided NASDAQ with notice of our intention to cure the bid price deficiency, the NASDAQ rules may  then permit us to transfer to the NASDAQ Capital Market, which would give us an additional 180 calendar days to regain compliance. If we were not eligible for an additional compliance period, NASDAQ will notify us that our securities are subject to delisting. At that time, we could appeal the determination to delist our securities to a Listing Qualifications Panel.
In addition to the minimum bid price requirement, NASDAQ's continued listing rules require us to meet at least one of the following listing standards: (i) stockholders' equity of at least $10 million (the "Equity Standard"), (ii) market value of listed securities (calculated by multiplying the daily closing bid price of our common shares by our total outstanding common shares) of at least $50 million (the "Market Value Standard") or (iii) total assets and total revenue of at least $50 million each (the "Total Assets/Total Revenue Standard"). If our total market capitalization decreases to an amount less than $50 million we may no longer meet any of these three listing standards. Similar to the process described above in the minimum bid price context, if we fail to meet the Market Value Standard for 30 consecutive trading days and do not otherwise meet the Equity Standard or the Total Assets/Total Revenue Standard, we expect that we would then receive a notification letter from NASDAQ advising us that we fail to comply with the Market Value Standard and providing us a period of 180 calendar days to regain compliance with the Market Value Standard. In order to regain compliance with the Market Value Standard, the market value of our listed securities would have to be at least $50 million for a period of 10 consecutive business days. Otherwise, our securities may then be subject to delisting.
There can be no assurance that our common shares will remain listed on NASDAQ. If we fail to meet any of NASDAQ's continued listing requirements, our common shares may be delisted. Any delisting of our common shares may adversely affect a shareholder's ability to dispose, or obtain quotations as to the market value, of such shares.
We do not intend to pay dividends in the near future.
To date, we have not declared or paid any dividends on our common shares. We currently intend to retain our future earnings, if any, to finance further research and the expansion of our business. As a result, the return on an investment in our common

17


shares will, for the foreseeable future, depend upon any future appreciation in value. There is no guarantee that our common shares will appreciate in value or even maintain the price at which shareholders have purchased them.
Future issuances of securities and hedging activities may depress the trading price of our common shares.
Any additional or future issuance of equity securities or securities convertible into or exchangeable for equity securities, including the issuance of common shares upon the exercise of stock options and upon the exercise of outstanding warrants, could dilute the interests of our existing shareholders, and could substantially decrease the trading price of our common shares. We may issue equity securities in the future for a number of reasons, including to finance our operations and business strategy, to satisfy our obligations upon the exercise of options or warrants or for other reasons. Our Stock Option Plan generally permits us to have outstanding, at any given time, stock options that are exercisable for a maximum number of common shares equal to 11.4% of all then issued and outstanding common shares. As at December 31, 2012, there were:
•
25,329,288 common shares issued and outstanding;
•
no issued and outstanding preferred shares;
•
4,407,410 common shares issuable upon exercise of outstanding warrants; and
•
2,056,367 stock options outstanding.
In addition, the price of common shares could also be affected by possible sales of common shares by investors who view other investment vehicles as more attractive means of equity participation in us and by hedging or arbitrage trading activity that may develop involving our common shares. This hedging or arbitrage could, in turn, affect the trading price of our common shares.
Our articles of incorporation contain "blank check" preferred share provisions, which could delay or impede an acquisition of our company.
Our articles of incorporation, as amended, authorize the issuance of an unlimited number of "blank check" preferred shares, which could be issued by our board of directors without shareholder approval and may contain voting, liquidation, dividend and other rights equivalent or superior to our common shares. In addition, we could implement in our constating documents an advance notice procedure for shareholder approvals to be brought before an annual meeting of our shareholders, including proposed nominations of persons for election to our board of directors. These provisions, among others, whether alone or together, could delay or impede hostile takeovers and changes in control or changes in our management. Any provision of our constating documents that has the effect of delaying or deterring a change in control could limit the opportunity for our shareholders to receive a premium for their common shares and could also affect the price that some investors are willing to pay for our common shares.
The outcome of pending and future claims and litigation could have a material adverse impact on the Company's business, financial condition and results of operation.
The Company and its subsidiaries may, from time to time, be parties to litigation in the normal course of business. Due to the inherent uncertainties of litigation, it is not possible to predict the final outcome of these lawsuits or determine the amount of any potential losses, if any, and we may, in the future, be subject litigation proceedings, including class action lawsuits. In the event the Company is required or determines to pay amounts in connection with any such lawsuits, such amounts could be significant and could have a material adverse impact on our liquidity, business, financial condition and results of operation.
On December 21, 2012, a second amended securities class action (the "U.S. Class Action") was filed against the Company and certain of its senior officers in the purported class action lawsuit initially filed in June 2012 in the United States District Court, Southern District of New York. On February 1, 2013, we filed a motion to dismiss the U.S. Class Action. This lawsuit, alleging failures to disclose certain information under U.S. federal securities laws, is being prosecuted by a lead plaintiff on behalf of shareholders who acquired the Company's common shares between June 1, 2009 and April 1, 2012 and does not claim a specified amount of damages. We have not recorded any liability related to the U.S. Class Action. The Company's directors' and officers' insurance policy provides for reimbursement of costs and expenses incurred in connection with this lawsuit, including legal and professional fees, as well as potential damages awarded, if any, subject to certain policy restrictions, limits and deductibles. While we continue to believe that there is no basis for the lawsuit and we intend to defend ourselves vigorously, no assurance can be given with respect to the ultimate outcome of such proceedings, and the amount of any damages awarded in such lawsuit could be substantial.


18


Item 4.
Information on the Company
A.
History and development of the Company
We are an oncology and endocrinology drug development company currently investigating treatments for various unmet medical needs.
We were incorporated on September 12, 1990 under the Canada Business Corporations Act (the "CBCA") and continue to be governed by the CBCA. Our registered office is located at 1405 du Parc-Technologique Blvd., Quebec City, Quebec, Canada G1P 4P5, our telephone number is (418) 652-8525 and our website is www.aezsinc.com. None of the documents or information found on our website shall be deemed to be included in or incorporated by reference into this annual report on Form 20-F.
On December 30, 2002, we acquired Zentaris AG, a biopharmaceutical company based in Frankfurt, Germany. Zentaris was a spin-off of Asta Medica GmbH, a former pharmaceutical company affiliated with Degussa AG. With this acquisition, the Company changed its risk profile and inherited a product pipeline with capabilities from drug discovery to commercialization with a particular focus on endocrine therapy and oncology.
In May 2004, we changed our name to Aeterna Zentaris Inc. and on May 11, 2007, Zentaris GmbH was renamed Aeterna Zentaris GmbH ("AEZS GmbH"). AEZS GmbH is our principal operating subsidiary.
On April 6, 2005, our former subsidiary, Atrium Biotechnologies Inc. (now Atrium Innovations Inc.) ("Atrium"), completed its initial public offering in Canada and began trading on the TSX under the ticker symbol "ATB".
In 2006, we spun off our ownership interest in Atrium in two phases. As of January 2, 2007 we no longer held any ownership interest in Atrium.
In May 2007, we opened an office in the United States, located at 20 Independence Boulevard, Warren, New Jersey 07059-2731. The Company moved this office to a new location in December 2011 at 25 Mountainview Blvd., Suite 203, Basking Ridge, NJ 07920.
On October 2, 2012, we effected a 6-to-1 Share Consolidation (reverse stock split). Our common shares commenced trading on a consolidated and adjusted basis on both NASDAQ and TSX on October 5, 2012.
We currently have three wholly-owned direct and indirect subsidiaries, Aeterna Zentaris GmbH (Germany), based in Frankfurt, Germany, Zentaris IVF GmbH, a direct wholly-owned subsidiary of AEZS Germany based in Frankfurt, Germany, and Aeterna Zentaris, Inc., based in Basking Ridge, New Jersey in the United States.
 
 
 
 
Aeterna Zentaris Inc.
(Canada)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
100%
 
 
100%
 
 
 
 
Aeterna Zentaris GmbH
(Germany)
 
Aeterna Zentaris, Inc.
(Delaware)
 
 
 
 
 
 
 
 
100%
 
 

 
 
Zentaris IVF GmbH
(Germany)
 
 
 
 
 
 
 
 
 

Our current drug development strategy focuses mainly on our later-stage compounds AEZS-108 (doxorubicin Luteinizing Hormone-Releasing Hormone ("LHRH")-targeted conjugate compound) in oncology and AEZS-130 (oral ghrelin agonist) in endocrinology, as well as on strategic and targeted earlier-stage compounds, as depicted in the chart reproduced under the heading, "Our Product Pipeline".

19


Our common shares are listed for trading on the TSX under the trading symbol "AEZ" and on NASDAQ under the trading symbol "AEZS".
The Company's agent for service of process and SEC matters in the United States is its wholly-owned subsidiary, Aeterna Zentaris, Inc., located at 25 Mountainview Blvd., Suite 203, Basking Ridge, NJ 07920.
There have been no public takeover offers by third parties with respect to the Company or by the Company in respect of other companies' shares during the last or current fiscal year.
B.
Business overview
We are an oncology and endocrinology drug development company currently investigating treatments for various unmet medical needs.
Our pipeline encompasses compounds at all stages of development, from drug discovery through to marketed products. We also benefit from agreements and arrangements with strategic collaborators and licensee partners, which contribute to the development of our pipeline of product candidates and in the establishment of commercial activities in specific territories.
Over the years, the Company has incurred recurring operating losses, having invested significantly in our R&D activities, as well as supporting our general and administrative expenses. We have financed our operations through different sources including the issuance of common shares and warrants, the conclusion of strategic alliances with licensee partners and research and development grants awarded by governmental agencies. The Company expects to continue to incur operating losses and may require significant capital to fulfill our future obligations. See the capital disclosures and the liquidity risk sections.
In oncology, we are in the initiation process of a Phase 3 study under a Special Protocol Assessment ("SPA") with AEZS-108, a doxorubicin LHRH-targeted conjugate compound, in endometrial cancer, for which we have successfully completed a Phase 2 trial in advanced endometrial and advanced ovarian cancer. We are also advancing Phase 2 trials with AEZS-108 in triple-negative breast cancer, refractory bladder cancer and castration- and taxane-resistant prostate cancer.
Our oncology pipeline also encompasses other earlier-stage programs, including AEZS-112, an oral anticancer agent which involves three mechanisms of action (tubulin, topoisomerase II and angiogenesis inhibition), which has completed a Phase 1 trial in advanced solid tumors and lymphoma. Additionally, several novel targeted anticancer candidates such as AEZS-120, a live recombinant oral tumor vaccine candidate, as well as our PI3K/Erk inhibitors, including AEZS-129, AEZS-134 and AEZS-136, are currently in preclinical development.
In endocrinology, we are preparing the filing of an NDA in the U.S. for the registration of AEZS-130, an oral ghrelin agonist, as a diagnostic test for adult growth hormone deficiency ("AGHD"). A Phase 3 trial under a SPA with the FDA has been completed in this indication. Furthermore, AEZS-130 is in a Phase 2A trial for the treatment of cancer-induced cachexia.
Recent Developments
On March 11, 2013, we announced that an independent Data Safety Monitoring Board ("DSMB") recommended discontinuing the Phase 3 study comparing the efficacy and safety of perifosine to placebo when combined with bortezomib (Velcade®) and dexamethasone in patients with relapsed or relapsed/refractory multiple myeloma. Based on the outcome of its preplanned interim analysis of efficacy and safety, the DSMB recommended that patient enrollment be stopped and the study discontinued. The DSMB reported that it was highly unlikely the study would achieve a significant difference in its primary endpoint, progression-free survival; no safety concerns were raised. Based on the foregoing, we determined to discontinue the Phase 3 study of perifosine in multiple myeloma.
For a complete description of our recent corporate and pipeline developments, refer to "Item 5. – Operating and Financial Review and Prospects – Key Developments in 2012".
Our Business Strategy
Our primary business strategy is to advance, with the collaboration of our strategic partners, our product development pipeline with a focus on our principal product candidates in oncology and endocrinology. In addition, we continue to advance certain other clinical and preclinical programs as described below. Our vision is to become a fully-integrated specialty biopharmaceutical company.

20


Our product pipeline
Pipeline table
Discovery
 
Preclinical
 
Phase 1
 
Phase 2
 
Phase 3
 
Commercial
~120,000 compound library
 
AEZS-120
Prostate cancer vaccine
(oncology)
AEZS-129, 134 and 136
PI3K/Erk inhibitors (oncology)
AEZS-137 (disorazol Z) (oncology)
AEZS-125
(LHRH-
disorazol Z)
(oncology)
 
AEZS-112
(oncology)
 
AEZS-108
•  Triple-negative breast cancer
•  Ovarian cancer
•  Castration- and taxane-resistant prostate cancer
•  Refractory bladder cancer
Ozarelix
•  Prostate cancer
AEZS-130
•  Therapeutic in cancer cachexia
Perifosine
(Phase 1/2)
•  Neuroblastoma
•  Glioma
•  Pediatric solid tumors
 
AEZS-108
•  Endometrial cancer (not yet recruiting)
AEZS-130
•  Diagnostic in adult growth hormone deficiency (endocrinology)
 
Cetrotide®
(in vitro
fertilization)

Licensee Partners and Territories by Product
Cetrotide®:
Merck Serono, World (except Japan) - Nippon Kayaku/Shionogi, Japan
Ozarelix:
Spectrum Pharmaceuticals, Inc. ("Spectrum"), World (ex-Japan, Korea and other Asian countries) - Handok Pharmaceuticals ("Handok"), Korea and other Asian countries for BPH indication - Nippon Kayaku, Japan for oncology indications
Perifosine:
Yakult Honsha Co. Ltd ("Yakult"), Japan - Handok, Korea - Hikma Pharmaceuticals, Middle East/North Africa
Oncology
In oncology, we are in the initiation process of a Phase 3 study under a SPA with the FDA for AEZS-108 in endometrial cancer, for which we have successfully completed a Phase 2 trial in advanced endometrial and advanced ovarian cancer. We are also advancing Phase 2 trials with AEZS-108 in triple-negative breast cancer, refractory bladder cancer and castration- and taxane-resistant prostate cancer.

21


AEZS-108
AEZS-108 represents a new targeting concept in oncology using a hybrid molecule composed of a synthetic peptide carrier and a well-known chemotherapy agent, doxorubicin. AEZS-108 is the first intravenous drug in advanced clinical development that directs the chemotherapy agent specifically to LHRH-receptor expressing tumors, resulting in more targeted treatment with less damage to healthy tissue. The product has successfully completed Phase 2 studies for the treatment of ovarian and endometrial cancer and the Company is initiating a Phase 3 trial in advanced endometrial cancer under a SPA with the FDA. AEZS-108 is also in Phase 2 trials in triple-negative breast cancer, refractory bladder cancer and castration- and taxane-resistant prostate cancer. AEZS-108 has been granted orphan drug designation by the FDA and orphan medicinal product designation from the European Medicines Agency for the treatment of ovarian cancer. We hold the worldwide rights to AEZS-108 pursuant to an exclusive license agreement with Tulane University, as licensor, and AEZS GmbH, as licensee. We also have a collaboration agreement with Ventana Medical Systems, Inc. ("Ventana"), a member of the Roche Group, to develop a companion diagnostic for the immunohistochemical determination of LHRH-receptor expression, for AEZS-108.
Endocrinology
In endocrinology, we are preparing the filing of an NDA in the U.S. for the registration of AEZS-130, as a diagnostic test for AGHD. A Phase 3 trial under a SPA with the FDA has been completed in this indication. Furthermore, AEZS-130 is in a Phase 2A trial for the treatment of cancer-induced cachexia.
AEZS-130
AEZS-130, a ghrelin agonist, is an orally available novel synthetic small molecule that stimulates the secretion of growth hormone. We completed a Phase 3 trial under a SPA obtained from the FDA and, following discussions with the FDA, we are preparing to file a NDA in the United States. AEZS-130 has been granted orphan-drug designation by the FDA. In addition to the diagnostic indication, we believe that AEZS-130 has potential application for the treatment of cachexia, a condition frequently associated with severe chronic diseases such as cancer, chronic obstructive pulmonary disease and Acquired Immune Deficiency Syndrome ("AIDS"). Furthermore, the FDA has granted an IND for the initiation of a Phase 2A trial in cancer-induced cachexia. The study is currently conducted under a cooperative research and development agreement ("CRADA") with the Michael E. DeBakey Veterans Affairs Medical Center that will be funding the study. We hold the worldwide rights to AEZS-130 pursuant to an exclusive license agreement with The French Centre National de la Recherche Scientifique, as licensor, and AEZS GmbH, as licensee.
Clinical and Preclinical Programs
Our oncology pipeline also encompasses other earlier-stage programs, including AEZS-112, an oral anticancer agent that involves three mechanisms of action (tubulin, topoisomerase II and angiogenesis inhibition), which has completed a Phase 1 trial in advanced solid tumors and lymphoma. Additionally, several novel targeted anticancer candidates such as AEZS-120, a live recombinant oral tumor vaccine candidate, as well as our PI3K/Erk inhibitors, including AEZS-129, AEZS-134 and AEZS-136, are currently in preclinical development.
We also continue to perform targeted drug discovery activities from which we are able to derive preclinical candidates. This drug discovery includes high throughput screening systems and a library of more than 120,000 compounds.
We are currently at a stage in which some of our products and product candidates are being further developed or marketed jointly with strategic partners or with funding from governmental organizations.
1.0
ONCOLOGY
1.1
TUMOR TARGETING CYTOTOXIC CONJUGATES AND CYTOTOXICS
Cytotoxic conjugates
In view of the non-specific toxicity of most chemotherapeutic agents against normal cells, targeting such drugs to cancerous tissue offers a potential benefit for patients with advanced or metastatic tumors. Targeted cytotoxic peptide conjugates are hybrid molecules composed of a cytotoxic moiety linked to a peptide carrier which binds to receptors on tumors. Cytotoxic conjugates are designed to achieve differential delivery, or targeting, of the cytotoxic agent to cancer vs. normal cells.
Our cytotoxic conjugates represent a novel oncological strategy to control and reduce toxicity and improve the effectiveness of cytotoxic drugs.

22


In AEZS-108, the most advanced of our cytotoxic conjugates, doxorubicin is chemically linked to an LHRH agonist, a modified natural hormone with affinity for the LHRH receptor. This design allows for the specific binding and selective uptake of the cytotoxic conjugate by LHRH receptor-positive tumors. Potential benefits of this targeted approach include a more favorable safety profile with lower incidence and severity of side effects, as normal tissues are spared from toxic effects of doxorubicin. In addition, the targeted approach may enable treatment of LHRH receptor-positive cancers that have become refractory to doxorubicin which has been administered in its non-targeted form.
1.1.1
AEZS-108 - Ovarian and Endometrial Cancer
In 2007, a Phase 2 open-label, non-comparative, multicenter two indication trial stratified with two stages Simon Design was prepared. The study was planned to involve up to 82 patients, with up to 41 patients each with a diagnosis of platinum-resistant ovarian cancer (stratum A) or disseminated endometrial cancer (stratum B). Under coordination by Prof. Günter Emons, M.D., Chairman of the Department of Obstetrics & Gynaecology at the University of Göttingen, Germany, this open-label, multicenter and multinational Phase 2 study "AGO-GYN 5" was conducted by the German AGO Study Group (Arbeitsgemeinschaft Gynäkologische Onkologie / Gynaecological Oncology Working Group), in cooperation with clinical sites in Europe. As part of a personalized healthcare approach, the study selected patients with tumors expressing LHRH receptors, the key element in the targeting mechanism of AEZS-108. An i.v. infusion of AEZS-108 (267 mg/m2) was administered over a period of two hours, every Day 1 of a 21-day (3-week) cycle. The proposed duration of the study treatment was six cycles. The study was performed with 14 centers of the German Gynaecological Oncology Working Group, in cooperation with three clinical sites in Europe. The primary efficacy endpoint was a response rate with a success criterion at the end of Stage II defined as five or more patients with partial or complete tumor responses according to RECIST and/or Gynaecologic Cancer Intergroup ("GCIG") guidelines. Secondary endpoints included TTP, survival, toxicity, as well as adverse effects. In October 2008, we announced that we had entered the second stage of patient recruitment for the Phase 2 trial in platinum-resistant ovarian cancer indication. This decision was taken following the report of two PR among patients with ovarian cancer. The second stage of patient recruitment for the endometrial cancer indication was reached in November 2008 and was based on the report of one CR and two PR among 14 patients with endometrial cancer.
On November 2, 2009, we announced positive preliminary efficacy data for the Phase 2 study in patients with LHRH-receptor positive platinum-resistant and taxane-pretreated ovarian cancer. All 43 patients who had entered the study had completed their treatment, and a preliminary evaluation had shown that the study had met its predefined primary efficacy endpoint of five or more responders in 41 evaluable patients. Responders, as well as patients with stable disease after completion of treatment with AEZS-108, were to be followed to assess the duration of response and, ultimately, OS.
On November 24, 2009, we announced positive results for the Phase 2 study in patients with endometrial cancer. Preliminary evaluation showed that the study met its predefined primary efficacy endpoint of five or more responders in endometrial cancer patients. Responders, as well as patients with stable disease after completion of treatment with AEZS-108, were to be followed to assess the duration of PFS and, ultimately, OS.
On May 6, 2010, we announced that we had received orphan drug designation from the FDA for AEZS-108 for the treatment of ovarian cancer.

23


On May 17, 2010, we announced that we had received a positive opinion for orphan medicinal product designation from the COMP of the EMA for AEZS-108 for the treatment of ovarian cancer.
On June 7, 2010, Prof. Günter Emons, Chairman, Department of Obstetrics & Gynaecology Georg-August University Göttingen, Germany, presented positive efficacy and safety data for AEZS-108 in ovarian cancer at the ASCO Annual Meeting. The poster (abstract #5035), was entitled "Phase 2 study of AEZS-108, a targeted cytotoxic LHRH analog, in patients with LHRH receptor-positive platinum resistant ovarian cancer".
42 patients with platinum-resistant ovarian cancer entered the study. Efficacy included PR in five patients (11.9%) and stable disease for more than twelve weeks in eleven patients (26.2%). Based on those data, a CBR of 38% was estimated. Median TTP and OS were evaluated as 3.5 months (104 days) and 15.6 months (475 days), respectively. OS compared favourably with data from Doxil® and topotecan (8-9 months). In all, tolerability of AEZS-108 was good and commonly allowed retreatment as scheduled. Only one patient (2.4%) had a dose reduction, and overall, 25 of 170 (14.7%) courses were given with a delay, including cases in which delay was not related to toxicity. Severe (Grade 3 or 4) toxicity was mainly restricted to rapidly reversible hematologic toxicity (leukopenia / neutropenia) associated with fever in three cases. Good tolerability of AEZS-108 was also reflected with only a few patients with non-hematological toxicities of Grade 3 (none with Grade 4), including single cases each of nausea, constipation, poor general condition, and an enzyme elevation. No cardiac toxicity was reported.
Final evaluation of the ovarian cancer study revealed six patients with PR based on tumor lesions, plus two responders with tumor marker response including one case with normalization, for an overall response rate of 19% (one unconfirmed CR and seven partial responses). Median TTP and OS were evaluated as three and twelve months, respectively.
On September 14, 2011, positive final Phase 2 efficacy and safety data for AEZS-108 in advanced endometrial cancer were presented at the European Society of Gynecological Oncology in Milan, Italy. The data showed that AEZS-108, administered as a single agent at a dosage of 267 mg/m2 every three weeks was active, well tolerated and that OS was similar to that reported for modern triple combination chemotherapy, but was achieved with lower toxicity. The primary endpoint was the response rate as defined by the RECIST. Secondary endpoints included safety, TTP and OS.
In all, of 43 patients treated with AEZS-108, 39 were evaluable for efficacy. Efficacy confirmed by independent response review included two CR, ten PR, and 17 patients with SD. Based on those data, the estimated ORR (ORR = CR+PR) was 30.8% and the CBR (CBR = CR+PR+SD) was 74.4%. Responses in patients previously treated with chemotherapy included one CR, one PR and two SDs in eight of the patients with prior use of platinum/taxane regimens. Median TTP and OS were seven months and 13.7 months, respectively. A final evaluation, not excluding non-evaluable cases, revealed the following results: two CR, eleven PR (including three patients with PR not confirmed at subsequent time point), and 17 patients with SD, for an ORR of 30.2% and CBR of 70%; median TTP and OS at seven and 15 months, respectively.
Overall, tolerability of AEZS-108 was good and commonly allowed retreatment as scheduled. Severe (Grade 3 or 4) toxicity was mainly restricted to rapidly reversible leukopenia and neutropenia, associated with fever in only one patient who had been treated only three weeks after a surgery. Good tolerability of AEZS-108 was also reflected by a low rate of severe non- hematological and possibly drug-related adverse events which included single cases each of nausea, diarrhea, fatigue, general health deterioration, creatinine elevation, and blood potassium decrease. No cardiac toxicity was reported.
On December 28, 2012, we announced that we had reached an agreement with the FDA with respect to a SPA for an upcoming Phase 3 registration trial of AEZS-108 in endometrial cancer. The SPA agreement states that the proposed trial protocol design, clinical endpoints and planned analyses are acceptable to the FDA to support a regulatory submission. Final marketing approval depends on the results of efficacy, the adverse event profile and an evaluation of the benefit/risk of treatment demonstrated in the Phase 3 trial. This will be an open-label, randomized, multicenter Phase 3 trial conducted in North America and Europe, comparing AEZS-108 with doxorubicin as second-line therapy for locally-advanced, recurrent or metastatic endometrial cancer. The trial will involve approximately 500 patients and the primary efficacy endpoint is Overall Survival.
Competitors for AEZS-108 in Endometrial Cancer
At present, the Company is not aware of any approved drug product for the treatment of advanced and recurrent metastatic endometrial cancer in the United States and Europe. There is also no systemic therapy approved in the United States and Europe (except Germany) for treating advanced or recurrent endometrial cancer.

24


The following products are among some of the many products currently in clinical trial in endometrial cancer:
Product / mode of action*
Company*
Development Status*
Ixabepilone / microtubule inhibitor
Bristol-Myers Squibb
Phase 3
Letrozole / non-steroidal aromatase inhibitor
Novartis
Phase 2 and Phase 3
SAR245408 (XL-147)/oral pan-PI3K inhibitor
Sanofi
Phase 2
BKM120/PI3K inhibitor
Novartis
Phase 2
_________________________
*
Source: Competitor company's website and www.clinicaltrials.gov.
See also the risk factor entitled "Competition in our targeted markets is intense, and development by other companies could render our products or technologies non-competitive" in Item 3D of this annual report on Form 20-F.
Market Data - Endometrial Cancer
According to the American Cancer Society, endometrial cancer is the most common invasive gynecologic cancer in women in the United States, with an estimated 49,560 new cases expected to occur in 2013. This disease primarily affects postmenopausal women at an average age of 60 years at diagnosis. In the United States, it is estimated that approximately 8,190 women will die of endometrial cancer in 2013.
According to Datamonitor Healthcare (March 2010), a research and advisory firm focusing on therapeutic, strategic and health market analysis and competitive intelligence, the incidence of endometrial cancer in the seven major pharmaceutical markets was 94,061 patients in 2010 and is forecasted to reach approximately 98,500 cases by 2019.
1.1.2
AEZS-108 - Triple-Negative Breast Cancer
On October 25, 2011, we announced that the FDA had granted Alberto J. Montero M.D. of the Sylvester Comprehensive Cancer Center, an IND approval for the initiation of a randomized Phase 2 trial in chemotherapy refractory triple-negative (ER/PR/HER2-negative) LHRH receptor-positive metastatic breast cancer with AEZS-108. Subsequently, the study was converted into a Company-sponsored study and is now conducted under our IND.
On February 20 2013, we announced that a first patient had been treated for the randomized Phase 2 trial in chemotherapy refractory triple-negative ("ER/PR/HER2-negative") luteinizing hormone-releasing hormone receptor ("LHRH-R")-positive metastatic breast cancer, with AEZS-108. Alberto J. Montero, MD, Assistant Professor, Department of Medicine, Division of Hematology/Oncology, Sylvester Comprehensive Cancer Center at the University of Miami Miller School of Medicine, is the lead investigator of this trial which also include sites at the Universities of Regensburg and Goettingen, in Germany.
This is an open-label, randomized, two-arm, multicenter Phase 2 study which will involve up to 74 patients. Patients will be randomized in a 1:1 ratio into one of the two treatment arms: [Arm A] AEZS-108 (267 mg/m2 every 21 days) or [Arm B] SSC standard single agent cytotoxic chemotherapy at the discretion of the treating oncologist.
The primary study endpoint is median time of progression-free survival. Secondary endpoints include overall response rate, and overall survival. The study will also evaluate AEZS-108's toxicity profile and patients' quality of life relative to conventional cytotoxic chemotherapy.
1.1.3
AEZS-108 - Bladder Cancer
On May 12, 2010, we announced that the FDA had approved our IND application for AEZS-108 in LHRH receptor-positive urothelial (bladder) cancer. Following this approval from the FDA, this trial will be conducted by Dr. Gustavo Fernandez at the Sylvester Comprehensive Cancer Center at the University of Miami's Miller School of Medicine, and will include up to 64 patients, male and female, with advanced LHRH receptor-positive urothelial (bladder) cancer. The study will be conducted in two parts: first, a dose-finding part in up to twelve patients; subsequently, the selected dose will be studied for its effect on PFS.
On December 14, 2010, we announced the initiation of the Phase 1/2 trial.
On July 26, 2012, we announced that preclinical data on AEZS-108 in urinary bladder cancer were published in the online edition of Oncotarget. The article underlined that AEZS-108 powerfully inhibited growth of bladder cancers in nude mice, exerted greater effects than doxorubicin ("DOX") and was less toxic. In contrast to DOX alone, which activated strong multidrug resistance mechanisms in RT-4 and HT-1197 cancers, AEZS-108 had no or fewer such effects. Polymerase Chain

25


Reaction ("PCR") assays and in vitro studies revealed differences in the action of AEZS-108 and DOX on the expression of genes involved in apoptosis.
1.1.4
AEZS-108 - Prostate Cancer
On August 5, 2010, we announced that the The National Institutes of Health ("NIH") had awarded Dr. Jacek Pinski, Associate Professor of Medicine at the Norris Comprehensive Cancer Center of the University of Southern California, a grant of $1.6 million over three years to conduct a Phase 1/2 study in refractory prostate cancer with AEZS-108. The study, entitled A Phase I/II Trial of AN-152 [AEZS-108] in Castration- and Taxane-Resistant Prostate Cancer, will enroll up to 55 patients and will be conducted in two portions: an abbreviated dose-escalation followed by a single arm, Simon Optimum two-stage design Phase 2 study using the dose selected in the Phase 1 portion. The primary objective of the Phase 2 portion is to evaluate the clinical benefit of AEZS-108 in men with castration- and taxane-resistant metastatic prostate cancer, for which the presence of LHRH receptors has been confirmed.
On December 14, 2010, we announced the initiation of the investigator initiated Phase 1/2 trial.
On September 26, 2011, we announced positive interim data for the Phase 1 portion of the Phase 1/2 trial with AEZS-108 in castration-and taxane-resistant prostate cancer at the ESMO meeting, Stockholm, Sweden. This is a single arm study with a Phase 1 lead-in to a Phase 2 clinical trial. The primary endpoint of the Phase 1 portion is safety. The primary objective of the Phase 2 portion is to evaluate the clinical benefit of AEZS-108 for these patients. Twelve patients entered the study: three patients each received AEZS-108 at the lower dose levels of 160 and 210 mg/m2, and six patients at 267 mg/m2. Data on ten patients were presented as two patients were too early for evaluation. AEZS-108 was generally well tolerated and there were no dose limiting toxicities so far. The only Grade 3 and 4 toxicities were hematologic in nature. At the time, there were three Grade 4 toxicities (two at 210 mg/m2 and one at 267 mg/m2) all of which were asymptomatic. There were six Grade 3 toxicities including two cases of Grade 3 anemia after repeated courses (cycles five and six) and one case of febrile neutropenia that occurred during cycle one. Signs of therapeutic activity included five patients with Prostate Specific Antigen ("PSA") regression. One of these patients treated at the lowest dose level, received eight treatment cycles because he demonstrated continued clinical benefit. Three out of four evaluable patients with radiologic evaluable disease achieved stable disease per RECIST. The Phase 2 extension is planned after completion of the toxicity assessment in the final dose level of the Phase 1 portion of the study. In correlative studies, drug uptake was demonstrated for the first time in captured circulating tumor cells of patients, thus validating the principle of targeted tumor therapy with AEZS-108 in a clinical setting.
On February 3, 2012, we reported updated results for the Phase 1 portion of the ongoing Phase 1/2 study of AEZS-108 in prostate cancer.
The results were based on 13 patients who had been previously treated with androgen-deprivation therapy (LHRH agonist) and at least one taxane-based chemotheraphy regimen, who were treated on three dose levels of AEZS-108: three at 160 mg/m2, three at 210 mg/m2, and seven at 267 mg/m2. Overall, AEZS-108 was well tolerated among this group of heavily pretreated older patients. There were two dose-limiting toxicities, each of which having been a case of asymptomatic Grade 4 neutropenia at the 267 mg/m2 dose level and both patients fully recovered. The Grade 3 and 4 toxicities were primarily hematologic. There was minimal non-hematologic toxicity, most frequently fatigue and alopecia.
Despite the low doses of AEZS-108 in the first cohorts, there was some evidence of antitumor activity. One patient received eight cycles (at 210 mg/m2) due to continued benefit. Among the five evaluable patients with measurable disease, four achieved stable disease. At the time of submission of the abstract, a decrease in PSA was noted in six patients. Six of 13 (46%) treated patients received at least five cycles of therapy with no evidence of disease progression at twelve weeks. Correlative studies on circulating tumor cells ("CTC") demonstrated the uptake of AEZS-108 into the targeted tumor.
On November 12, 2012, we announced the initiation of the Phase 2 portion of the ongoing Phase 1/2 study of AEZS-108 in prostate cancer. The primary endpoint of the Phase 2 portion is to evaluate the clinical benefit of AEZS-108 for these patients. Secondary endpoints include toxicity, time to RECIST and PSA progression, RECIST response rate for patients with measurable disease, PSA response rate, pain palliation and overall survival.
1.1.5
AEZS-108 - Companion Diagnostic Tool
On January 5, 2012, we announced that we had entered into a collaboration agreement, dated December 19, 2011, with Ventana, to develop a companion diagnostic for the immunohistochemical determination of LHRH receptor expression, for AEZS-108. According to the literature, in humans, LHRH receptors are expressed in a significant proportion of endometrial, ovarian, breast, bladder, prostate and pancreatic tumors. AEZS-108 specifically targets LHRH receptors and could therefore prove to be more efficient in treating patients with these types of LHRH receptor-positive cancers.

26


1.1.6
AEZS-137 (Disorazol Z) / AEZS-125 (LHRH-Disorazol Z)
In search of new antitumor agents, we found that disorazol Z (AEZS-137), isolated from the myxobacterium Sorangium cellulosum, possess cytotoxicity in the picomolar range in a panel of different tumor cell lines. Inhibition of tubulin polymerization, cell cycle arrest and efficient induction of apoptosis, have been identified as modes of action.
In order to obtain a specifically acting antitumor agent, we have linked disorazol Z to [D-Lys6] LHRH. The resulting conjugate, AEZS-125, has been characterized with respect to in vitro and in vivo antitumor activity. In CD 1 nu/nu mice xenografted with the LHRH receptor-positive, human ovarian carcinoma cell line OVCAR-3, we have shown tumor suppression by single administration of AEZS-125 in doses as low as 45 nmol/kg (0.1 mg/kg). Proof of concept for this approach is the far more efficient tumor suppression obtained with AEZS‑125 in comparison to equimolar doses of disorazol Z itself. The results were published during the 99th AACR Annual Meeting in April 2008 in San Diego, California.
On March 24, 2011, we were awarded a $1.5 million grant from the German Ministry of Education and Research to develop, up to the clinical stage, cytotoxic conjugates of the proprietary cytotoxic compound AEZS-137 and peptides targeting G-protein coupled receptors, including the LHRH receptors. The compounds being developed will combine the targeting principle successfully employed in Phase 2 with AEZS-108 (doxorubicin and LHRH receptor targeting agent) with the novel cytotoxic disorazol Z. Furthermore, diagnostic tools systematically assessing the receptor expression in tumor specimens will be developed to allow the future selection of patients and tumor types with the highest chance of benefiting from this personalized medicine approach. The grant will be payable as a partial reimbursement of qualifying expenditures over a three-year period. The qualified project will be performed with Morphisto GmbH and the Helmholtz Institute in Saarbrücken, Germany, which will receive additional funding of approximately US$0.7 million. Researchers from the departments of Gynecology and Obstetrics at both the University of Göttingen and the University of Würzburg, Germany, will also be part of the collaboration.
On November 16, 2011, we announced the presentation of a poster at the AACR-NCI-EORTC International Conference on Molecular Targets and Cancer Therapeutics on encouraging preclinical data for AEZS-137. The data showed that AEZS-137 possesses cytotoxicity in a highly diverse panel of 60 different tumor cell lines, and also underlined the identification of important aspects of this novel natural compound's mechanism of action. AEZS-137 has been identified as a tubulin binding agent with highly potent antitumor properties. Cell cycle analysis revealed that AEZS-137 arrested cells in the G2/M cell cycle phase and subsequently induced apoptosis with remarkable potency, as shown by sub-nanomolar EC50 values. Currently, experiments are under way to determine the tubulin binding site for disorazol Z and to identify further mechanisms of action of this novel highly potent agent. To expand our AEZS-108 technology platform, we aim to evaluate the utility of disorazol Z as a cytotoxic component in a drug-targeting approach utilizing GPCR ligands as the targeting moieties for the treatment of GPCR over-expressing cancers.
On November 8, 2012, we announced encouraging preclinical results for disorazol Z cytotoxic conjugates, such as AEZS-125 in ovarian cancer. All conjugates of D-Lys6-LHRH and disorazol Z analyzed demonstrated good potential regarding the treatment of LHRH-receptor positive tumors. For all conjugates including AEZS-125, a proof of concept was demonstrated in an LHRH-receptor positive ovarian cancer xenograft model. The data were presented at the 24th EORTC-NCI-AACR (ENA) Symposium. The study was funded through a grant from the German Ministry of Education and Research.
1.2
TUBULIN INHIBITORS / VASCULAR TARGETING AGENTS
1.2.1
AEZS-112 - Development of a Low Molecular Weight Tubulin Inhibitor with Antiangiogenic Properties
Tubulin is a protein found in all cells that plays an important role during cell division, in that it helps to transmit genetic information to the daughter cells. Inhibition of this process leads to the death of the affected cell. The antitumor agents taxol and vincristine, which are widely used in cancer therapy, are based on this principle. Both compounds are expensive natural substances and cause severe side effects when used in humans.
We are currently identifying and developing novel tubulin inhibitors which, compared with currently used products, exhibit improved efficacy in animal models, have a more acceptable side effect profile, an incomplete or no cross-resistance and are administered orally.
AEZS-112 is a drug development candidate with a favorable safety and tolerability profile showing excellent in vivo activity in various tumor models including mammary, colon, melanoma and leukemia cancers at acceptable and very well tolerated doses administered orally once weekly. This compound acts through three mechanisms of action. Strong anticancer activity is combined with proapoptotic and antiangiogenic properties. AEZS‑112 inhibits the polymerization of tubulin, destroys the mitotic spindle of the cancer cells and, inhibits topoisomerase II activity. AEZS-112 arrests the cancer cells in the G2M cell cycle phase at a nanomolar concentration and induces apoptosis. AEZS-112 is not cross-resistant to cisplatin, vincristine and doxorubicin in cell lines resistant to these drugs. No findings with respect to cardiotoxicity and neurotoxicology parameters

27


could be observed during the toxicological evaluation in mice, rats and dogs. With this profile of activity, AEZS-112 is a promising candidate for further clinical development.
On January 8, 2007, we announced the initiation of a Phase 1 trial for AEZS-112 in patients with solid tumors and lymphoma. This open-label, dose-escalation, multicenter, intermittent treatment Phase 1 trial was conducted in the United States with Daniel D. Von Hoff, M.D., Senior Investigator at the Translational Genomics Research Institute in Phoenix, AZ, as the lead investigator. The trial included up to 50 patients with advanced solid tumors and lymphoma who have either failed standard therapy or for whom no standard therapy exists. Patients received a once-a-week oral administration of AEZS-112 for three consecutive weeks, followed by a one-week period without treatment. The cycles were repeated every four weeks based on tolerability and response, basically planned for up to four cycles, but allowing for continuation in case of potential benefit for the patient. The starting dose of AEZS-112 in this study was 13 mg/week, with doubling of doses in subsequent cohorts in the absence of significant toxicity. The primary endpoint of the Phase 1 trial focused on determining the safety and tolerability of AEZS-112 as well as establishing the recommended Phase 2 dose and regimen. Secondary endpoints were aimed at establishing the pharmacokinetics and determining the efficacy based on standard response criteria.
Results of this Phase 1 study were presented in April 2009 at the AACR meeting. In part I, 22 patients (twelve men / ten women) were studied on seven dose levels ranging from 13 to 800 mg/week. In all, 62 treatment cycles were administered. In part II, the weekly dose was split into three doses taken eight hours apart. Ultimately, 22 patients (twelve men / ten women) were studied on five dose levels ranging from 120 to 600 (= 200 x 3) mg/week. As at April 1, 2009, 62 treatment cycles had been administered (mean 3.2/patient) and treatment had been ongoing in eight patients. SD for more than twelve weeks was observed in 16 patients; four more patients were ongoing at less than twelve weeks. Prolonged courses of SD ranging from 20 to 35+ weeks were observed in nine patients with the following primary cancer types: trachea (39+), tongue (30+), thyroid (29+), prostate and melanoma (28), non-small cell lung cancer (26+), pancreas and 2x colorectal (20). Except for one patient with a background of gastrointestinal problems ("GI") who had dose-limiting GI reactions and electrolyte loss at a dose of 200 x 3 mg/week, no clinically relevant drug-related adverse events or changes in laboratory parameters were observed. AEZS-112 was shown to be metabolically stable in human plasma. As predicted by pharmacokinetic modelling based on data from part I of the study, the split-dose scheme led to a higher Cmax and trough values after administration of comparable doses. Those preliminary results showed that a maximum tolerated dose for weekly dosing has not been defined so far. However, prolonged courses of stable disease in both parts of the study were an encouraging observation.
Completion of this Phase 1 trial was announced on September 21, 2009. Stable disease with time to failure ranging from 20 to 60+ weeks was achieved in twelve patients with various cancer types, including melanoma and cancers of the colon/rectum, lung, pancreas, prostate, tongue, trachea and thyroid. In several of these patients, the duration of stabilization exceeded the duration of disease control on previous treatment regimens. Except for a dose-limiting gastrointestinal reaction in a patient with pre-existing GI problems, no clinically relevant drug-related adverse events or changes in laboratory safety parameters were observed.
In 2011, we developed a higher concentration oral formulation of AEZS-112 in order to improve patient compliance.
1.3
IMMUNOTHERAPY / VACCINES
1.3.1
AEZS-120
AEZS-120 is a tumor vaccine. The general principle of active tumor vaccines is the induction of a cellular and/or humoral immune response which is capable of attacking the tumor. AEZS-120 is a live recombinant oral tumor vaccine candidate based on Salmonella typhi Ty21a as a carrier strain. Salmonella typhi Ty21a is an approved oral typhoid vaccine which has been safely applied in more than 350 million doses. The molecular basis of AEZS-120 is the recombinant expression of the fusion protein between cholera toxin B (CtxB) and prostate specific antigen (PSA), and the recombinant expression of two components of the hemolysin secretion system (HlyB and HlyD) as well as the signal component HlyA which allow the secretion of the fusion protein by the attenuated approved carrier strain S. typhi Ty21a.

28


The relevant features with respect to activity as a tumor vaccine can be divided into two parts: A) adjuvant elements for optimal induction of innate and adaptive immunity; and B) the tumor antigen itself.
In the case of AEZS-120, the tumor antigen is PSA which is expressed in the majority of prostate cancer cases and is employed as a tumor antigen in several prostate cancer vaccines in development. Therefore, PSA can be considered as a valid antigen for prostate cancer vaccines.
The adjuvant activity is provided by three elements: the live bacterial carrier itself, the fusion to CtxB and the secretion of the antigen.
An important property of AEZS-120 is the oral application mode, which is based on the carrier S. typhi Ty21a. This strain is approved as a vaccine against typhoid fever and has preserved some features of virulent S. typhi strains which are relevant for the use of S. typhi Ty21a as a vaccine carrier. Virulent S. typhi is a pathogen which leads to systemic infection after oral uptake. Several virulence factors allow the survival within the gastro-intestinal tract and the crossing of the intestinal barrier. These features are, at least in part, also intact in the attenuated live vaccine S. typhi Ty21a allowing oral application with retained immunogenicity.
However, in particular, the cellular immune response against recombinantly expressed antigens, which is important for anti-tumor immunity, has been described as being suboptimal if the antigen is expressed within the carrier cell.
A substantial enhancement can be achieved via secretion of the recombinant antigen. In gram negative bacteria, like Salmonellae, protein secretion requires the activity of protein secretion machineries. Several types of secretion systems with different levels of complexity have been described. The principle of AEZS-120 is based on the recombinant expression of prostate-specific antigen fused to the B subunit of cholera toxin and a secretion signal in the presence of the Escherichia coli type I hemolysin secretion system. The proprietary system allows the secretion of the antigen together with an immunological adjuvant which has been demonstrated to be required for optimal induction of CD8 T-cell responses by recombinant Salmonella based bacterial vaccines. The proof-of-concept was already demonstrated for the mouse homologue of AEZS-120 in a mouse tumor challenge model and is supported by several patent applications filed in 2007 and 2009.
In 2007, the Company's PSA vaccine (AEZS-120) was selected as the first preclinical development candidate of an antitumor vaccine.
On July 20, 2011, we reached a key milestone in this non-clinical development program of AEZS-120, which encompassed the full development of a GMP process, including GMP production and quality testing of a clinical batch, as well as a non-clinical safety and toxicology package. AEZS-120 has been developed through a research collaboration with the Department of Medical Radiation Biology and Cell Research, and the Department of Microbiology of the University of Würzburg, Germany. The collaboration was funded with a total of $890,000 for us and $870,000 for the university partner by the German Ministry of Education and Research (BMBF) for a period of three years. In accordance with this grant, 50% of our preclinical development costs and 100% of those of our university partner were reimbursed by the German Ministry of Science and Education. In addition, as part of the collaboration, a melanoma vaccine based on the recombinant expression of a modified B-Raf protein has been generated.
On October 2, 2012, we announced the presentation of a poster on AEZS-120 during the 32nd Congress of the Société Internationale d'Urologie in Fukuoka, Japan. The poster, entitled "Preclinical Proof of Concept and Characterization of AEZS-120, a Therapeutic Oral Prostate Cancer Vaccine Candidate Based on Live Recombinant Attenuated Salmonella", underlined the feasibility of an oral therapeutic vaccination approach against prostate cancer. The production, release, pharmacology, safety and toxicology program was conducted in agreement with the regulatory authorities and successfully finalized. The conclusions were:
•
The proof-of-concept has been shown in a tumor-challenge mouse model using the anticipated clinical application schedule.
•
Biosafety and biodistribution studies did not reveal a different safety profile compared to the carrier strain.
•
Pharmacological and toxicological studies did not reveal differences to the approved carrier strain.
•
In all, the non-clinical studies suggest that the safety and toxicological profile of AEZS-120 is similar to the approved carrier strain S. typhi Ty21a, which has already been safely applied in more than 250 million doses.
GMP material for clinical use has been produced and released, and a Clinical Trial Application ("CTA") filing in Europe for a Phase 1 clinical study is planned in 2013.

29


1.4
SIGNAL TRANSDUCTION INHIBITORS
1.4.1
Erk/PI3K inhibitors and dual kinase inhibitors
The Ras/Raf/Mek/Erk and the PI3K/Akt signaling pathways are prime targets for drug discovery in proliferative diseases such as cancer. The results of research to date indicate that both the MAPK and the PI3K signaling pathways represent therapeutic intervention points for the clinical treatment of malignant tumors.
Our multi-parameter optimization program for kinase inhibitor selectivity, cellular efficacy, physicochemical and in vitro ADMET properties has led to the identification of small molecular compounds with a unique kinase selectivity profile. Our kinase research program comprises the investigation of different compounds for single Erk inhibition, single PI3K inhibition and dual Erk/PI3K kinase inhibition.
1.4.1.1
AEZS-126/129
On April 21, 2009, we presented two posters on AEZS-126, a promising compound for clinical intervention of the PI3K/Akt pathway in human tumors, at the AACR Annual Meeting. In vivo and in vitro data showed significant antitumor activity and a favorable in vitro pharmacologic profile which could lead to further in vivo profiling.
On November 17, 2010, we presented a poster on encouraging preclinical results for AEZS-129, a novel orally active compound with antitumor effects, at the 22nd EORTC-NCI-AACR Symposium on Molecular Targets and Cancer Therapeutics in Berlin, Germany. AEZS-129 has been identified as a highly potent and selective pan-PI3K inhibitor. The compound inhibits the PI3K/Akt signaling pathway both in vitro and in vivo and leads to growth inhibition of tumor cells. The compound was well tolerated during the four-week treatment period and showed substantial tumor growth inhibition in different mouse xenograft tumor models.
On March 22, 2011, we presented preclinical results for AEZS-129 at the Informa Life Sciences Protein Kinases Congress in Berlin, Germany. AEZS-129 was identified as a potent inhibitor of class I PI3Ks lacking activity against mTOR. Lack of mTOR activity is considered to potentially lead to a better safety profile. In biochemical and cellular assays, AEZS-129 demonstrated favorable properties in early in vitro ADMET screening, including microsomal stability, plasma stability and screening against a safety profile composed of receptors, enzymes and cardiac ion-channels. In vitro, the compound was shown to be a selective ATP-competitive inhibitor of PI3K with a broad antiproliferative activity against a broad panel of tumor cell lines. In vivo, AEZS-129 showed excellent plasma exposure and significant tumor growth inhibition in several tumor xenografts models, including A-549 (lung), HCT-116 (colon) and Hec1B (endometrium). These data suggest that AEZS-129 is a promising compound for clinical intervention of the PI3K/Akt pathway in human tumors.
1.4.1.2
AEZS-136
On April 3, 2012, we announced that a poster on AEZS-136 showed the compound's unique inhibition and promising activity against PI3K and Erk signaling pathways, as well as being well tolerated. The poster, entitled "Dual inhibition of PI3K and Erk1/2 shows synergy and efficacy in human tumor cells, either by using drug combinations or novel dual PI3K/Erk inhibitors", was presented at the AACR Annual Meeting in Chicago.
The conclusions were as follows:
•
Effective dual targeting of Raf-Mek-Erk and PI3K-Akt pathway
•
Unique inhibitor with excellent activity against PI3K and Erk
•
Induction of cell cycle arrest in G1 phase and apoptosis
•
Broad anti-proliferative activity in vitro
•
Favorable in vitro ADMET and in vivo PK profile
•
Well tolerated up to daily doses of 90mg/kg for 4 weeks
•
In vivo antitumor efficacy after oral administration
On August 13, 2012, we announced the presentation of a poster on AEZS-136 during the 244th National Meeting of the American Chemistry Society in Philadelphia. The data outlined the compound's unique inhibition and excellent preclinical activity against PI3K and Erk signaling pathways, as well as being well tolerated. AEZS-136 is an integral part of our kinase research program comprising the investigation of different compounds for single Erk inhibition, single PI3K inhibition and dual Erk/PI3K kinase inhibition. AEZS-136 selectively inhibits the kinase activity of Erk 1/2 and class 1 PI3Ks, enabling simultaneous inhibition of the Raf-Mek-Erk and the PI3K-Akt signaling cascades. AEZS-136 was discovered using our proprietary compound library and high throughput screening technology.

30


1.4.2
Perifosine
On April 2, 2012, we announced top-line Phase 3 results for perifosine in refractory colorectal cancer ("CRC"). The Phase 3 "X-PECT" (Xeloda® + Perifosine Evaluation in Colorectal Cancer Treatment) clinical trial evaluating perifosine + capecitabine in patients with refractory advanced CRC did not meet the primary endpoint of improving overall survival vs. capecitabine + placebo. The trial involving 468 patients in 65 sites in the U.S was conducted by our North American licensee partner, Keryx.
On March 11, 2013, we announced that an independent Data Safety Monitoring Board ("DSMB") recommended discontinuing the Phase 3 study comparing the efficacy and safety of perifosine to placebo when combined with bortezomib (Velcade®) and dexamethasone in patients with relapsed or relapsed/refractory multiple myeloma. Based on the outcome of its pre-planned interim analysis of efficacy and safety, the DSMB recommended that patient enrolment be stopped and the study discontinued. The DSMB reported that it was highly unlikely the study would achieve a significant difference in its primary endpoint, progression-free survival; no safety concerns were raised. Based on the foregoing, we determined to discontinue the Phase 3 study of perifosine in multiple myeloma.
Perifosine remains partnered with Yakult in Japan, Handok in Korea and Hikma in the MENA region for various cancer indications.
In addition, perifosine remains the object of certain investigator-initiated studies in different indications such as neuroblastoma, glioma, pediatric solid tumors and other indications.
2.0
ENDOCRINOLOGY
2.1
AEZS-130 - ORAL GHRELIN AGONIST
AEZS-130, a ghrelin agonist, is a novel orally active small molecule that stimulates the secretion of growth hormone by binding to the ghrelin receptor (GHSR-1a). It has potential uses in both endocrinology and in oncology indications. In endocrinology, we have completed a Phase 3 trial for its use as an oral diagnostic test for AGHD. AEZS-130 works by stimulating a patient's growth hormone secretion, which normally only occurs during sleep, after which a healthcare provider will measure how well the body responds to that stimulation based on the patient's growth hormone levels over a period of time. Low growth hormone levels, despite giving an effective stimulating agent, confirm a diagnosis of AGHD. AEZS-130 has been granted orphan-drug designation by the FDA for use as a diagnostic test for growth hormone deficiency. We own the worldwide rights to AEZS‑130 which, if approved, would become the first orally administered diagnostic test for AGHD. In oncology, an IND has been granted for a Phase 2A trial with AEZS-130 in cancer induced cachexia, a disease which leads to significant weight loss and diminished functional performance. Since ghrelin agonists such as AEZS-130 have been shown to stimulate food intake and increase body weight in rats and mice, AEZS-130 could lead to better quality of life for patients with cancer induced cachexia. Ghrelin agonists have been in clinical trials for over a decade and have demonstrated good safety and efficacy profiles.
2.1.1
AEZS-130 - Diagnostic test for AGHD
On October 19, 2009, we announced that we had initiated activities intended to complete the clinical development of AEZS-130 which could be the first oral diagnostic test approved for growth hormone deficiency ("GHD"). We had already assumed the sponsorship of the IND and discussed with the FDA the best way to complete the ongoing Phase 3 clinical trial and subsequently file a NDA for approval of AEZS-130 as a diagnostic test for AGHD.
The pivotal Phase 3 trial was designed to investigate the safety and efficacy of the oral administration of AEZS-130 as a growth hormone stimulation diagnostic test. It was accepted by the FDA that for the ongoing part of the study, AEZS-130 would not be tested against a comparator drug, as Geref® had been removed from the market.
On June 21, 2010, we presented positive data at the 92nd ENDO Meeting on AEZS-130 for diagnostic and therapeutic use. The preclinical data showed that AEZS-130 is a potent and safe oral synthetic GH-releasing compound with potential utility as a diagnostic test for growth hormone deficiencies.
On July 14, 2010, we announced the presentation of a poster on AEZS-130, entitled Use of the Orally Active Ghrelin Mimetic AEZS-130 as a Simple Test for the Diagnosis of Growth Hormone (GH) Deficiency (GHD) in adults (AGHD). Merriam G.R., Yuen K., Bonert V., Dobs A, Garcia J., Kipnes M., Molitch M., Swerdloff R., Wang C., Cook D., Altemose I. and Biller B. This poster was presented at the Seventh International Congress of Neuroendocrinology, in Rouen, France.
On October 5, 2010, we announced at the Fifth International Congress of the Growth Hormone Research Society and the Insulin-like Growth Factors Society, after the interim Phase 3 analysis, that AEZS-130 demonstrated the potential to provide a simple, well tolerated and safe oral diagnostic test for AGHD.

31


On December 20, 2010, we announced we had reached agreement with the FDA on a SPA for AEZS-130, enabling the Company to complete the ongoing registration study required to gain approval as a diagnostic test for AGHD.
Study Design
The Phase 3 study was completed according to the modifications agreed with the FDA.
Original Study
The first part of the study conducted by our former partner, Ardana, was a two-way cross-over study and included 42 patients with confirmed AGHD or multiple pituitary hormone deficiencies and a low insulin-like growth factor-I. A control group of 10 subjects without AGHD were matched to patients for age, gender, body mass index and (for females) estrogen status.
On July 26, 2011, we announced the completion of the Phase 3 study of AEZS-130 as a first oral diagnostic test for AGHD and the decision to meet with the FDA for the future filing of a NDA for the registration of AEZS‑130 in the United States.
On August 30, 2011, we announced favorable top-line results of our completed Phase 3 study with AEZS-130 as a first oral diagnostic test for AGHD. The results showed that AEZS-130 had reached its primary endpoint demonstrating >90% area-under-the-curve ("AUC") of the Receiver Operating Characteristic ("ROC") curve, which determines the level of specificity and sensitivity of the product. Importantly, the primary efficacy parameters show that the study achieved both specificity and sensitivity at a level of 90% or greater. In addition, eight of the ten newly enrolled AGHD patients were correctly classified by a pre-specified peak GH threshold level. The use of AEZS-130 was shown to be safe and well tolerated overall throughout the completion of this trial.
On June 26, 2012, we announced that the final results from a multicenter, open-label Phase 3 trial for AEZS-130 showed that the drug is safe and effective in diagnosing AGHD. Jose M. Garcia, MD, PhD, of the Baylor College of Medicine and the Michael E. DeBakey VA Medical Center, disclosed these data during an oral presentation at the 94th ENDO Annual Meeting and Expo in Houston. The study had originally been designed as a cross-over trial of AEZS-130 vs. growth hormone-releasing hormone (GHRH) + L-Arginine (ARG) in AGHD patients and in controls matched for body mass index ("BMI"), estrogen status, gender and age. After 43 AGHD patients and ten controls had been tested, GHRH became unavailable. The study was completed by testing ten more AGHD patients and 38 controls with AEZS-130 alone. Of the 53 AGHD subjects enrolled, 52 received AEZS-130, and 50 who had confirmed AGHD prior to study entry were included in this analysis, along with 48 controls. Two AGHD subjects could not be matched due to the combination of young age, high BMI and estrogen use. The objective of this clinical trial was to determine the efficacy and safety of AEZS-130 in the diagnosis of AGHD. Mean peak growth hormone ("GH") levels in AGHD patients and controls following AEZS-130 administration were 2.36ng/mL (range 0.03-33) and 17.71ng/mL (range 10.5-94), respectively. The ROC plot analysis yielded an optimal GH cut-point of 2.7ng/mL, with 82% sensitivity, 92% specificity and a 13% misclassification rate. Obesity (BMI>30) was present in 58% of cases and controls, and peak GH levels were inversely associated with BMI in controls. Adverse events ("AE") were seen in 37% of AGHD patients and in 21% of controls following AEZS-130. In contrast, 61% of AGHD subjects and 30% of controls experienced AEs with L ARG+GHRH. The most common AEs after AEZS-130 were unpleasant taste (19.2%) and diarrhea (3.8%) for the AGHD patients and unpleasant taste (4.2%) and diarrhea (4.2%) for the matched controls. No clinically meaningful changes from baseline in ECG results during the study for AGHD patients; however, one control subject had an ECG change (T wave abnormality and QTc interval prolongation) one hour after treatment with AEZS-130 that was considered a serious treatment-related adverse event and resolved spontaneously within 24 hours. The subject had been pre-treated with citalopram, a drug that was later reported by the FDA to be associated with QT prolongation, although the patient had stopped this medication seven days prior to dosing. Overall, this study demonstrated that AEZS-130 is safe and effective in diagnosing growth hormone deficiency in adults.
On August 7, 2012, the United States Patent and Trademark Office granted us a patent for the use of AEZS-130 (EP1572) as a diagnostic test for AGHD. Filed on February 19, 2007, the patent (US 8,192,719 B2), entitled "Methods and Kits to Diagnose Growth Hormone Deficiency by Oral Administration of EP1572 or EP1573 Compounds", became effective as of June 5, 2012 and will expire on October 12, 2027. The corresponding composition of matter patent (US 6,861,409 B2), filed on June 13, 2001 and granted on March 1, 2005, will expire on August 1, 2022, with the possibility of a patent term extension of up to five years.
On September 25, 2012, the European Patent Office granted us a patent for the use of AEZS-130 related to methods and kits for use in relation to the diagnosis of GHD in a human or animal subject. Filed on February 19, 2007, the patent, (EP #1 984 744 B1) entitled "Methods and Kits to Diagnose Growth Hormone Deficiency", was effective as of September 19, 2012 following its publication in the European Patent Bulletin, and it will expire on February 19, 2027.

32


On September 26, 2012, we received notification from the FDA that Fast Track designation previously filed had not been granted for AEZS-130 as a diagnostic test for AGHD.
On October 18, 2012, we announced that results from a multicenter open-label Phase 3 trial for AEZS-130 demonstrated that the drug is safe and effective in diagnosing AGHD. George R. Merriam, MD, Director of the Clinical Study Unit at the Veterans Affairs Puget Sound Health Care System, and Professor of Medicine at the University of Washington, Seattle and Tacoma, WA, disclosed these data at the 6th International Congress of the GRS and IGF Society in Munich, Germany. His presentation confirmed data previously presented by Jose M. Garcia, MD, Ph.D., of the Baylor College of Medicine and the Michael E. DeBakey Veterans Affairs Medical Center, at the 94th ENDO Meeting in Houston, Texas in June 2012. Dr. Merriam's presentation drew attention to the effect of BMI on optimizing the cut-off values to improve the sensitivity and specificity of the test. Responses in normal subjects classified as obese, with BMI's above 30, were significantly lower than in leaner subjects. Since GH deficiency can lead to increased body fat, many of the patients also met criteria for obesity, and therefore, a lower peak GH cut-off is more accurate in separating obese normals from obese patients. Based upon these study results, a cut-off of 2.7 µg/L was optimal for subjects with a BMI≥30 and a cut-off of 6.8 µg/L for subjects with a BMI<30. Age had a weaker effect on test performance and gender made no difference. Thus GH stimulation with oral AEZS-130 may provide a simple, rapid, safe, and well-tolerated diagnostic test for AGHD, with accuracy comparable to that of the GHRH-ARG test.
Competitors for AEZS-130 as a Diagnostic Test
Competitors for AEZS-130 as a diagnostic test for AGHD are principally the diagnostic tests currently performed by endocrinologists, although none of these tests are approved by the FDA for this purpose.
The most commonly used diagnostics tests for GHD are:
•
Measurement of blood levels of Insulin Growth Factor ("IGF")-1, which is typically used as the first test when GHD is suspected. However, this test is not used to definitively rule out GHD as many growth hormone deficient patients show normal IGF-1 levels;
•
Insulin Tolerance Test ("ITT"), which is considered to be the "gold standard" for GH secretion provocative tests but requires constant patient monitoring while the test is administered and is contra-indicated in patients with seizure disorders, with cardiovascular disease and in brain injured patients and elderly patients. ITT is administered i.v.;
•
GHRH + Arginine test, which is an easier test to perform in an office setting and has a good safety profile but is considered to be costly to administer compared to ITT and Glucagon. This test is contra-indicated in patients with renal failure. GHRH + Arginine is approved in the EU and has been proposed to be the best alternative to ITT, but it is no longer available in the United States. This test is administered i.v.; and
•
Glucagon test, which is simple to perform and is considered relatively safe by endocrinologists but is contraindicated in malnourished patients and patients who have not eaten for more than 48 hours. Since there is a suspicion that this test may cause hypoglycemia, it may not be appropriate in diabetic populations. This test is administered i.m.
Oral administration of AEZS-130 offers more convenience and simplicity over the current GHD tests used, requiring either i.v. or i.m. administration. Additionally, AEZS-130 may demonstrate a more favorable safety profile than existing diagnostic tests, some of which may be inappropriate for certain patient populations e.g. diabetes mellitus or renal failure, and have demonstrated a variety of side effects which AEZS-130 has not thus far. These factors may be limiting the use of GHD testing and may enable AEZS-130 to become the diagnostic test of choice for GHD.
Market Data - AGHD
According to the Hormone Foundation, in the United States, about 35,000 adults have GHD, with about 6,000 newly diagnosed each year (source: Hormone Foundation Website). In addition, in patients with traumatic brain injury ("TBI"), a GHD is frequent and may contribute to the cognitive sequel and to a reduction in quality of life. According to the CDC (Center for Disease Control and Prevention – MMWR – Surveillance for traumatic brain injury – related deaths USA, May 6, 2011), of the 1.7 million TBIs occurring each year in the USA, 80.7% were emergency department visits, 16.3% were hospitalizations and 3% were deaths. GHD develops in approximately 18% of patients with complicated mild, moderate or severe TBI (source: Kelly et al. Journal of Neurotrauma, 2006).

33


2.1.2
AEZS-130 - Cancer Cachexia
On November 28, 2011, we announced that the FDA had granted Jose M. Garcia, M.D., Ph.D., Assistant Professor, Division of Diabetes Endocrinology and Metabolism, Departments of Medicine and Molecular and Cell Biology, Baylor College of Medicine and Michael E. DeBakey Veterans Affairs Medical Center, in Houston Texas, an IND approval for the initiation of a Phase 2A trial to assess the safety and efficacy of repeated doses of AEZS-130, in patients with cancer cachexia. Cachexia, which is characterized by diminished appetite and food intake in cancer patients, is defined as an involuntary weight loss of at least 5% of the pre-illness body weight over the previous 6 months.
On March 8, 2012, we announced that the Michael E. DeBakey Veterans Affairs Medical Center, in Houston, Texas, had initiated the Phase 2A trial assessing the safety and efficacy of repeated doses of AEZS-130 in patients with cancer cachexia. The study is conducted under a CRADA with the Michael E. DeBakey Veterans Affairs Medical Center, which is funding the study. This is a double-blind, randomized, placebo-controlled Phase 2A trial to test the effects of different doses of AEZS-130 in 18 to 26 patients with cancer cachexia. The study will involve three sequential groups receiving differing doses of AEZS-130. Each dose group will have six patients who will receive AEZS-130 and 2-4 patients who will receive a placebo. The primary objective of the study is to evaluate the safety and efficacy of repeated oral administration of AEZS-130 at different doses daily for one week in view of developing a treatment for cachexia.
On August 28, 2012, we announced that a first patient had been recruited for a Phase 2A trial in cancer-induced cachexia with AEZS-130.
2.2
LHRH ANTAGONISTS
2.2.1
Cetrorelix
Cetrorelix is a peptide-based active substance which was developed in cooperation with Nobel Laureate Professor Andrew Schally presently of the United States Veterans Administration-Miami, University of Miami, and formerly of Tulane University in New Orleans. This compound is a LHRH (also known as GnRH) antagonist that blocks the pituitary LHRH receptors resulting in a rapid decrease of sexual hormone levels. Moreover, cetrorelix allows the LHRH receptors on the pituitary gland to be blocked gradually. Conversely, the side effects usually associated with the use of agonists and resulting from total hormone withdrawal can be avoided in conditions that do not require a castrating degree of hormone withdrawal. Therefore, in contrast to treatment with agonists, LHRH antagonists permit dose-dependent hormone suppression which is of critical importance for the tolerability of hormonal therapy.
2.2.1.1
Cetrorelix In Vitro Fertilization (Controlled Ovulation Stimulation/Assisted Reproductive Technologies ("COS/ART")
Cetrotide®
Cetrorelix was the first LHRH antagonist approved for therapeutic use as part of fertilization programs in Europe and was launched on the market under the trade name Cetrotide® (cetrorelix acetate) in 1999. In women who undergo controlled ovarian stimulation for recovery of ovocytes for subsequent fertilization, Cetrotide® helps prevent premature ovulation. LHRH is a naturally occurring hormone produced by the brain to control the secretion of LH and, therefore, final egg maturation and ovulation. Cetrotide® is designed to prevent LH production by the pituitary gland and to delay the hormonal event, known as the "LH surge" which could cause eggs to be released too early in the cycle, thereby reducing the opportunity to retrieve the eggs for the assisted reproductive techniques procedure.
In comparison with LHRH agonists that require a much longer pre-treatment, the use of Cetrotide®, permits the physician to interfere in the hormone regulation of the women undergoing treatment much more selectively and within a shorter time.
Cetrotide® is the only LHRH antagonist that is available in two dosing regimens. With an immediate onset of action, Cetrotide® permits precise control - a single dose (3 mg), which controls the LH surge for up to four days, or a daily dose (0.25 mg) given over a short period of time (usually five to seven days).
Cetrotide® is marketed in a 3 mg and a 0.25 mg subcutaneous injection as cetrorelix acetate by Merck Serono in the United States and Europe. In September 2006, we announced the launch of Cetrotide® in Japan for in vitro fertilization. Cetrotide® is marketed in Japan by our partner Shionogi. We receive revenue from the supply of Cetrotide® to our Japanese partners. The market competitor is ganirelix (Antagon™/Orgalutran®) from Merck indicated for the inhibition of premature LH surges in women undergoing controlled ovarian hyperstimulation.

34


Partners for Cetrotide®
In August 2000, we entered into a commercialization agreement with Merck Serono for Cetrotide®. Under the terms of this agreement, we granted an exclusive license to Merck Serono to commercialize Cetrotide® for IVF/COS/ART worldwide ex-Japan and we are entitled to receive fixed and sales royalties from Merck Serono. The Japanese rights for this indication are held by Shionogi whereby, according to a commercialization agreement, we received transfer pricing from Shionogi.
In November 2008, we sold our rights to royalties on future sales of Cetrotide® covered by our license agreement with Merck Serono for $52.5 million to HRP less transaction costs of $1.0 million, resulting in initial net proceeds to us of $51.5 million. In addition, upon net sales of Cetrotide® having reached a specified level in 2010, we received an additional payment of $2.5 million from HRP in February 2011. Furthermore, under the terms of the agreement, we agreed to make a one-time cash payment to HRP in an amount ranging from $5 million up to a maximum of $15 million in the event cetrorelix is approved for sale by the European regulatory authorities in an indication other than in vitro fertilization. The amount which would be due to HRP will be higher the earlier the product receives European regulatory approval. Since cetrorelix development has been terminated, we do not expect to make this one-time cash payment to HRP.
Cetrorelix clinical development has been terminated in all indications other than in vitro fertilization (COS/ART). Furthermore, we focus on our manufacturing on behalf of Merck Serono and Shionogi.
2.2.2
Ozarelix
Ozarelix is a modified LHRH antagonist which is a linear decapeptide sequence. Ozarelix is a fourth-generation LHRH antagonist designed to extend the suppression of testosterone levels, which does not require a sophisticated depot formulation for long-lasting activity.
On August 12, 2004, we entered into a licensing and collaboration agreement with Spectrum for ozarelix and its potential to treat hormone-dependent cancers as well as benign proliferative disorders, such as BPH and endometriosis for all potential indications in North America (including Canada and Mexico) and India while keeping the rights for the rest of the world. In addition, Spectrum is entitled to receive 50% of upfront and milestone payments and royalties received from our Japanese partner, Nippon Kayaku, that are generated in the Japanese market for oncological indications. In November 2010, this agreement with Spectrum was amended. Under the terms of the amended agreement, Spectrum is entitled to use our patent rights and know-how to develop, use, make, have made, sell, offer for sale, have sold, import, export and commercialize ozarelix in all worldwide territories except Japan, Korea, Indonesia, Malaysia, the Philippines and Singapore. Under the terms of the amended agreement, Spectrum granted, as further consideration, 326,956 shares of its common stock, with an equivalent fair value at the time of approximately $1,263,000, as an upfront nonrefundable license fee payment to us. Also per the amended agreement, we will be entitled to receive a total of approximately $22,765,000 in cash payments, as well as approximately $670,000 in Spectrum common stock, upon achieving certain regulatory milestones in various markets. Furthermore, we will be entitled to receive royalties (scale-up royalties from high single to low double-digit) on future net sales of ozarelix products in the named territories.
In July 2006, we entered into a licensing and collaboration agreement with Nippon Kayaku for ozarelix (oncological indication) in Japan.
During the third quarter of 2008, we entered into a commercialization agreement with Handok for ozarelix (BPH indication) for the Korean market.
2.2.2.1
Prostate Cancer Clinical Trials
In August 2006, we announced positive Phase 2 results for ozarelix in hormone-dependent inoperable prostate cancer. This open-label, randomized-controlled dose-finding trial enrolled 64 patients receiving different IM dosage regimens of ozarelix to assess its safety and efficacy. The study achieved its primary endpoint of defining a tolerable dosage regimen of ozarelix that would ensure continuous suppression of testosterone at castration level for a three-month test period. A secondary efficacy endpoint aimed at assessing tumor response as determined by a 50% or greater reduction of serum PSA level, compared to baseline, was also achieved. The best results regarding the primary endpoint of continuous suppression were obtained with a dose of 130 mg per cycle where all patients remained suppressed to castration until at least day 85. In patients with continuous testosterone suppression below castration level, tumor response as measured by PSA levels was 97%.
On August 3, 2006, we announced a licensing and collaboration agreement with Nippon Kayaku for ozarelix. Under the terms of the agreement, we granted Nippon Kayaku an exclusive license to develop and market ozarelix for all potential oncological indications in Japan. In return, we received an upfront payment upon signature and are eligible to receive payments upon

35


achievement of certain development and regulatory milestones, in addition to low double-digit royalties on potential net sales. Spectrum is entitled to receive 50% of the upfront, milestone payments and royalties received from Nippon Kayaku.
Our partner, Spectrum, is currently recruiting patients in Phase 2 trial for the treatment of prostate cancer. This is an international, multicenter, open-label, randomized study assessing the safety and efficacy of a monthly dosing regimen of ozarelix versus goserelin depot in men with prostate cancer (source: www.clinicaltrials.gov).
RAW MATERIALS
Raw materials and supplies are generally available in quantities adequate to meet the needs of our business. We are dependent on third-party manufacturers for the pharmaceutical products that we market. An interruption in the availability of certain raw materials or ingredients, or significant increases in the prices paid by us for them, could have a material adverse effect on our business, financial condition, liquidity and operating results.
DISTRIBUTION
We currently have a lean sales and marketing staff. In order to commercialize our product candidates successfully, we would need to make arrangements with third parties to perform some or all of these services in certain territories.
We contract with third parties for the sales and marketing of our products. We are currently dependent on strategic partners and may enter into future collaborations for the research, development and commercialization of our product candidates. Our arrangements with these strategic partners may not provide us with the benefits we expect and may expose us to a number of risks.
REGULATORY COMPLIANCE
Governmental authorities in Canada, the United States, Europe and other countries extensively regulate the preclinical and clinical testing, manufacturing, labeling, storage, record keeping, advertising, promotion, export, marketing and distribution, among other things, of our product candidates. Under the laws of the United States, the countries of the European Union, and other countries, we and the institutions at which we sponsor research are subject to obligations to ensure that our clinical trials are conducted in accordance with GCP guidelines and the investigational plan and protocols contained in an IND application, or comparable foreign regulatory submission. The Japanese regulatory process for approval of new drugs is similar to the FDA approval process described below except that Japanese regulatory authorities request bridging studies to verify that foreign clinical data are applicable to Japanese patients and also require the tests to determine appropriate dosages for Japanese patients to be conducted on Japanese patient volunteers. Due to these requirements, delays of two to three years in introducing a drug developed outside of Japan to the Japanese market are possible. Set forth below is a brief summary of the material government regulations affecting the Company in the major markets in which we intend to market our products.
Canada
In Canada, the Canadian Therapeutic Products Directorate is the Canadian federal authority that regulates pharmaceutical drugs and medical devices for human use. Prior to being given market authorization, a manufacturer must present substantive scientific evidence of a product's safety, efficacy and quality as required by the Food and Drugs Act and other legislation and regulations. The requirements for the development and sale of pharmaceutical drugs in Canada are substantially similar to those in the United States, which are described below.
United States
In the United States, the FDA under the Federal Food, Drug, and Cosmetic Act, the Public Health Service Act and other federal statutes and regulations, subject pharmaceutical products to rigorous review.
In order to obtain approval of a new product from the FDA, we must, among other requirements, submit proof of safety and efficacy as well as detailed information on the manufacture and composition of the product. In most cases, this proof entails extensive preclinical, clinical, and laboratory tests. Before approving a new drug or marketing application, the FDA also typically conducts pre-approval inspections of the company, its contract research organizations and/or its clinical trial sites to ensure that clinical, safety, quality control, and other regulated activities are compliant with Good Clinical Practices, or GCP, or Good Laboratory Practices, or GLP, for specific non-clinical toxicology studies. Manufacturing facilities used to produce a product are also subject to ongoing inspection by the FDA. The FDA may also require confirmatory trials, post-marketing testing, and extra surveillance to monitor the effects of approved products, or place conditions on any approvals that could restrict the commercial applications of these products. Once approved, the labeling, advertising, promotion, marketing, and distribution of a drug or biologic product must be in compliance with FDA regulatory requirements.

36


The first stage required for ultimate FDA approval of a new biologic or drug involves completion of preclinical studies and the submission of the results of these studies to the FDA. This, together with proposed clinical protocols, manufacturing information, analytical data, and other information in an IND, must become effective before human clinical trials may commence. Preclinical studies involve laboratory evaluation of product characteristics and animal studies to assess the efficacy and safety of the product. The FDA regulates preclinical studies under a series of regulations called the current GLP regulations. If the sponsor violates these regulations, the FDA may require that the sponsor replicate those studies.
After the IND becomes effective, a sponsor may commence human clinical trials. The sponsor typically conducts human clinical trials in three sequential phases, but the phases may overlap. In Phase 1 trials, the sponsor tests the product in a small number of patients or healthy volunteers, primarily for safety at one or more doses. Phase 1 trials in cancer are often conducted with patients who have end-stage or metastatic cancer. In Phase 2, in addition to safety, the sponsor evaluates the efficacy of the product in a patient population somewhat larger than Phase 1 trials. Phase 3 trials typically involve additional testing for safety and clinical efficacy in an expanded population at geographically dispersed test sites. The sponsor must submit to the FDA a clinical plan, or "protocol", accompanied by the approval of the institutions participating in the trials, prior to commencement of each clinical trial. The FDA may order the temporary or permanent discontinuation of a clinical trial at any time. In the case of product candidates for cancer, the initial human testing may be done in patients with the disease rather than in healthy volunteers. Because these patients are already afflicted with the target disease, such studies may provide results traditionally obtained in Phase 2 studies. Accordingly, these studies are often referred to as "Phase 1/2" studies. Even if patients participate in initial human testing and a Phase 1/2 study is carried out, the sponsor is still responsible for obtaining all the data usually obtained in both Phase 1 and Phase 2 studies.
The sponsor must submit to the FDA the results of the preclinical and clinical testing, together with, among other things, detailed information on the manufacture and composition of the product, in the form of a NDA or, in the case of a biologic, a BLA. In a process that can take a year or more, the FDA reviews this application and, when and if it decides that adequate data are available to show that the new compound is both safe and effective for a particular indication and that other applicable requirements have been met, approves the drug or biologic for marketing. The amount of time taken for this approval process is a function of a number of variables, including the quality of the submission and studies presented and the potential contribution that the compound will make in improving the treatment of the disease in question.
Orphan-drug designation is granted by the FDA Office of Orphan Drug Products to novel drugs or biologics that treat a rare disease or condition affecting fewer than 200,000 patients in the U.S. The designation provides the drug developer with a seven-year period of U.S. marketing exclusivity if the drug is the first of its type approved for the specified indication or if it demonstrates superior safety, efficacy or a major contribution to patient care versus another drug of its type previously granted the designation for the same indication. We have been granted orphan drug designations for perifosine in the MM and neuroblastoma indications, for AEZS-108 for the treatment of advanced ovarian cancer and for AEZS-130 for the diagnosis of growth hormone deficiency.
Under the Hatch-Waxman Act, newly-approved drugs and indications may benefit from a statutory period of non-patent data exclusivity. The Hatch-Waxman Act provides five-year data exclusivity to the first applicant to gain approval of an NDA for a new chemical entity, or NCE, meaning that the FDA has not previously approved any other drug containing the same active pharmaceutical ingredient, or active moiety. Although protection under the Hatch-Waxman Act will not prevent the submission or approval of another full NDA, such an NDA applicant would be required to conduct its own preclinical and adequate, well controlled clinical trials to demonstrate safety and effectiveness.
The Hatch-Waxman Act also provides three years of data exclusivity for the approval of new and supplemental NDAs, including Section 505(b)(2) applications, for, among other things, new indications, dosage forms, routes of administration, or strengths of an existing drug, or for a new use, if new clinical investigations that were conducted or sponsored by the applicant are determined by the FDA to be essential to the approval of the application. This exclusivity, which is sometimes referred to as clinical investigation exclusivity, would not prevent the approval of another application if the applicant has conducted its own adequate, well-controlled clinical trials demonstrating safety and efficacy, nor would it prevent approval of a generic product that did not incorporate the exclusivity-protected changes of the approved drug product.
The labeling, advertising, promotion, marketing, and distribution of a drug or biologic product must be in compliance with FDA regulatory requirements. Failure to comply with applicable requirements can lead to the FDA demanding that production and shipment cease and, in some cases, that the manufacturer recall products, or to enforcement actions that can include seizures, injunctions, and criminal prosecution. These failures can also lead to FDA withdrawal of approval to market a product.

37


European Union
Medicines can be authorized in the European Union by using either the centralized authorization procedure or national authorization procedures.
Centralized procedure
The European Union has implemented a centralized procedure coordinated by the EMA for the approval of human medicines, which results in a single marketing authorization issued by the European Commission that is valid across the European Union, as well as Iceland, Liechtenstein and Norway. The centralized procedure is compulsory for human medicines that are derived from biotechnology processes, such as genetic engineering, contain a new active substance indicated for the treatment of certain diseases, such as HIV/AIDS, cancer, diabetes, neurodegenerative disorders or autoimmune diseases and other immune dysfunctions, and designated orphan medicines. For medicines that do not fall within these categories, an applicant has the option of submitting an application for a centralized marketing authorization to the EMA, as long as the medicine concerned is a significant therapeutic, scientific or technical innovation, or if its authorization would be in the interest of public health.
National authorization procedures
There are also two other possible routes to authorize medicinal products in several European Union countries, which are available for investigational drug products that fall outside the scope of the centralized procedure:
Decentralized procedure. Using the decentralized procedure, an applicant may apply for simultaneous authorization in more than one European Union country of medicinal products that have not yet been authorized in any European Union country and that do not fall within the mandatory scope of the centralized procedure.
The application will be reviewed by a selected Reference Member State ("RMS"). The Marketing Authorization granted by the RMS will then be recognized by the other Member States involved in this procedure.
Mutual recognition procedure. In the mutual recognition procedure, a medicine is first authorized in one European Union Member State, in accordance with the national procedures of that country. Following this, further marketing authorizations can be sought from other European Union countries in a procedure whereby the countries concerned agree to recognize the validity of the original, national marketing authorization.
For more information about the regulatory risks associated with the Company's business operations, see "Item 3. – Key Information – Risk Factors".
DRUG DISCOVERY
There is an increasing demand on the world market for active substances. Our internal drug discovery unit provides an important prerequisite for the provision of new patented active substances, which can then be developed further or licensed to third parties.
Our drug discovery unit concentrates on the search for active substances for innovative targets, which open the door to the introduction of new therapeutic approaches. Further, this unit searches for new active substances having improved properties for clinically validated targets for which drugs are already being used in humans and which produce inadequate effects, cause severe side effects, are not economical or are not available in a patient-friendly form.
To this end, we possess an original substance library for the discovery of active compounds with a comprehensive range of promising natural substances which can serve as models for the construction of synthetic molecules. The initial tests involve 120,000 samples from our internal substance library in the form of high-throughput screening. The "hits", which are the first active compounds found in the library, are tested further and built up specifically into potential lead structures. Based on two to three lead structures, they are then optimized in a further step to potential development candidates.
INTELLECTUAL PROPERTY - PATENTS
We believe that we have a solid intellectual property portfolio that covers compounds, manufacturing processes, compositions and methods of medical use for our lead drugs and drug candidates. Our patent portfolio consists of approximately 50 owned and in-licensed patent families (issued, granted or pending in the United States, Europe and other jurisdictions). Independent of the original patent expiry date, additional exclusivity is possible in the United States, Europe and several other countries by data protection for new chemical entities, by orphan drug designation, or by patent term extension respective supplementary protection certificate.

38


In the United States, the patent term of a patent that covers an FDA-approved drug may also be eligible for patent term extension, which permits patent term restoration as compensation for the patent term lost during the FDA regulatory review process. The Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, permits a patent term extension of up to five years beyond the expiration of the patent, in which the patentee may file an application for yearly interim extensions within five years if the patent will expire and the FDA has not yet approved the NDA. The length of the patent term extension is related to the length of time the drug is under regulatory review. Patent extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval and only one patent applicable to an approved drug may be extended.
Similar provisions are available in Europe and other foreign jurisdictions to extend the term of a patent that covers an approved drug. In these jurisdictions however no interim extensions exist and the marketing approval must be granted before the patent expires. In the future, if and when our pharmaceutical products receive FDA approval, we expect to apply for patent term extensions on patents covering those products. While we anticipate that any such applications for patent term extensions will likely be granted, we cannot predict the precise length of the time for which such patent terms would be extended in the United States, Europe or other jurisdictions. If we are not able to secure patent term extensions on patents covering our products for meaningful periods of additional time, we may not achieve or sustain profitability, which would adversely affect our business.
Of the issued or granted patents, the protective rights described below form the core of our patent portfolio with regard to our lead drugs and drug candidates.
AEZS-108:
•
U.S. patent 5,843,903 provides protection in the United States for the compound AEZS-108 and other related targeted cytotoxic anthracycline analogs, pharmaceutical compositions comprising the compounds as well as their medical use for the treatment of cancer. This U.S. patent expires in November 2015. A patent term extension of up to five years may be possible.
•
European patent 0 863 917 B1 provides protection in Europe for the compound AEZS-108 and other related targeted cytotoxic anthracycline analogs, pharmaceutical compositions comprising the compounds as well as their medical use for the treatment of tumors. This European patent expires in November 2016. A patent term extension of up to five years may be possible in case approval has been achieved prior to patent expiration.
•
Japanese patent 3 987 575 provides protection in Japan for the compound AEZS-108 and other related targeted cytotoxic anthracycline analogs, pharmaceutical compositions comprising the compounds as well as their medical use for the treatment of tumors. This Japanese patent expires in November 2016. A patent term extension of up to five years may be possible in case approval has been achieved prior to patent expiration.
AEZS-120:
•
European patent 2 092 067 B1 provides protection in Europe for microorganisms as carriers of heterogeneous nucleotide sequences coding for antigens and protein toxins, a process of manufacturing thereof as well as corresponding plasmids or expression vectors, useful as medicaments, in particular as tumor vaccines for the treatment of various tumors. This European patent expires in November 2027. A patent term extension of up to five years may be possible.
•
U.S. and Japanese patent applications have been filed for AEZS-120 in November 2007. Patent applications are still pending. Granted patents will expire in November 2027.
AEZS-130:
•
U.S. patent 6,861,409 protects the compound AEZS-130 and U.S. patent 7,297,681 protects other related growth hormone secretagogue compounds, each also protecting pharmaceutical compositions comprising the compounds as well as their medical use for elevating the plasma level of growth hormone. This U.S. patent 6,861,409 expires in August 2022. A patent term extension of up to five years may be possible.
•
European patent 1 289 951 protects the compound AEZS-130 and European patent 1 344 773 protects other related growth hormone secretagogue compounds, pharmaceutical compositions comprising the compounds as well as their medical use for elevating the plasma level of growth hormone. This European patent 1 289 951 expires in June 2021. A patent term extension of up to five years by SPC may be possible.
•
Japanese patent 3 522 265 protects the compound AEZS-130 and pharmaceutical compositions comprising the compounds as well as their medical use for elevating the plasma level of growth hormone. This Japanese patent expires in June 2021. A patent term extension of up to five years may be possible.

39


•
U.S. patent 8,192,719 protects a method of assessing pituitary-related growth hormone deficiency in a human or animal subject comprising an oral administration of the compound AEZS-130 and determination of the level of growth hormone in the sample and assessing whether the level of growth hormone in the sample is indicative of growth hormone deficiency. This U.S. patent 8,192,719 expires in October 2027.
•
European patent 1 984 744 protects a method of assessing pituitary-related growth hormone deficiency by oral administration of AEZS-130. The European patent 1 984 744 expires in February 2027.
•
Japanese patent 4 852 728 protects a method of assessing pituitary-related growth hormone deficiency by oral administration of AEZS-130. The Japanese patent 4 852 728 expires in February 2027.
Cetrotide®:
•
European patent 0 299 402 provides protection in European countries for the compound cetrorelix and other LHRH antagonists. This patent will expire in July 2013 pursuant to granted requests for SPC.
•
U.S. patent 5,198,533 provided protection in U.S.A. for the compound cetrorelix per se. This patent expired in extended status in October 2010.
•
Japanese patent 2 944 669 provides protection in Japan for the compound cetrorelix and other LHRH antagonists. This patent will expire in July 2013 pursuant to granted requests for patent term extension.
•
U.S. patent 6,828,415 protects a method for preparing sterile lyophilizate formulations of cetrorelix. It specifically protects the lyophilization process used to manufacture Cetrotide®. This U.S. patent will expire in December 2021.
•
European patent 0 611 572 protects a method for preparing sterile lyophilizate formulations of cetrorelix. It specifically protects the lyophilization process used to manufacture Cetrotide®. This patent will expire in February 2014.
•
Japanese patent 4 033 919 protects a method for preparing sterile lyophilizate formulations of cetrorelix. It specifically protects the lyophilization process used to manufacture Cetrotide®. This patent will expire in February 2014.
•
U.S. patent 7,790,686 protects an aqueous injectable solution of the compound cetrorelix or other LHRH antagonists in an organic, pharmaceutically acceptable acid. This patent will expire in October 2023.
•
European patent 1 448 221 protects an aqueous injectable solution of the compound cetrorelix or other LHRH antagonists in an organic, pharmaceutically acceptable acid. This patent will expire in November 2022.
Ozarelix:
•
U.S. patent 6,627,609 provides protection in the United States for the compound ozarelix and related third-generation LHRH antagonists and pharmaceutical compositions comprising them. This U.S. patent will expire in March 2020. A patent term extension of up to five years may be possible.
•
European patent 1 163 264 provides protection in Europe for the compound ozarelix and related third-generation LHRH antagonists and pharmaceutical compositions comprising them. This European patent will expire in March 2020. A SPC of up to five years may be possible.
•
Japanese patent 3 801 867 provides protection in Japan for the compound ozarelix and related third-generation LHRH antagonists and pharmaceutical compositions comprising them. This Japanese patent will expire in March 2020. A patent term extension of up to five years may be possible.

40


The table below lists some of our issued or granted patents in the United States, Europe and Japan:
Patent No.
Title
Country
Expiry Date
AEZS-108
 
 
 
U.S. 5,843,903
Targeted cytotoxic anthracycline analogs
United States
2015-11-27
EP 0 863 917
Targeted cytotoxic anthracycline analogs
Europe
2016-11-14
JP 3 987 575
Targeted cytotoxic anthracycline analogs
Japan
2016-11-14
 
 
 
 
AEZS-120
 
 
 
EP 2 092 067
Microorganisms as carriers of nucleotide sequences
Europe
2027-11-13
 
 
 
 
AEZS-130
 
 
 
U.S. 6,861,409
Growth hormone secretagogues
United States
2022-08-01
EP 1 289 951
Growth hormone secretagogues
Germany, United Kingdom, France, Switzerland and others
2021-06-13
JP 3 522 265
Growth hormone secretagogues
Japan
2021-06-13
U.S. 8,192,719
Method and kit to diagnose growth hormone deficiency
United States
2027-10-12
EP 1 984 744
Method and kit to diagnose growth hormone deficiency
Europe
2027-02-19
JP 4 852 728
Method and kit to diagnose growth hormone deficiency
Japan
2027-02-19
 
 
 
 
Cetrotide®
 
 
 
EP 0 299 402
LHRH antagonists
Germany, United Kingdom, France, Switzerland and others
2013-07-10*
EP 0 611 572
Process to prepare a cetrorelix lyophilised composition
Germany, United Kingdom, France, Switzerland and others
2014-02-04
U.S. 6,828,415
Oliogopeptide lyophilisate, their preparation and use
United States
2021-12-07
U.S. 6,716,817
Method of treatment of female infertility
United States
2014-02-22
U.S. 6,863,891
Oligopeptide lyophilisate, their preparation and use
United States
2014-02-22
U.S. 6,867,191
Preparation and use of oligopeptide lyophilisate for gonad protection
United States
2014-02-22
U.S. 7,605,121
Oligopeptide lyophilisate, their preparation and use
United States
2014-02-22
U.S. 7,790,686
Injection solution of an LHRH antagonist
United States
2023-10-28
 
 
 
 
AEZS-112
 
 
 
U.S. 7,365,081
Indole derivatives and their use as medicaments
United States
2017-09-08
EP 1 309 585
Indole derivatives and their use as medicaments
Germany, United Kingdom, France, Switzerland and others
2021-07-26
 
 
 
 
Ozarelix
 
 
 
U.S. 6,627,609
LHRH antagonists having improved solubility properties
United States
2020-03-14
EP 1 163 264
LHRH antagonists having improved solubility properties
Germany, United Kingdom, France, Switzerland and others
2020-03-11
JP 3 801 867
LHRH antagonists having improved solubility properties
Japan
2020-03-11
_________________________
*
Includes Patent Term Extension.



41


C.
Organizational structure
The following chart presents our corporate structure, the jurisdiction of incorporation of our direct and indirect subsidiaries and the percentage of shares that we held in those subsidiaries as at December 31, 2012.
 
 
 
 
Aeterna Zentaris Inc.
(Canada)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
100%
 
 
100%
 
 
 
 
Aeterna Zentaris GmbH
(Germany)
 
Aeterna Zentaris, Inc.
(Delaware)
 
 
 
 
 
 
 
 
100%
 
 

 
 
Zentaris IVF GmbH
(Germany)
 
 
 
 
 
 
 
 
 


D.
Property, plants and equipment
Our corporate head office and facilities are located in Quebec City, Province of Quebec, Canada. The following table sets forth information with respect to our main facilities as at March 21, 2013.
Location
 
Use of space
 
Square Footage
 
Type of interest
1405 du Parc Technologique Blvd., Quebec City (Quebec), Canada
 
Fully occupied for management, R&D and administration
 
4,400

 
Leased
25 Mountainview Blvd., Suite 203, Basking Ridge, NJ 07920
 
Fully occupied for management, R&D and administration
 
3,188

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

 
Leased

Item 4A    Unresolved Staff Comments
None.
Item 5.
Operating and Financial Review and Prospects
Key Developments in 2012
AEZS-108 (Doxorubicin Peptide Conjugate)
•
Special Protocol Assessment ("SPA") was granted by the United States Food and Drug Administration ("FDA") for the initiation of a Phase 3 study in advanced recurrent endometrial cancer. This study is an open-label, randomized, and multicenter trial which will be conducted in North America and Europe, comparing AEZS-108 with doxorubicin as second-line therapy for locally-advanced, recurrent or metastatic endometrial cancer. The trial will involve approximately 500 patients and the primary efficacy endpoint is improvement in median overall survival.

42


•
Initiation of the Phase 2 portion of the Phase 1/2 trial in castration- and taxane-resistant prostate cancer ("CRPC"). The National Institutes of Health ("NIH") awarded a three-year $1.6 million grant to an investigator in order to support this study. Results for the Phase 1 portion demonstrated that AEZS-108 was well tolerated and early evidence of antitumor activity was observed in men with CRPC.
AEZS-130 (Oral Ghrelin Agonist)
•
Phase 3 trial results for AEZS-130, as a diagnostic test for adult growth hormone deficiency ("AGHD") presented at the 6th International Congress of the Growth Hormone Research ("GRS") and Insulin-like Growth Factor ("IGF") Society in Munich, Germany. The data expanded on the previously disclosed data in June 2012 at the 94th ENDO Annual Meeting and Expo ("ENDO"). Both sets of data confirm AEZS-130's potential of possibly becoming the first approved oral diagnostic test for AGHD.
•
Subsequent to year-end, New Drug Application ("NDA") as a diagnostic test for AGHD remains in preparation.
Perifosine (Oral AKT Inhibitor)
•
Phase 3 trial results for perifosine + capecitabine ("Xeloda®") showed no benefit in overall survival and in progression-free survival in the refractory colorectal cancer ("CRC") setting.
•
On March 11, 2013, we announced that an independent DSMB recommended discontinuing the Phase 3 study comparing the efficacy and safety of perifosine to placebo when combined with bortezomib ("Velcade®") and dexamethasone in patients with relapsed or relapsed/refractory multiple myeloma. Based on the outcome of its preplanned interim analysis of efficacy and safety, the DSMB recommended that patient enrollment be stopped and the study discontinued. The DSMB reported that it was highly unlikely the study would achieve a significant difference in its primary endpoint, progression-free survival; no safety concerns were raised. Based on the foregoing, we determined to discontinue the Phase 3 study of perifosine in multiple myeloma.
Corporate Developments
At-the-Market Issuance Program
•
During the year 2012, we issued a total of 1.2 million common shares (retroactively adjusted to reflect the Share Consolidation described below) under the January 2012 At-The-Market ("ATM") Program for aggregate gross proceeds of $8.8 million.
Share Consolidation and NASDAQ Minimum Bid Price Compliance
•
We consolidated our issued and outstanding common shares on a 6-to-1 basis (the "Share Consolidation"), effective as of October 2, 2012, in order to regain compliance with The NASDAQ Stock Market ("NASDAQ") minimum bid price requirement. Our common shares began trading on a consolidated basis on October 5, 2012 and we regained NASDAQ compliance on October 19, 2012.
Public Offering
•
On October 17, 2012, we completed a public offering (the "Offering") of 6.6 million units at a purchase price of $2.50 per unit, generating net proceeds of $15.1 million.
Introduction
This Management's Discussion and Analysis ("MD&A") provides a review of the results of operations, financial condition and cash flows of Aeterna Zentaris Inc. for the year ended December 31, 2012. In this MD&A, "Aeterna Zentaris", the "Company", "we", "us", "our" and the "Group" mean Aeterna Zentaris Inc. and its subsidiaries. This discussion should be read in conjunction with the information contained in the Company's consolidated financial statements and related notes as at December 31, 2012 and December 31, 2011 and for the years ended December 31, 2012, 2011 and 2010. Our consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").
All amounts in this MD&A are presented in U.S. dollars, except for share, option and warrant data, per share and per warrant data and as otherwise noted.

43


All shares, options and share purchase warrants as well as per share, option and share purchase warrant information for periods preceding October 2, 2012 have been adjusted, including proportionate adjustments being made to each stock option and share purchase warrant exercise price, to reflect and give effect to the Share Consolidation described above.
About Forward-Looking Statements
This document contains forward-looking statements, which reflect our current expectations regarding future events. Forward-looking statements may include words such as "anticipate", "assuming", "believe", "could", "expect", "foresee", "goal", "guidance", "intend", "may", "objective", "outlook", "plan", "seek", "should", "strive", "target" and "will".
Forward-looking statements involve risks and uncertainties, many of which are discussed in this MD&A. Results or performance may differ significantly from expectations. For example, the results of current clinical trials cannot be foreseen, nor can changes in policy or actions taken by regulatory authorities such as the FDA, the European Medicines Agency ("EMA"), the Therapeutic Products Directorate of Health Canada or any other organization responsible for enforcing regulations in the pharmaceutical industry.
Given these uncertainties and risk factors, readers are cautioned not to place undue reliance on any forward-looking statements. We disclaim any obligation to update any such factors or to publicly announce any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments, unless required to do so by a governmental authority or by applicable law.
About Material Information
This MD&A includes information that we believe to be material to investors after considering all circumstances, including potential market sensitivity. We consider information and disclosures to be material if they result in, or would reasonably be expected to result in, a significant change in the market price or value of our securities, or where it is likely that a reasonable investor would consider the information and disclosures to be important in making an investment decision.
The Company is a reporting issuer under the securities legislation of all of the provinces of Canada, and its securities are registered with the United States Securities and Exchange Commission. The Company is therefore required to file or furnish continuous disclosure information such as interim and annual financial statements, MD&A, proxy circulars, annual reports on Form 20-F, material change reports and press releases with the appropriate securities regulatory authorities. Copies of these documents may be obtained free of charge upon request from the Company's Investor Relations department or on the Internet at the following addresses: www.aezsinc.com, www.sedar.com and www.sec.gov.
Company Overview
Aeterna Zentaris Inc. (NASDAQ: AEZS and TSX: AEZ) is an oncology and endocrinology drug development company currently investigating treatments for various unmet medical needs. Our pipeline encompasses compounds at all stages of development, from drug discovery through to marketed products. We also benefit from agreements and arrangements with strategic collaborators and licensee partners; which contribute to the development of our pipeline of product candidates and in the establishment of commercial activities in specific territories.
Over the years, the Company has incurred recurring operating losses, having invested significantly in our R&D activities, as well as supporting our general and administrative expenses. We have financed our operations through different sources including the issuance of common shares and warrants, the conclusion of strategic alliances with licensee partners and research and development grants awarded by governmental agencies. The Company expects to continue to incur operating losses and may require significant capital to fulfill our future obligations. See the capital disclosures and the liquidity risk sections below.
In oncology, we are in the initiation process of a Phase 3 study under a Special Protocol Assessment ("SPA") with AEZS-108, a doxorubicin Luteinizing Hormone Releasing Hormone ("LHRH")-targeted conjugate compound, in endometrial cancer, for which we have successfully completed a Phase 2 trial in advanced endometrial and advanced ovarian cancer. We are also advancing Phase 2 trials with AEZS-108 in triple-negative breast cancer, refractory bladder cancer and castration- and taxane-resistant prostate cancer.
Our oncology pipeline also encompasses other earlier-stage programs, including AEZS-112, an oral anticancer agent which involves three mechanisms of action (tubulin, topoisomerase II and angiogenesis inhibition), which has completed a Phase 1 trial in advanced solid tumors and lymphoma. Additionally, several novel targeted anticancer candidates such as AEZS-120, a live recombinant oral tumor vaccine candidate, as well as our PI3K/Erk inhibitors, including AEZS-129, AEZS‑134 and AEZS-136, are currently in preclinical development.

44


In endocrinology, we are preparing the filing of an NDA in the United States ("U.S.") for the registration of AEZS-130, an oral ghrelin agonist, as a diagnostic test for AGHD. A Phase 3 trial under an SPA with the FDA has been completed in this indication. Furthermore, AEZS-130 is in a Phase 2A trial for the treatment of cancer-induced cachexia.
Status of Our Drug Pipeline
Discovery
 
Preclinical
 
Phase 1
 
Phase 2
 
Phase 3
 
Commercial
~120,000 compound library
 
AEZS-120
Prostate cancer vaccine
(oncology)
AEZS-129, 134 and 136
PI3K/Erk inhibitors(oncology)
AEZS-137 (disorazol Z) (oncology)
AEZS-125
(LHRH-
disorazol Z)
(oncology)
 
AEZS-112
(oncology)
 
AEZS-108
•  Triple-negative breast cancer
•  Ovarian cancer
•  Castration- and taxane-resistant prostate cancer
•  Refractory bladder cancer
Ozarelix
•  Prostate cancer
AEZS-130
•  Therapeutic in cancer cachexia
Perifosine
(Phase 1/2)
•  Neuroblastoma
•  Glioma
•  Pediatric solid tumors
 
AEZS-108
•  Endometrial cancer (not yet recruiting)
AEZS-130
•  Diagnostic in adult growth hormone deficiency (endocrinology)
 
Cetrotide®
(in vitro
fertilization)

Licensee Partners and Territories by Product
Cetrotide®:
Merck Serono, World (except Japan) – Nippon Kayaku/Shionogi, Japan
Ozarelix:
Spectrum Pharmaceuticals, World (ex-Japan , Korea and other Asian countries) – Handok Pharmaceuticals, Korea and other Asian countries for BPH indication – Nippon Kayaku, Japan for oncology indications
Perifosine:
Yakult Honsha, Japan – Handok Pharmaceuticals, Korea – Hikma Pharmaceuticals, Middle East/North Africa

45


Consolidated Statements of Comprehensive Loss Information
 
 
Three-month periods ended December 31,
 
Years ended
December 31,
(in thousands, except share and per share data)
 
2012
 
2011
 
2012
 
2011
 
2010
 
 
$
 
$
 
$
 
$
 
$
Revenues
 
 
 
 
 
 
 
 
 
 
Sales and royalties
 
9,165

 
9,317

 
31,538

 
31,306

 
24,857

License fees and other
 
380

 
3,310

 
2,127

 
4,747

 
2,846

 
 
9,545

 
12,627

 
33,665

 
36,053

 
27,703

Operating expenses
 
 
 
 
 
 
 
 
 
 
Cost of sales
 
7,489

 
8,114

 
26,820

 
27,560

 
18,700

Research and development costs, net of refundable tax credits and grants
 
5,523

 
7,793

 
20,604

 
24,517

 
21,257

Selling, general and administrative expenses
 
3,469

 
5,408

 
13,245

 
16,170

 
12,552

 
 
16,481

 
21,315

 
60,669

 
68,247

 
52,509

Loss from operations
 
(6,936
)
 
(8,688
)
 
(27,004
)
 
(32,194
)
 
(24,806
)
Finance income
 
689

 
1,434

 
6,974

 
6,231

 
1,792

Finance costs
 
(700
)
 
(2
)
 
(382
)
 
—

 
(5,437
)
Net finance (costs) income
 
(11
)
 
1,432

 
6,592

 
6,231

 
(3,645
)
Loss before income taxes
 
(6,947
)
 
(7,256
)
 
(20,412
)
 
(25,963
)
 
(28,451
)
Income tax expense
 
—

 
(263
)
 
—

 
(1,104
)
 
—

Net loss
 
(6,947
)
 
(7,519
)
 
(20,412
)
 
(27,067
)
 
(28,451
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
Items that may be reclassified subsequently to profit or loss
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(204
)
 
169

 
(504
)
 
(789
)
 
1,001

Items that will not be reclassified to profit or loss
 
 
 
 
 
 
 
 
 
 
Actuarial loss on defined benefit plans
 
(3,705
)
 
(1,335
)
 
(3,705
)
 
(1,335
)
 
191

Comprehensive loss
 
(10,856
)
 
(8,685
)
 
(24,621
)
 
(29,191
)
 
(27,259
)
Net loss per share
 
 
 
 
 
 
 
 
 
 
Basic
 
(0.29
)
 
(0.44
)
 
(1.03
)
 
(1.72
)
 
(2.26
)
Diluted
 
(0.29
)
 
(0.44
)
 
(1.03
)
 
(1.72
)
 
(2.26
)
Weighted average number of shares outstanding
 
 
 
 
 
 
 
 
 
 
Basic
 
24,181,462

 
17,185,156

 
19,775,073

 
15,751,331

 
12,609,902

Diluted
 
24,181,462

 
17,185,156

 
19,775,073

 
15,751,331

 
12,609,902


46


2012 compared to 2011
Revenues
Revenues are derived primarily from sales and royalties as well as from license fees. Sales are derived from Cetrotide® (cetrorelix acetate solution for injection), marketed for reproductive health assistance for in vitro fertilization, as well as from Active Pharmaceutical Ingredients ("API"). Royalties are derived indirectly from ARES Trading S.A.'s ("Merck Serono") net sales of Cetrotide® and represent the periodic amortization, under the units-of-revenue method, of the proceeds received in connection with the 2008 sale to Healthcare Royalty Partners L.P. (formerly Cowen Healthcare Royalty Partners L.P.) ("HRP") of the underlying future royalty stream.
License fees include periodic milestone payments, research and development ("R&D") contract fees and the amortization of upfront payments received from our licensing partners.
Sales and royalties were $9.2 million and $31.5 million for the three-month period and the year ended December 31, 2012, respectively, compared to $9.3 million and $31.3 million for the same periods in 2011.
License fees and other revenues were $0.4 million and $2.1 million for the three-month period and the year ended December 31, 2012, respectively, as compared to $3.3 million and $4.7 million for the same periods in 2011. Such decreases in license fees and other revenues are mainly due to the recording of a $2.6 million milestone payment from Yakult with respect to the initiation of a Phase 1 trial with perifosine in CRC in Japan during the last quarter of the year 2011.
Excluding the impact of foreign exchange rate fluctuations, revenues are expected to remain at similar levels in 2013 as compared to 2012.
Operating Expenses
Cost of sales were $7.5 million and $26.8 million for the three-month period and the year ended December 31, 2012, respectively, as compared to $8.1 million and $27.6 million for the same periods in 2011.
For the three-month period ended December 31, 2012, cost of sales as a percentage of sales and royalties decreased to approximately 81.7%, as compared to 87.1% in the fourth quarter of 2011. The improved margin is attributable to a comparative increase of Cetrotide® lot sizes delivered that have a lower production cost by unit.
For the year ended December 31, 2012, cost of sales as a percentage of sales and royalties decreased to approximately 85.0%, as compared to 88.0% for the same period in 2011. The improved margin is attributable to an increase of Cetrotide® lot sizes delivered that have a lower production cost by unit, as well as to the higher margin on the API sold during the second quarter of 2012.
R&D costs, net of refundable tax credits and grants, were $5.5 million and $20.6 million for the three-month period and the year ended December 31, 2012, respectively, compared to $7.8 million and $24.5 million for the same periods in 2011.
For each of the three-month period and the year ended December 31, 2012, the decreases are attributable to lower employee compensation and benefit costs, as no annual cash bonuses were recorded during the fourth quarter of 2012, as well as to continued cost-saving measures resulting in a lower number of employees. The decreases are also related to comparative lower third-party costs associated with the development of PI3K/Erk inhibitors and other products during the fourth quarter of 2012 and to lower third-party costs associated with the development of most of our products except for AEZS‑108 and perifosine and the weakening of the euro against the U.S. dollar.

47


The following table summarizes our net R&D costs by nature of expense:
 
 
Three-month periods ended December 31,
 
Years ended December 31,
(in thousands)
 
2012
 
2011
 
2012
 
2011
 
2010
 
 
$
 
$
 
$
 
$
 
$
Employee compensation and benefits
 
2,145

 
3,152

 
8,590

 
10,028

 
9,226

Third-party costs
 
2,345

 
3,576

 
8,679

 
10,244

 
8,138

Facilities rent and maintenance
 
401

 
459

 
1,661

 
1,835

 
1,773

Other costs*
 
744

 
661

 
2,542

 
2,793

 
2,807

R&D tax credits and grants
 
(112
)
 
(55
)
 
(868
)
 
(383
)
 
(687
)
 
 
5,523

 
7,793

 
20,604

 
24,517

 
21,257

 _________________________
*
Includes depreciation and amortization charges.

The following table summarizes primary third-party R&D costs, by product candidate, incurred by the Company during the three-month periods ended December 31, 2012 and 2011.
(in thousands, except percentages)
 
Three-month periods ended December 31,
Product
 
Status
 
2012
 
2011
 
 
 
 
$
 
%
 
$
 
%
Perifosine
 
Phases 2 and 3
 
1,434

 
61.2

 
1,366

 
38.2

AEZS-108
 
Phase 2 and 3
 
282

 
12.0

 
510

 
14.3

AEZS-130
 
Phase 3
 
30

 
1.3

 
101

 
2.8

PI3K/Erk inhibitors
 
Preclinical
 
199

 
8.5

 
589

 
16.5

Other
 
Preclinical
 
400

 
17.0

 
1,010

 
28.2

 
 
 
 
2,345

 
100.0

 
3,576

 
100.0


The following table summarizes primary third-party R&D costs, by product candidate, incurred by the Company during the years ended December 31, 2012, 2011 and 2010.
(in thousands, except percentages)
 
Years ended December 31,
Product
 
Status
 
2012
 
2011
 
2010
 
 
 
 
$
 
%
 
$
 
%
 
$
 
%
Perifosine
 
Phases 2 and 3
 
3,801

 
43.8

 
3,726

 
36.4

 
968

 
11.9

AEZS-108
 
Phase 2 and 3
 
2,133

 
24.6

 
1,652

 
16.1

 
2,089

 
25.7

AEZS-130
 
Phase 3
 
112

 
1.3

 
1,156

 
11.3

 
865

 
10.6

PI3K/Erk inhibitors
 
Preclinical
 
1,727

 
19.9

 
1,860

 
18.2

 
923

 
11.4

Other
 
Preclinical and clinical
 
906

 
10.4

 
1,850

 
18.0

 
3,293

 
40.4

 
 
 
 
8,679

 
100.0

 
10,244

 
100.0

 
8,138

 
100.0


Excluding the impact of foreign exchange rate fluctuations, we expect net R&D costs for 2013 to increase, compared to 2012, due to the advancement of our lead projects listed above. Excluding the impact of unforeseen foreign exchange rate fluctuations, we expect that we will incur net R&D costs of between $20 million and $22 million for the year 2013, particularly given our primary focus on developing AEZS-108, AEZS-130, AEZS‑120 and certain earlier-stage compounds. We note, however, that our R&D estimates may be revised as we continue to advance our development activities and as new information becomes available.

48


Selling, general and administrative ("SG&A") expenses were $3.5 million and $13.2 million for the three-month period and the year ended December 31, 2012, respectively, compared to $5.4 million and $16.2 million for the same periods in 2011.
For the three-month period ended December 31, 2012, the comparative decrease in SG&A expenses is mainly related to 2011 events. During the three-month period ended December 31, 2011, we recognized an impairment loss on property, plant and equipment ($0.3 million), an increase in onerous lease provision ($0.2 million) and we incurred marketing expenses in Europe ($0.5 million), as described below. In addition, the quarter-to-quarter decrease is attributable to the employee benefits expense decrease ($0.4 million) and the related foreign exchange loss decrease ($0.5 million), partly offset by transaction costs related to share purchase warrants ($0.4 million).
For the year ended December 31, 2012, the comparative decrease in SG&A expenses is mainly related to 2011 events. During the year ended December 31, 2011, we recognized an impairment loss on our Cetrotide® asset ($1.1 million), an impairment loss on property, plant and equipment ($0.3 million), an increase in onerous lease provision ($0.2 million) and we incurred marketing expenses in Europe ($0.9 million), as described below. In addition, the year-over-year decrease in SG&A expenses is attributable to the decreases in employee benefit expenses ($0.8 million) and royalty expenses ($0.2 million), as well as the weakening of the euro against the U.S. dollar, partly offset by transaction costs related to share purchase warrants ($0.4 million), share-based compensation costs related to collaborators ($0.3 million) and an increase in legal fees ($0.3 million).
We expect SG&A expenses to decrease in 2013, as compared to 2012, assuming lower royalty expenses, lower transaction costs related to share purchase warrants, lower legal and audit fees, as well as lower share-based compensation costs related to collaborators combined with continued costs reduction in human resources.
Net finance (costs) income are comprised predominantly of the change in fair value of warrant liability, net gains (losses) due to changes in foreign currency exchange rates and the gain on our short-term investment. For the three-month period and the year ended December 31, 2012, net finance (costs) income totalled $nil and $6.6 million, respectively, as compared to $1.4 million and $6.2 million for the same periods in 2011, as presented below.
 
Three-month periods ended December 31,
 
Years ended December 31,
(in thousands)
2012
 
2011
 
2012
 
2011
 
2010
 
$
 
$
 
$
 
$
 
$
Finance income
 
 
 
 
 
 
 
 
 
Net gains due to changes in foreign currency exchange rates
—

 
1,118

 
—

 
2,197

 
932

Change in fair value of warrant liability
634

 
221

 
6,746

 
2,533

 
—

Interest income
55

 
93

 
228

 
223

 
173

Gain on held-for-trading financial instrument
—

 
—

 
—

 
1,278

 
687

 
689

 
1,432

 
6,974

 
6,231

 
1,792

Finance costs
 
 
 
 
 
 
 
 
 
Net losses due to changes in foreign currency exchange rates
(700
)
 
—

 
(382
)
 
—

 
—

Change in fair value of warrant liability
—

 
—

 
—

 
—

 
(5,437
)
 
(700
)
 
—

 
(382
)
 
—


(5,437
)
 
(11
)
 
1,432

 
6,592

 
6,231

 
(3,645
)


49


The significant fluctuation in net finance (costs) income, as compared to the same periods in 2011, is mainly due to the change in fair value of our warrant liability and to (losses) or gains due to changes in foreign currency exchange rates. The change in fair value of our warrant liability results from the periodic "mark-to-market" revaluation, via the application of the Black-Scholes option pricing model, of currently outstanding share purchase warrants. The Black-Scholes "mark-to-market" warrant valuation most notably has been impacted by the market price of our common shares, which, on NASDAQ, has fluctuated from $10.32 on January 3, 2011 to $2.38 on December 31, 2012. The (losses) or gains due to changes in foreign currency exchange rates are mainly related to the period-over-period continued weakness of the euro against the U.S. dollars, as presented below.
 
 
Three-month periods ended December 31,
 
Years ended December 31,
 
 
2012
 
2011
 
2012
 
2011
 
2010
Euro to US$ average conversion rate
 
1.2975
 
1.3477
 
1.2858
 
1.3919
 
1.3273
Income tax expense was $nil for the year ended December 31, 2012, as compared to $1.1 million for the same period in 2011. The year-over-year decrease consists of foreign withholding taxes related to an upfront payment received from a partner and to milestone license fee revenues recorded in 2011.
Net loss for the three-month period and the year ended December 31, 2012 was $6.9 million and $20.4 million, or $0.29 and $1.03 per basic and diluted share, respectively, compared to $7.5 million and $27.1 million, or $0.44 and $1.72 per basic and diluted share for the same periods in 2011.
The decrease in net loss for the three-month period ended December 31, 2012, as compared to the same period in 2011, is largely due to lower net R&D costs, SG&A expenses and income tax expense, as well as to higher margin contribution from Cetrotide®, partly offset by the significant decrease in license fee revenues, and in net finance income.
The decrease in net loss for the year ended December 31, 2012, as compared to the year ended December 31, 2011, is largely due to lower net R&D costs, SG&A expenses and income tax expense, as well as to higher margin contribution from sales and higher net finance income, partly offset by the significant decrease in license fee revenues.
2011 compared to 2010
Revenues
Sales and royalties were $31.3 million for the year ended December 31, 2011, compared to $24.9 million for the year ended December 31, 2010. This increase is largely attributable to comparatively higher deliveries of Cetrotide® to Merck Serono.
License fees and other revenues were $4.7 million for the year ended December 31, 2011, compared to $2.8 million for the year ended December 31, 2010. This increase is mainly due to the recording in 2011 of a milestone payment from a partner, as described above.
Operating Expenses
Cost of sales was $27.6 million for the year ended December 31, 2011, compared to $18.7 million for the year ended December 31, 2010. This increase is largely attributable to the comparative increase in volume of sales of Cetrotide® to Merck Serono, as discussed above. Additionally, cost of sales as a percentage of sales and royalties increased to approximately 88.0% for the year ended December 31, 2011, compared to 75.2% for the year ended December 31, 2010. Our lower comparative margins are largely attributable to a decrease of $3.4 million of royalties in 2011, as compared to 2010.
R&D costs, net of refundable tax credits and grants, were $24.5 million for the year ended December 31, 2011, compared to $21.3 million for the year ended December 31, 2010. The comparative increase is mainly attributable to an increase in third-party costs incurred in connection with the advancement of perifosine, AEZS‑130 and Erk/PI3K compounds (AEZS‑129, AEZS‑131, AEZS‑132) related activities.
SG&A expenses were $16.2 million for the year ended December 31, 2011, compared to $12.6 million for the year ended December 31, 2010. SG&A expenses were higher during the year 2011 mainly due to the recognition of impairment losses and due to the initiation of pre-launch and marketing efforts related to the potential commercialization of perifosine in Europe.
During the year 2011, we recognized an impairment loss ($1.1 million) following impairment testing that was performed on our Cetrotide® asset. The impairment loss was recognized predominantly to take into account management's lower trend estimates related to the commercialization of Cetrotide®, due to changes in the competitive environment in the Japanese market.

50


In addition, during the year 2011, following the relocation of one of the Company's offices, we recognized an impairment loss on property plant and equipment (leasehold improvements and furniture and fixtures ($0.3 million)) and an additional onerous lease provision ($0.2 million).
Furthermore, we initiated our pre-launch and marketing efforts related to the potential marketing by the Company of perifosine in Europe. During the year 2011, we incurred approximately $0.9 million in connection with the preparation of a launch plan, including market research, pricing expectations and forecast calculations.
Net finance (costs) income for the year ended December 31, 2011 totalled $6.2 million, compared to ($3.6 million) for the year ended December 31, 2010, as presented above.
The significant increase in net finance income, as compared to the same period in 2010, is mainly due to the change in fair value of our warrant liability. That change results from the periodic "mark-to-market" revaluation, via the application of the Black-Scholes option pricing model, of currently outstanding share purchase warrants. The Black-Scholes "mark-to-market" warrant valuation most notably has been impacted by the market price of our common shares, which, on NASDAQ, has fluctuated from $4.84 as at January 4, 2010 to $10.32 as at December 31, 2010, and $9.24 as at December 30, 2011.
Additionally, our net finance income increased during the year 2011 from the same period in 2010 due to higher foreign exchange gains, which in turn resulted primarily from the overall substantial weakening, during 2011, of the euro against the U.S. dollar, as compared to an overall lower weakening of the euro against the U.S. dollar within the 2010 period. As a result, during the twelve-month period ended December 31, 2011, we recorded foreign exchange gains on transactions and on cash and cash equivalent balances denominated in U.S. dollars.
The increase in our net finance income during the year ended December 31, 2011, as compared to the year ended December 31, 2010, also included gains on our short-term investment, which was sold during the year 2011.
Income tax expense was $1.1 million for the year ended December 31, 2011, as compared to $nil for the same period in 2010. The year-over-year increase consists of foreign withholding taxes related to an upfront payment received from a partner and milestone license fees revenues recorded in 2011.
Net loss for the year ended December 31, 2011 was $27.1 million, or $1.72 per basic and diluted share, compared to $28.5 million, or $2.26 per basic and diluted share for the year ended December 31, 2010.
The decrease in net loss for the year ended December 31, 2011, as compared to the year ended December 31, 2010, is largely due to the significant increase in license fees revenues, as well as net finance income, partly offset by lower margin contribution from Cetrotide®, higher net R&D costs and SG&A expenses, combined with the recording of income tax expense of $1.1 million in 2011, as discussed above.

51


Quarterly Consolidated Results of Operations Information
(in thousands, except for per share data)
Quarters ended
 
December 31, 2012
 
September 30, 2012
 
June 30,
2012
 
March 31, 2012
 
$
 
$
 
$
 
$
Revenues
9,545

 
7,139

 
7,471

 
9,510

Loss from operations
(6,936
)
 
(5,680
)
 
(7,600
)
 
(6,788
)
Net (loss) income
(6,947
)
 
(6,554
)
 
4,540

 
(11,451
)
Net (loss) income per share*
 
 
 
 
 
 
 
Basic
(0.29
)
 
(0.35
)
 
0.25

 
(0.65
)
Diluted
(0.29
)
 
(0.35
)
 
0.25

 
(0.65
)

 
Quarters ended
 
December 31, 2011
 
September 30, 2011
 
June 30,
 2011
 
March 31, 2011
 
$
 
$
 
$
 
$
Revenues
12,627

 
9,514

 
6,523

 
7,389

Loss from operations
(8,688
)
 
(8,244
)
 
(7,971
)
 
(7,291
)
Net (loss) income
(7,519
)
 
1,078

 
(10,569
)
 
(10,057
)
Net (loss) income per share*
 
 
 
 
 
 
 
Basic
(0.44
)
 
0.07

 
(0.70
)
 
(0.72
)
Diluted
(0.44
)
 
0.06

 
(0.70
)
 
(0.72
)
_________________________
*
Net (loss) income per share is based on the weighted average number of shares outstanding during each reporting period, which may differ on a quarter-to-quarter basis. As such, the sum of the quarterly net (loss) income per share amounts may not equal year-to-date net (loss) income per share.
First and second quarter revenues of 2012 increased, when compared quarter-over-quarter to each of the corresponding periods in 2011, mainly due to higher deliveries of Cetrotide® to Merck Serono, partly offset by the weakening of the euro against the U.S. dollar.
Third and fourth quarter revenues decreased, when compared quarter-over-quarter to each of the corresponding periods in 2011. The decreases are largely attributable to comparative lower deliveries of Cetrotide® to certain customers in the third quarter, to a decrease in license fee revenues from a partner in the fourth quarter and to the relative weakening of the euro against the U.S. dollar.
In the last eight quarters, net (loss) income has been impacted by revenues, as mentioned above, by the comparative level of net R&D costs in connection with the advancement of perifosine, AEZS-108, AEZS-130 and certain earlier stage compounds. Net R&D costs increased in the first quarter, as compared to the same quarter of 2011 and decreased when compared quarter-over-quarter for each of the other corresponding periods in 2012 vs. 2011. The quarter-over-quarter periods net (loss) income were also impacted by the recognition of impairment losses in the third and fourth quarters of 2011, as well as in the fourth quarter of 2012, by the initiation of prelaunch and marketing efforts related to the potential commercialization of perifosine in Europe in the third and fourth quarters of 2011, by gains on our short-term investment recorded during the first, second and third quarters of 2011, by foreign exchange gains or losses and changes in fair value of our warrant liability, as well as by the income tax expense in the first and fourth quarters of 2011.

52


Consolidated Statement of Financial Position Information
 
As at December 31,
(in thousands)
2012
 
2011
 
$
 
$
Cash and cash equivalents
39,521

 
46,881

Trade and other receivables and other current assets
13,780

 
13,258

Restricted cash
826

 
806

Property, plant and equipment
2,147

 
2,512

Other non-current assets
11,391

 
11,912

Total assets
67,665

 
75,369

Payables and other current liabilities
15,675

 
17,784

Long-term payable (current and non-current portions)
30

 
88

Warrant liability (current and non-current portions)
6,176

 
9,204

Non-financial non-current liabilities*
52,479

 
52,839

Total liabilities
74,360

 
79,915

Shareholders' deficiency
(6,695
)
 
(4,546
)
Total liabilities and shareholders' deficiency
67,665

 
75,369

_________________________
*
Comprised mainly of non-current portion of deferred revenues, employee future benefits and provision.
The decrease in cash and cash equivalents as at December 31, 2012, as compared to December 31, 2011, is due to the recurring disbursements and other variations in components of our working capital, partially offset by: the receipt of a milestone payment of $2.6 million in connection with our development, commercialization and licensing agreement entered into with a partner, the receipt of net proceeds of $23.6 million pursuant to a public offering and drawdowns made under our January 2012 ATM Program, as discussed above, and the relative strengthening as at December 31, 2012 of the euro against the U.S. dollar, as compared to December 31, 2011.
Payables and other current liabilities decreased from December 31, 2011 to December 31, 2012, mainly due to decreases of approximately $1.4 million in trade accounts payable, $1.3 million in accrued salaries and $0.3 million in income taxes payable, which in turn were partly offset by an increase of approximately $0.7 million in accrued liabilities in connection with deliveries of Cetrotide® and with the R&D expenses resulting from the advancement of perifosine, AEZS‑108, AEZS‑130 and Erk/PI3K compounds and by the impact of foreign exchange rate fluctuations.
Our warrant liability decreased from December 31, 2011 to December 31, 2012 predominantly due to the change in fair value pursuant to the periodic "mark-to-market" revaluation of the underlying outstanding share purchase warrants, as discussed above, partly offset by the grant of 2,970,000 share purchase warrants during the fourth quarter of 2012.
Non-financial liabilities were slightly lower as at December 31, 2012, as compared to December 31, 2011, mainly as a result of the recurring amortization of deferred revenues of $4.6 million and the utilization amount of onerous lease provisions, partially offset by the change of $4.4 million in the employee benefit obligations. That change predominantly resulted from the 2012 actuarial loss which was mainly related to the change in the discount rate assumption.
The increase in shareholders' deficiency from December 31, 2011 to December 31, 2012 is mainly attributable to the increase in our deficit due to the net loss and the actuarial loss on defined benefit plans for the year 2012. This is partly offset by an increase in share capital representing the proceeds from the issuance of common shares pursuant to the aforementioned public offering and drawdowns made under our January 2012 ATM Program, and the exercise of warrants and stock options, as well as the recording of share-based compensation costs.
Financial Liabilities, Obligations and Commitments
We have certain contractual leasing obligations and purchase obligation commitments as well as long-term obligations. Purchase obligation commitments mainly include R&D services and manufacturing agreements related to the production of Cetrotide® and other R&D programs. Long-term obligations are related to unfunded benefit pension plans and unfunded post-employment benefit plans. The following tables summarize future cash requirements with respect to these obligations.

53


Future minimum lease payments and future minimum sublease payments expected to be received under non-cancellable operating leases (subleases), as well as future payments in connection with utility service agreements are as follows:
 
 
As at December 31, 2012
(in thousands)
 
Minimum lease payments
 
Minimum sublease payments
 
Utilities
 
 
$
 
$
 
$
Less than 1 year
 
1,669

 
(226
)
 
610

1 – 3 years
 
3,215

 
(451
)
 
861

4 – 5 years
 
997

 
(451
)
 
105

More than 5 years
 
29

 
(19
)
 
—

Total
 
5,910

 
(1,147
)
 
1,576

Service and manufacturing commitments given, which consist of R&D service agreements and manufacturing agreements for Cetrotide®, are as follows:
 
 
As at December 31,
(in thousands)
 
2012
 
 
$
Less than 1 year
 
10,123

1 – 3 years
 
6,693