Draxis Health 20-F 2006
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
DRAXIS HEALTH INC.
(Exact name of Registrant as specified in its charter)
(Jurisdiction of incorporation or organization)
6870 GOREWAY DRIVE, 2nd FLOOR, MISSISSAUGA, ONTARIO, CANADA L4V 1P1
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
(Title of Class)
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report.
Shares 41,588,005 common shares (as of 12/31/05)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o 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 o No ý
NoteChecking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
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 o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check One)
Large accelerated filer o Accelerated filer ý Non-accelerated filer o
Indicate by check mark which financial statement item the Registrant has elected to follow.
Item 17 o Item 18 ý
DRAXIS Health Inc. (DRAXIS or the Company) is a specialty pharmaceutical company providing products in three categories: sterile products, non-sterile products and radiopharmaceuticals. Sterile products include liquid and freeze-dried (lyophilized) injectables and sterile ointments. Non-sterile products are produced as solid oral, liquid and semi-solid dosage forms. Radiopharmaceuticals are used for both therapeutic and diagnostic molecular imaging applications. In the radiopharmaceutical category, DRAXIS has its own products and a targeted research and development program for new products. As of January 1, 2005, all of the operations of the Company are carried out through our wholly owned subsidiary DRAXIS Specialty Pharmaceuticals Inc., which operates two major divisions, DRAXIS Pharma (contract manufacturing) and DRAXIMAGE (radiopharmaceuticals). Our operations are carried out at our sole manufacturing facilities located at 16751, Trans-Canada Highway, Kirkland, Québec, H9H 4J4, Canada (our manufacturing facilities or facility). For the year ended December 31, 2005, 68.9% of our consolidated revenues were derived from DRAXIS Pharma (contract manufacturing) and 24.3% of our consolidated revenues were derived from DRAXIMAGE (radiopharmaceuticals).
Our subsidiary Deprenyl Animal Health, Inc. (DAHI) receives licensing and royalty revenue related solely to ANIPRYL®, a companion animal health product. It does not engage in any operations.
Our registered and principal office is located at 6870 Goreway Drive, 2nd Floor, Mississauga, Ontario, L4V 1P1, Canada.
Unless otherwise indicated herein, the information presented in this Annual Report (Form 20-F) is for the year ended December 31, 2005.
The selected data set forth in the following table are expressed in U.S. dollars and in accordance with U.S. generally accepted accounting principles (U.S. GAAP). All data presented below should be read in conjunction with, and is qualified in its entirety by, reference to our audited Consolidated Financial Statements and Notes thereto for the year ended December 31, 2005 which are included in this annual report.
Selected Five-Year Review
(in thousands of U.S. dollars except share related data)
This Annual Report (Form 20-F) contains forward-looking statements (within the meaning of the Securities Exchange Act of 1934, as amended) and information that are based on managements beliefs, as well as assumptions made by and information currently available to management. When used in this Annual Report (Form 20-F), the words anticipate, estimate, plan, believe, expect, potential,
intend, designed and should and similar expressions are intended to identify forward-looking statements. These forward-looking statements necessarily make numerous assumptions with respect to: industry performance; general business, economic and regulatory conditions; access to markets and materials; and other matters, all of which are inherently subject to significant uncertainties and contingencies and many of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions made or factors considered in making a forward looking statement prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We believe that any of the following risk factors could cause our actual results to differ from those that may have been or may be projected in forward-looking statements made by us or on our behalf from time to time. The forward-looking statements in this Annual Report (Form 20-F) are contained principally under Items 4 and 5.
Our future financial condition, results of operations and business could be materially affected by the risks and uncertainties discussed below, or otherwise, and historic trends should not be used to anticipate results or trends in future periods:
Risks Related to our Industry
WE MAY NOT BE ABLE TO GET TIMELY REGULATORY APPROVAL FOR OUR PRODUCTS AND WE MUST COMPLY WITH REGULATORY REQUIREMENTS TO MANUFACTURE AND MARKET OUR PRODUCTS.
The manufacturing and marketing of our existing and potential products, as well as preclinical studies and clinical trials, are subject to extensive regulation and approval by the Therapeutic Products Directorate (TPD) of the Health Products and Food Branch Inspectorate of Health Canada (HPFBI) and other authorities in Canada and by numerous federal, state and local government authorities in the United States, including the Food and Drug Administration (FDA). Similar regulatory requirements exist in Europe and other countries. To the extent we choose to distribute our products in foreign markets, we may rely on licensees to obtain regulatory approvals in such countries. Any failure or delay by us, our collaborators or licensees to comply with applicable requirements or obtain regulatory approvals for our products could adversely affect the marketing of products developed or licensed by us and our ability to receive product or royalty revenue.
As of December 31, 2005, DRAXIMAGE had five regulatory submissions filed with European regulatory authorities: four with the Medicines Evaluation Board in the Netherlands and one with the Danish Medicines Agency. The submission dates for these radiopharmaceutical products range from June 2003 to December 2004. All of the approvals sought by DRAXIMAGE in Europe are for marketing authorizations through the mutual recognition procedure, which involves obtaining approval in one state (the reference member state) and recognition of that approval in other member states. All of the approvals being sought by DRAXIMAGE in Europe are for radiopharmaceutical products already approved in Canada or the U.S. One of these five European submissions was for DRAXIMAGEs kit for the Preparation of Technetium Tc-99m Albumin Aggregated Injection (MAA Kit) for which DRAXIMAGE received approval in one reference member state, the Netherlands, in February 2005.
The regulatory process for innovative products generally involves preclinical studies and clinical trials of each compound to establish its safety and efficacy, takes many years and requires the expenditure of substantial resources. For generic products, the regulatory process does not typically involve clinical studies. Moreover, if regulatory approval of a drug or diagnostic product is granted, such approval may entail limitations on the indicated uses for which it may be marketed. Our failure to
comply with applicable regulatory requirements can, among other things, result in the suspension of our regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution. Further, government policy may change and additional government regulations may be established that could prevent or delay regulatory approvals for our products. In addition, a marketed drug and its manufacturer are subject to continual review. Later discovery of previously unknown problems with the product or manufacturer may result in restrictions on such product or manufacturer, including withdrawal of the product from the market.
DRAXIMAGE manufactures approximately 65% of the active pharmaceutical ingredients that are used in the radiopharmaceutical products it manufactures. The final products in which the active pharmaceutical ingredients are used are subject to regulation for safety and efficacy by the FDA, TPD and regulatory authorities in other jurisdictions, as the case may be. Final products must be approved by the FDA, TPD and the regulatory authorities in other jurisdictions, as the case may be, before they can be commercially marketed. The process of obtaining regulatory clearance for marketing is uncertain, costly and time-consuming. We cannot predict how long the necessary regulatory approvals will take or whether we or our customers for whom we manufacture products will ever obtain such approval for products. To the extent that we and/or our customers do not obtain the necessary regulatory approvals for marketing new products, our product sales could be adversely affected.
All products manufactured by us (including those manufactured for our contract manufacturing customers) will have to comply with the current Good Manufacturing Practices (cGMP) imposed under the laws of the U.S., Canada and other jurisdictions, as well as the guidelines and policies of TPD, FDA and the regulatory authorities in other jurisdictions, as the case may be. In addition, products containing radioactive isotopes will have to comply with the guidelines and regulations of the Canadian Nuclear Safety Commission in Canada and the United States Nuclear Regulatory Commission and other similar regulations in other countries. Compliance with cGMP regulations requires us to expend time, money and effort on our production facilities and to maintain precise and extensive records and quality control to ensure that our products meet applicable specifications and other requirements. The FDA, TPD and other regulators may periodically inspect our drug manufacturing facilities to ensure compliance with applicable cGMP requirements. In addition, our customers also periodically inspect our manufacturing facilities to ascertain compliance with cGMP requirements. If we fail to comply with the cGMP requirements, we may become subject to possible regulatory action, and manufacturing at the facility could consequently be suspended, causing possible loss of profit, regulatory fines and third-party liability. To date we have not been subject to any notice of material non-compliance.
The FDA, TPD or other regulatory authorities may also require us to submit lots of a particular product for inspection. If the product lot fails to meet applicable requirements, then the following actions might be taken: (i) restrict the release of the product; (ii) suspend manufacturing of the specific product lot; (iii) order a recall of the product lot; or (iv) order a seizure of the product lot.
WE MAY NOT BE ABLE TO OBTAIN AND ENFORCE EFFECTIVE PATENTS TO PROTECT OUR PROPRIETARY RIGHTS FROM USE BY COMPETITORS, AND THE PATENTS OF OTHER PARTIES COULD REQUIRE US TO STOP USING OR TO ACQUIRE A LICENSE FOR CONDUCTING CERTAIN BUSINESS ACTIVITIES, AND OUR COMPETITIVE POSITION AND PROFITABILITY COULD SUFFER AS A RESULT.
Our success will depend, in part, on our ability to obtain, enforce and maintain patent protection for our radiopharmaceutical and ANIPRYL® technologies in Canada, the United States and other countries. Patents for our radiopharmaceutical technologies have expiry dates ranging from October 2006 to July 2023. Patents issued to our subsidiary DAHI for our ANIPRYL® technology, have expiry dates ranging from August 2010 to June 2016. We cannot assure you that patents will be issued from any
pending applications or that claims now or in the future, if any, allowed under issued patents will be sufficiently broad to protect our technology. In addition, we cannot assure you that any patents issued to or licensed by us will not be challenged, invalidated, infringed or circumvented, or that the rights granted under these patents will provide a continuing competitive advantages to us. The patent positions of pharmaceutical and biotechnology firms, including ours, are generally uncertain and involve complex legal and factual questions. In addition, we do not know whether any of our current research endeavors will result in the issuance of patents in Canada, the United States or elsewhere, or if any patents already issued will provide significant proprietary protection or will be circumvented or invalidated. Since patent applications in the United States and Canada are maintained in secrecy for at least 18 months from the date of filing, and since publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries by several months, we cannot be certain that we will be the first to create inventions claimed by pending patent applications or that we will be the first to file patent applications for such inventions. Our failure to obtain patents for our products could negatively affect our competitive position.
Our commercial success will also depend in part on our not infringing patents or proprietary rights of others and not breaching the licenses granted to us. In the event that we are found to have infringed other parties patents, licenses may not be available to us on terms that are favorable or at all. In addition, the degree of patent protection afforded to pharmaceutical or biotechnological inventions around the world is uncertain and varies significantly among different countries. There can be no assurance that we will be able to license third-party technology or patents that we may require to conduct our business or that such technology or patents can be licensed at a reasonable cost. Failure by us or our collaborators or customers to license any technology or patents that we may need to commercialize our technologies or manufacture our products may result in delays in marketing our products or may impede our inability to proceed with the development, manufacture or sale of products requiring such licenses.
We may be required to engage in litigation and other patent proceedings to enforce patents issued to us, to defend our right, title and interest in patents related to our products and to determine the scope and validity of other parties proprietary rights. These proceedings can be costly, and if the outcome of any such proceedings is adverse to us, we could lose the right to sell some of our products or could be required to pay damages.
We also rely on unpatented trade secrets, improvements and know-how with respect to our contract manufacturing operations and all of our operations associated with our radiopharmaceutical kit business to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our customers, collaborators, employees and consultants. These agreements could be breached, and we may not have adequate remedies for any breach. Further, our trade secrets could otherwise become known or be independently discovered by competitors.
ALTHOUGH WE CARRY PRODUCT LIABILITY INSURANCE, A SUCCESSFUL LIABILITY CLAIM COULD NEGATIVELY IMPACT OUR BUSINESS.
We may be subject to liability claims by those who purchase our contract manufacturing services, for the use of any of our products under clinical development and the sale and use of any of our approved products. Such claims might be made directly by customers, consumers, healthcare providers or pharmaceutical companies or others selling such products. Although we believe that our insurance coverage is reasonably adequate to insulate us from potential product liability claims and we have not historically experienced any problems associated with claims by those who purchase our contract manufacturing services or users of our products under development or that we manufacture, we cannot provide any assurance that we will be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to this potential liability. We might not be able to
maintain or obtain additional commercially reasonable product liability insurance for any products approved for marketing and sale. Even unsuccessful product liability claims could result in the expenditure of funds in litigation and the diversion of management time and resources and could damage our reputation and impair the marketability of our products, which could have a material adverse effect on our financial condition and results of operation.
On July 22, 2005, we announced that, together with other defendants, we had received a Statement of Claim filed before the Superior Court of Justice of Ontario alleging that PermaxÒ, a drug that we distributed in Canada for a third party manufacturer prior to July 2003, causes compulsive/obsessive behaviour, including pathological gambling. The plaintiff is seeking to have this action certified as a class action. We believe this claim against us is without merit and we intend to vigorously defend this proceeding and any motion for certification. Prior to July 2003, PermaxÒ was distributed in Canada by DRAXIS Pharmaceutica, our Canadian pharmaceutical sales and marketing division. In July 2003, we sold the DRAXIS Pharmaceutica division to Shire BioChem Inc. (Shire).
IF THE MARKET DOES NOT ACCEPT OUR PRODUCTS CURRENTLY IN DEVELOPMENT, OUR BUSINESS COULD BE HARMED.
There can be no assurance that any of our products currently in development or our recently approved products will achieve market acceptance. The degree of market acceptance will depend upon a number of factors, including the receipt of regulatory approvals (generic and innovative products), the establishment and demonstration in the medical community of the clinical efficacy and safety of our products (innovative products), the establishment and demonstration of their potential advantages to existing and new diagnostic and treatment methods and the reimbursement policies of government and third-party payers and most importantly, the launching of competing products by our competitors that become established prior to the launch of our products in development. There can be no assurance that physicians, patients, payers or the medical community in general will accept and utilize any existing or future products.
We anticipate that we will face increased competition in the future as new products enter the market and advanced technologies become available. There can be no assurance that existing products or new products developed by our competitors will not be more effective, or be more effectively marketed and sold, than any of the products that may be developed, manufactured or sold by us. Competitive products may render our products obsolete and uncompetitive prior to recovering our research, development or commercialization expenses incurred with respect to any such products.
For example, in a press release dated March 27, 2006, we announced that although our product FIBRIMAGEÒ had met primary end points in its Phase III clinical trial in Canada, further market analysis had shown that new technologies have successfully captured the current deep venous thrombosis indications and there is no longer an economically interesting market opportunity at this time in either the at-risk asymptomatic patient, or those with symptoms. We further indicated that we had decided that no significant further work will be conducted in the development of this product for its current indications but that other potential opportunities for this product would be explored.
We currently have other products in development that could be exposed to this risk.
With respect to our radiopharmaceutical operations, we believe that the only radiopharmaceutical imaging products on the market at this time which may compete with DRAXIMAGEs INFECTON® product under clinical development (Phase II in Canada, U.S. and U.K.) are NeutroSpec® and LeukoScan®. In July 2004, Mallinckrodt (a business unit of Tyco Healthcare) and Palatin Technologies, Inc. (Palatin) announced that they had received FDA approval to market and
manufacture NeutroSpec® (formerly known as LeuTech®), a Technetium-labeled monoclonal antibody that binds to white blood cells and is indicated for diagnosing difficult-to-diagnose appendicitis, which will compete with our INFECTON® product currently in Phase II development. On December 19, 2005, Palatin announced that, as a result of the safety concerns raised in connection with the use of NeutroSpec® identified during routine pharmacovigilance, Palatin and Mallinckrodt decided to voluntarily suspend the sales, marketing and distribution of NeutroSpec® and recall existing customer inventories of this product. In addition, Immunomedics, Inc. announced in January 2005 that it received Health Canada approval for the marketing and use of LeukoScan® for the detection of osteomyelitis. LeukoScan® is a murine monoclonal IgG antibody fab fragment labeled with Tc-99m. We believe that INFECTON® will be capable of distinguishing inflammation from infection and as such would offer an advantage over agents that bind to white blood cells and which cannot distinguish between infection and inflammation.
To our knowledge, there are two approved somatostatin-based imaging products in the marketplace which may compete with our SOMATOSCAN® product currently in pre-clinical development: OctreoScan® from Tyco International Ltd. and NeoTect® from Berlex Laboratories Inc. Both of these molecules offer similar information but OctreoScan® is based on Indium-111 and is more expensive than Tc-99m-based NeoTect® and must be delivered in radioactive form. We are aware that development work is also being done on other somatostatin-based cancer therapy products that would compete with Somatostatin Therapy. We believe that by enabling the same molecule to be used for both diagnosis and therapy, physicians may have a greater ability to deliver therapeutic quantities of radiation specifically to well-defined targets in the body with our product.
With respect to our licensed technology, no significant competition for ANIPRYL® has been experienced to date in Canada or the United States from products approved for veterinary or human use. However, there are other treatments available that have not been approved in Canada or the United States to treat canine Cushings disease, but which we believe may be being used off-label for canine Cushings disease: LYSODREN® (mitotane) by Bristol-Myers Squibb Co., which was approved for use in the treatment of human inoperable cancer of the adrenal gland, and NIZORAL® (ketoconazote) tablets by Johnson & Johnson Inc., an anti-fungal medication, which was approved for the treatment of various internal and external fungal and yeast infections in humans. We believe that human use selegiline used for the treatment of Parkinsons disease, although not approved for veterinary use, may also compete with the use of ANIPRYL® in dogs.
WE DO NOT HAVE THE SAME AMOUNT OF RESOURCES AS SOME OF OUR COMPETITORS.
Many of our existing or potential competitors, particularly large pharmaceutical companies, have substantially greater financial, technical and human resources than we do. In addition, many of these competitors have significantly greater experience in undertaking research, preclinical studies and human clinical trials of new pharmaceutical products, obtaining regulatory approvals, manufacturing and marketing such products. Accordingly, our competitors may succeed in commercializing products more rapidly or effectively than us.
WE OPERATE IN A VERY COMPETITIVE MARKET.
DRAXIS Pharma, our contracting manufacturing division, competes with pharmaceutical companies that have in-house manufacturing capabilities as well as with third-party contract manufacturers, including Hospira Inc., Boehringer Ingelheim, Cardinal Health, Inc., DPT Laboratories, Haupt Pharma AG, Patheon Inc., Hollister-Stier Laboratories LLC and DSM Pharmaceuticals, Inc.
DRAXIMAGE, our radiopharmaceuticals division, competes with the following companies that have significant radiopharmaceutical operations: Bristol-Myers Squibb Company, Cardinal Health, Inc., Amersham Health, part of GE Healthcare (GE Amersham Healthcare), Tyco International Ltd., Schering AG, and Bracco SpA. In addition, there are a number of companies that are developing and/or marketing other radiopharmaceutical products, including MDS Nordion Inc., Immunomedics, Inc., Biogen Idec Inc. and NeoRx Corporation.
FAILURE OF ONE OF OUR CURRENT OR FUTURE CLINICAL TRIALS COULD HAVE A MATERIALLY NEGATIVE IMPACT ON OUR FUTURE PROSPECTS.
The development of new products is subject to a number of significant risks. Potential products that appear to be promising in various stages of development may not reach the market for a number of reasons. Such reasons include, but are not limited to, the possibility that the potential product will be found ineffective or unduly toxic during preclinical or clinical trials, fails to receive necessary regulatory approvals, be difficult to manufacture on a large scale, be uneconomical to market or not achieve market acceptance, or be precluded from commercialization by proprietary rights of third parties. Certain products we are attempting to develop have never been manufactured on a commercial scale, and there can be no assurance that such products can be manufactured at a cost or in a quantity to render such products commercially viable. Production of such products may require the development of new manufacturing technologies and expertise. The impact on our business in the event that new manufacturing technologies and expertise would have to be developed is uncertain. Many of our potential products will require significant additional research and development efforts and significant additional preclinical and clinical testing prior to any commercial use. There can be no assurance that we will successfully meet any of these technological challenges or others that may arise in the course of product development.
Before obtaining regulatory approval for the commercial sale of any innovative product under development, we must demonstrate through preclinical studies and clinical trials that the product is safe and efficacious. As of March 31, 2006, our INFECTONÒ product is in Phase II trials in Canada, the U.S. and the U.K. The results of preclinical studies and early-stage clinical trials may not be totally predictive of results obtained in larger late-stage clinical trials, and there can be no assurance that our clinical trials will demonstrate safety and efficacy, achieve regulatory approvals or result in marketable products. A number of companies in the biotechnology and pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after achieving promising results in earlier clinical trials.
OUR PROFIT DEPENDS IN PART ON REIMBURSEMENT POLICIES AND REGULATIONS OF GOVERNMENT HEALTH ADMINISTRATION AUTHORITIES, PRIVATE HEALTH INSURERS AND OTHER ORGANIZATIONS.
The business and financial condition of pharmaceutical companies will continue to be affected by the efforts of governments and third-party payers to contain or reduce the costs of healthcare through various means. For example, in certain markets, pricing or profitability of pharmaceutical products, medical devices and diagnostic products is subject to government control. In Canada, the Patented Medicine Prices Review Board (PMPRB) monitors and controls prices of patented drug products marketed in Canada. The PMPRB may assert jurisdiction over our products under development which may limit the prices that can be charged for such products in Canada. We may not be able to obtain prices for our products under development that will make them commercially viable exclusively in Canada. In the United States there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar pricing controls by government. In addition, the emphasis on managed healthcare in the United States has increased and will continue to increase the
pressure on pharmaceutical pricing. While we cannot predict whether such legislative or regulatory proposals will be adopted or the effects such proposals or managed healthcare efforts may have on our business, the announcement of such proposals or efforts could have a material adverse effect on the market price of our securities and, if adopted, on our business and financial condition and that of our current and prospective customers. Accordingly, our ability to establish strategic alliances may be adversely affected. In addition, in Canada, the United States and elsewhere, sales of prescription pharmaceutical products and radiopharmaceutical products are dependent, in part, on the availability of reimbursement to the consumer from third-party payers, such as government and private insurance plans. Third-party payers are increasingly challenging the prices charged for medical products and services. To the extent we succeed in bringing new products to market, there can be no assurance that these products will be considered cost-effective and that reimbursement to consumers will be available or will be sufficient to allow the sale of these products on a competitive basis.
Risks Related to our Company
WE ONLY HAVE ONE MANUFACTURING FACILITY AND FACTORS BEYOND OUR CONTROL COULD CAUSE AN INTERRUPTION IN OUR MANUFACTURING OPERATIONS, WHICH WOULD ADVERSELY AFFECT OUR REPUTATION IN THE MARKETPLACE AND OUR RESULTS OF OPERATIONS.
All of our manufacturing facilities are located in the same location in Kirkland, Québec. To succeed, we must be able to operate our manufacturing facilities without significant interruption and deliver radiopharmaceutical and contract manufacturing products in a timely manner. We could suffer an interruption in our manufacturing operations caused by damage from a variety of sources, many of which are not within our control, including fire, flood, earthquake and other natural disasters; power loss and telecommunication failure; disruption to transportation systems; equipment or machinery failure; software and hardware errors, failures or crashes and similar disruptions; or undue delays or restrictions with air transport systems and cross-border shipments. Any significant interruptions in our manufacturing operations or our ability to deliver time-sensitive products would damage our reputation in the marketplace and have a negative impact on our results of operations. For example, during the third quarter of 2005, DRAXIS Pharma, our contract manufacturing operating division, extended its regularly scheduled summer shutdown period at the beginning of the third quarter in the sterile area of our manufacturing facility, in order to correct an electrical panel failure and make associated repairs. The revalidation of the entire sterile area following these repairs and the related recalibration of production schedules due to this interruption had material financial implications which negatively affected our third and fourth quarter results. As a further example, if there was a cessation of flights leaving Canada for the U.S., then the radiopharmaceutical products manufactured by DRAXIMAGE, which are delivered in part via airplanes, could not be delivered to customers on a timely basis and our products would be harmed due to their short shelf-life. Also, if there was a prolonged loss of hydroelectric power at our manufacturing facility, then the manufacturing of our products may be impaired because we may not have sufficient back-up electrical power from independent generators for the duration of the hydroelectric interruption. Although we believe that we carry adequate property and business interruption insurance, we cannot provide any assurance that we will be able to maintain such insurance coverage at a reasonable cost or in sufficient amounts to protect us against all potential eventualities.
IF OUR COLLABORATIVE AND COMMERCIAL RELATIONSHIPS WITH THIRD PARTIES ON WHOM WE RELY ARE UNSUCCESSFUL, OUR BUSINESS MAY SUFFER.
To be successful, we must continually establish and maintain strategic relationships with leaders in a number of biotechnology and pharmaceutical industry segments. This is critical to our success because such relationships enable us to extend the reach of our products and sales in various
jurisdictions, generate additional revenue and develop and deploy new products in various marketplaces. Entering into strategic relationships is complicated, as some of our current and future strategic partners may decide to compete with us in some or all of the markets in which we operate or refuse to fulfill or honor their contractual obligations to us. In addition, our relationships with customers always require us to manufacture products in accordance with their specifications that are issued to us from time to time. If we are unable to meet our customers specifications, our strategic relationships would be harmed. We currently have strategic relationships with (i) Pfizer Consumer Healthcare, a division of Pfizer Canada, Inc. (Pfizer Canada), that covers several non-prescription products for the Canadian market, including Polysporin®, Sudafed®, Actifed® and Zincofax®, (ii) Genzyme Corporation (Genzyme) to manufacture Hectorol® Injection, (iii) GlaxoSmithKline Inc. (GSK) to supply it with established sterile products marketed by GSK in multiple international markets and a prescription sterile injectable product for the U.S. market and (iv) Cardinal Health 414, Inc. in respect of our Iodine I-131 kits, MAA, DTPA and MDP products sold in the U.S.
A SIGNIFICANT PORTION OF OUR BUSINESS IS DEPENDENT ON A SMALL NUMBER OF KEY CUSTOMERS.
For the year ended December 31, 2005, our three largest customers, Genzyme, GSK and Pfizer Canada, represented 58% of our consolidated revenues (23%, 22% and 13% respectively). The termination by any of these customers of its relationship with us would have a material adverse effect on our business, financial condition and results of operations unless we could replace those customers in a timely fashion.
IF OUR COLLABORATORS, EMPLOYEES, OR CONSULTANTS DISCLOSE OUR CONFIDENTIAL INFORMATION TO OTHERS DESPITE CONFIDENTIALITY AGREEMENTS IN PLACE, OUR BUSINESS MAY SUFFER.
Our practice is to require our employees, collaborators, consultants and outside scientific advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships. These agreements provide that all confidential information developed or made known to the individual during the course of the individuals relationship with us is to be kept confidential and not disclosed to third parties, subject to certain specific limited exceptions. In the case of employees, the agreements provide that all inventions conceived by the individual shall be our exclusive property. These agreements, however, may not provide meaningful protection for our trade secrets or adequate remedies in the event of unauthorized use or disclosure of such information. For example, trade secrets regarding the recipe to manufacture one of our radiopharmaceutical kit or capsule products could be disclosed, allowing our competitors to copy the recipe and manufacture a competing product.
WE ARE SUBJECT TO REGULATION BY GOVERNMENTS IN MANY JURISDICTIONS AND, IF WE DO NOT COMPLY WITH MANUFACTURING, NUCLEAR SAFETY AND ENVIRONMENTAL REGULATIONS, OUR EXISTING AND FUTURE OPERATIONS MAY BE CURTAILED, AND WE COULD BE SUBJECT TO LIABILITY.
Pharmaceutical drug manufacturing is a highly regulated industry, requiring significant documentation and validation of manufacturing processes and quality control assurance prior to approval of the facility to manufacture a specific drug. There can be considerable transition time between the initiation of a contract to manufacture a product and the actual initiation of manufacture of that product. Any lag time in the initiation of a contract to manufacture a product and the actual initiation of the manufacturing at our facilities could cause us to lose profits.
We have in place facilities and procedures designed to reduce and, to the extent possible,
eliminate the risk of environmental contamination resulting from the processing of raw materials and, more specifically, from the radiopharmaceutical business of DRAXIMAGE and the contract manufacturing business of DRAXIS Pharma. We also have in place regular maintenance programs to ensure continued compliance with all applicable health and safety, environmental and nuclear safety regulations. We believe that the operations at our manufacturing facilities comply in all material respects with applicable health and safety, environmental and nuclear safety laws. As of December 31, 2005, we have not received any notice stating that we are not in compliance with any such legislation applicable to us.
Canadian and U.S. federal, state, local and provincial regulations govern extensively the use, manufacture, storage, handling, transport and disposal of hazardous material and associated waste products. Although we believe that the operations at our facilities comply in all material respects with applicable laws, we cannot completely eliminate the risk of substantial environmental liabilities especially in respect of environmental contamination resulting from the processing of raw materials from the radiopharmaceutical business of DRAXIMAGE and the manufacturing business of DRAXIS Pharma. Any failure by us or any of our subsidiaries to comply with such present or future laws could result in any of the following: (i) cessation of portions or all of our or our subsidiaries operations; (ii) imposition of fines; (iii) restrictions on our or our subsidiaries ability to carry on or expand our operations; (iv) significant expenditures by us in order to comply with laws and regulations; or (v) liabilities in excess of our resources.
OUR BUSINESS COULD BE HARMED IF THERE WERE A DISPUTE OR DISRUPTION WITH OUR UNIONIZED EMPLOYEES.
The products manufactured by DRAXIS Pharma represent a significant amount of our consolidated revenues. 68.9% of our consolidated revenues for the year ended December 31, 2005 were derived from DRAXIS Pharma. Although a collective agreement with a five-year term to April 30, 2008 was ratified, by DRAXIS Pharma, in February 2004 with the United Food & Commercial Workers International Union, Local 291 (AFL-CIO), there can be no assurance that future labor difficulties will not arise, and if they did arise then the production and delivery of those products manufactured by DRAXIS Pharma would be impaired for the duration of those labor difficulties.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO GROW, AND IF WE ARE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY, WE MAY INCUR UNEXPECTED EXPENSES AND BE UNABLE TO MEET OUR CUSTOMERS REQUIREMENTS.
We will need to maintain, expand and upgrade our manufacturing facilities and operations to execute current commercial obligations to customers, widen our customer base and increase manufacturing efficiencies over the next few years. We cannot be certain that DRAXIS Pharma will be able to enter into enough lucrative third-party manufacturing contracts to increase its profitability. If we do secure advantageous agreements, we cannot be certain that our employees, systems, procedures, controls, productive capacity and existing space will be adequate to support expansion of the operations. Our future operating results will depend on the ability of our officers and key employees to manage changing business conditions and to implement and improve our technical, administrative, financial control and reporting systems and operational excellence in order to achieve established business objectives. An unexpectedly large increase in the volume of manufacturing business or the number of orders placed by customers may require us to expand capacity and further upgrade our manufacturing facilities and the technology related to our manufacturing. We may not be able to project the rate of timing of such increases or customer demands accurately or to expand and upgrade our manufacturing facilities and supporting systems and infrastructure to accommodate such increases. Difficulties in managing future growth and meeting customers expanded requirements could have a significant negative
impact on our business and its profitability.
OUR FINANCIAL RESULTS MAY FLUCTUATE, AND OUR FUTURE REVENUE AND PROFITABILITY ARE UNCERTAIN.
Our ability to achieve and maintain profitability in the foreseeable future depends on the commercial success of our products and services. Because we will be launching or are in the process of launching new products in new markets such as our Sodium Iodide I-131 Capsules USP, Diagnostic-Oral in the U.S., revenues are difficult to predict and may fluctuate substantially from period to period. In addition, product development programs will require substantial additional investment, including the cost of clinical trials for innovative products, obtaining additional regulatory approvals, if necessary, and marketing and sales expenses associated with potential new product introductions. Our manufacturing facilities will continue to require capital investment in order to maintain, upgrade and expand their operations. The success of DRAXIMAGE and DRAXIS Pharma will rely significantly on the ability of both divisions to maintain and to increase substantially their manufacturing capabilities to satisfy customer demand. There can be no assurance that, or when, we will successfully develop, receive regulatory approvals for, or manufacture or market any new products for our own marketing purposes or for third parties. DRAXIS Pharma may fail to secure sufficiently lucrative third-party manufacturing contracts to increase its profitability. In addition, DRAXIS Pharma may lose anticipated volumes of new products if the customers for whom it manufactures said products do not receive required approvals for the commercial sale of same. DRAXIS Pharma may also lose anticipated volumes of existing products if its customers lose market share for products due to decreased demand for said products. DRAXIMAGE may fail to increase its market penetration of its radioactive products, particularly in the U.S. DRAXIMAGE may also fail to increase its international sales of its key Tc-99m kits and Iodine I-131 products, particularly in Europe. The research, development, production and marketing of new products will require the application of considerable technical and financial resources by us and our customers, while revenues that are generated by such products, if successfully developed and marketed, may not be realized for several years. We may not be able to sustain profitability. We may require external financing to complete certain aspects of our three-year strategic plan, and external sources of capital may not be available to us at an acceptable cost.
IF WE CANNOT ADAPT TO CHANGING TECHNOLOGIES, OUR PRODUCTS AND SERVICES MAY BECOME OBSOLETE AND OUR BUSINESS COULD SUFFER.
Because the biotechnology, pharmaceutical and radiopharmaceutical industry is characterized by technology change and obsolescence, we may be unable to anticipate changes in our current and potential customer requirements that could make our existing technology obsolete. Our success will depend, in part, on our ability to continue to enhance our existing products and services, develop new technology that addresses the increasing sophistication and varied needs of our respective customers, license leading technologies and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. The development of our proprietary technology and investing in certain niche markets entails significant technical and business risks. We may not be successful in using our new technologies or exploiting our niche markets effectively or adapting our businesses to evolving customer requirements or emerging industry standards.
WE ARE EXPOSED TO EXCHANGE RATE FLUCTUATIONS WHICH COULD NEGATIVELY AFFECT OUR BUSINESS.
A substantial portion of our consolidated revenues are now, and are expected to continue to be, realized in U.S. dollars. Our operating expenses are primarily paid in Canadian dollars. We may be adversely affected by a significant and rapid strengthening of the Canadian dollar against the U.S.
dollar, should the Canadian dollar rise in value compared to the U.S. dollar by more than 10 cents. We do not currently use derivative instruments to hedge our foreign exchange risk and currently have no plans to do so in the near future. For fiscal year 2005, U.S. dollar revenue accounted for approximately 50% of the Companys consolidated revenue. During this same period, the value of the U.S. dollar versus the Canadian dollar decreased by 3.5% from January 1, 2005 to December 31, 2005. As a result, in 2005 we had to charge to income approximately $398,000 due to foreign exchange translation losses related to the strengthening of the Canadian dollar.
IF WE LOSE THE SERVICES OF KEY PERSONNEL, WE MAY BE UNABLE TO REPLACE THEM, AND OUR BUSINESS COULD BE NEGATIVELY AFFECTED.
Our success depends on the retention of principal members of our management staff, including Dr. Martin Barkin, Mr. Dan Brazier, Mr. Jean-Pierre Robert and Mr. John Durham and on our ability to continue to attract, motivate and retain additional key personnel. We have employment agreements with all our key management, with no fixed terms of duration. We have key man insurance on the lives of Dr. Martin Barkin, Mr. Jean-Pierre Robert and Mr. John Durham. The market for retaining and obtaining such key personnel is intensely competitive, and the loss of the services of key personnel or the failure to recruit necessary replacement and additional personnel in a timely manner could materially and adversely affect operations.
ALTHOUGH WE CONSIDER THE COMPANY TO HAVE GOOD DEFENSES TO SUCH ACTIONS, SHOULD THE CURRENT LAWSUITS AGAINST US SUCCEED, WE COULD INCUR A SUBSTANTIAL LOSS.
In 1998, a Canadian legal proceeding was launched against us and our subsidiary DAHI by a former consultant, Jozsef Knoll, claiming royalty entitlements based on the net profit from sales of ANIPRYL®. Total damages claimed are $100 million, including a claim to certain shares of DAHI. However, the plaintiff has taken no steps in the last six years to move the claim forward. While we believe that we have good defenses to the Knoll proceeding, this dispute may not be resolved in our favor, if it is pursued. It is possible that a court or arbitration tribunal may find us to be in breach of certain agreements, or infringing validly issued patents of third parties or practicing the intellectual property of others. In that event, in addition to the cost of defending the underlying proceeding, we may have to pay license fees, additional royalties and/or damages and may be ordered to assign certain ANIPRYL®-related patents and be prohibited from conducting certain activities. Under such circumstances, we could incur substantial loss and our business could be negatively affected.
On July 22, 2005, we announced that, together with other defendants, we had received a Statement of Claim filed before the Superior Court of Justice of Ontario alleging that PermaxÒ, a drug that we distributed in Canada for a third party manufacturer prior to July 2003, causes compulsive/obsessive behaviour, including pathological gambling. The plaintiff is seeking to have this action certified as a class action. We believe this claim against us is without merit and we intend to vigorously defend this proceeding and any motion for certification. Prior to July 2003, PermaxÒ was distributed in Canada by DRAXIS Pharmaceutica, our Canadian pharmaceutical sales and marketing division. In July 2003, we sold the DRAXIS Pharmaceutica division to Shire.
Risks Related to our Common Shares
OUR COMMON SHARE PRICE HAS BEEN, AND IS LIKELY TO CONTINUE TO BE, VOLATILE.
The market prices for the securities of pharmaceutical and biotechnology companies,
including ours, have historically been volatile, and the market has, from time to time, experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. For the last two years, the price of our stock has ranged from a low of $3.18, to a high of $5.94 on NASDAQ (CDN$4.12 to CDN$7.90 on the Toronto Stock Exchange). We believe that in 2005 the volatility in the share price and volumes of shares traded was impacted by financial results that differed from market expectations, particularly in the second half of the year as a result of the extended shutdown of production at DRAXIS Pharma for sterile products. We believe that in 2004 the appreciation in the share price and volumes of shares traded increased due to improvements in financial performance and increased visibility resulting from an equity offering of shares during the first half of 2004.
Factors such as fluctuations in our operating results, announcements of competing technological innovations or new products by our competitors, clinical trial results, governmental regulation and enforcement actions, developments in patent or other proprietary rights, public concern as to the safety of drugs developed by us or others and general market conditions can have an adverse effect on the market price of our shares. In particular, the realization of any of the risks described herein could have a material adverse impact on such market price. Unusual sales of substantial amounts of our shares in the public market over a relatively short time period, or the perception that such sales will occur, could also adversely affect the market price of our shares and make it more difficult in the future for us to raise funds through equity offerings.
DRAXIS is a specialty pharmaceutical company providing products in three categories: sterile products, non-sterile products and radiopharmaceuticals. Sterile products include liquid and freeze-dried (lyophilized) injectables and sterile ointments. Non-sterile products are produced as solid oral, liquid and semi-solid dosage forms. Radiopharmaceuticals are used for both therapeutic and diagnostic molecular imaging applications. In the radiopharmaceutical category, DRAXIS has its own products and a targeted research and development program for new products. As of January 1, 2005, all of the operations of the Company are carried out through our wholly owned subsidiary DRAXIS Specialty Pharmaceuticals Inc., which operates two major divisions, DRAXIS Pharma (contract manufacturing) and DRAXIMAGE (radiopharmaceuticals). For the year ended December 31, 2005, 68.9% of our consolidated revenues were derived from DRAXIS Pharma (contract manufacturing) and 24.3% of our consolidated revenues were derived from DRAXIMAGE (radiopharmaceuticals).
In addition, DRAXIS has continuing financial interests associated with its collaboration agreements with Pfizer Inc. with respect to ANIPRYL®, and with Shire with respect to Canadian sales of products divested in 2003.
Our consolidated operations are integrated across research, product development, manufacturing, sales and marketing, as well as the in-licensing and commercial development of radiopharmaceutical products and technologies.
DRAXIS has emerged from a transitional phase of its development. In past years, we were reliant on income earned from ANIPRYL®. For the year ended December 31, 2005, our collaboration agreement with Pfizer Inc. with respect to ANIPRYL® represented 6.3% of our consolidated revenues which represented the majority of our income from royalties and licensing. In the near term, we expect to continue to lessen this reliance as we continue to develop a diversified profit base from our other business units. In particular, we expect radiopharmaceuticals and contract manufacturing to remain major sources of longer-term revenue and earnings.
The common shares of DRAXIS are listed on the Toronto Stock Exchange (ticker symbol DAX) and on NASDAQ (ticker symbol DRAX). The shares of DRAXIS are included in the NASDAQ Biotechnology IndexÒ (NASDAQ: NBI) since May 23, 2005 and the NASDAQ Healthcare IndexÒ (symbol: IXHC) since July 27, 2005.
Our registered and head office is located at 6870 Goreway Drive, 2nd Floor, Mississauga, Ontario, Canada L4V 1P1. Telephone: (905) 677-5500. Fax: (905) 677-5494.
The Companys only manufacturing, research and development facilities are located at 16751 Trans-Canada Road, Kirkland, Québec, Canada H9H 4J4.
The Companys website is: www.draxis.com.
History and Development of the Company
The Company was incorporated under the name Deprenyl Research Limited on October 13, 1987 under the Canada Business Corporations Act. The Company was founded principally to engage in the marketing in Canada of prescription pharmaceuticals discovered, developed or acquired by Chinoin Pharmaceutical and Chemical Works Co. Ltd., the first of which was ELDEPRYL® (selegiline;
1-deprenyl), for the treatment of Parkinsons disease. We changed our name to DRAXIS Health Inc. in May 1994.
We completed an initial public offering of our common shares in February 1988 on the Toronto Stock Exchange. Our common shares were listed on NASDAQ in August 1989.
Beginning in 1990, we expanded on our knowledge and experience with selegiline by initiating directly on our own behalf, as well as through contract research arrangements, studies designed to investigate the potential of selegiline for companion animal use. This initiative ultimately resulted in the formation of our subsidiary DAHI, through which we developed and commercialized a companion animal health product, ANIPRYL®.
In 1991, we began to invest in the applications of aminolevulinic acid photodynamic therapy, which resulted in the formation of a subsidiary, DUSA Pharmaceuticals, Inc. (DUSA). Through a series of transactions from 1991 to 1996, we divested all of our interest in DUSA.
By late 1992, we faced considerable uncertainty due to the impending threat of generic competition for ELDEPRYL® which, at that time, still accounted for almost 100% of our consolidated revenues. Faced with this as well as other business challenges, in 1992 we began the process of recruiting new senior management to develop and implement a new strategic business plan for the Company to (i) address the generic threat to our lead drug by expanding and diversifying our established Canadian pharmaceuticals franchise; (ii) strengthen our financial position; and (iii) diversify from our historical Canadian base through the acquisition of niche pharmaceutical products and/or manufacturing-oriented businesses with international growth potential.
Since 1993, we implemented the following corporate development initiatives:
1993 to 1999 acquisition and licensing of several prescription and non-prescription products for the Canadian market, predominantly products for neurological disorders.
March 2003 return of Canadian rights to affiliates of Elan Corporation, plc (Elan) for several neurological products that had not achieved regulatory approval in Canada.
July 2003 sale to Shire of Canadian marketing rights for substantially all remaining products of our Canadian sales and marketing division (DRAXIS Pharmaceutica).
March 1996 disposition of our remaining interest in DUSA for net proceeds of $6.8 million.
April 1996 public offering of 3,000,000 common shares generating net proceeds of $8.5 million.
March 2003 receipt of $6.5 million from Elan for Canadian rights to unapproved neurology products.
July 2003 receipt of $9.6 million from Shire for Canadian marketing rights for substantially all of the remainder of our divested Canadian sales and marketing division.
April 2004 purchase from SGF Santé Inc. (SGF) of its remaining 32.7% interest in our contract manufacturing operations, DRAXIS Pharma Inc. (now known as DRAXIS Pharma, a division of DRAXIS Specialty Pharmaceuticals Inc.).
April 2004 closing of an equity financing offering of 3,053,436 units, consisting of one common share of the Company and one half share purchase warrant per unit, for gross proceeds of $13.4 million.
December 2004 repayment of all third-party debt.
December 2005 we initiated a Normal Course Issuer Bid to buy back on the Toronto Stock Exchange for cancellation up to 3,522,530 of our common shares, representing up to 10% of the public float on December 6, 2005. As at March 20, 2006, 199,200 shares have been repurchased and cancelled at an average market price plus commission of $4.49 (CDN$5.18).
November 1996 acquisition of the shares of DAHI that we did not previously own through a mandatory share exchange transaction valued at $17.4 million.
July 1997 $8.6 million acquisition of Mercks radiopharmaceutical business which became DRAXIMAGE Inc. (now known as DRAXIMAGE, a division of DRAXIS Specialty Pharmaceuticals Inc.).
December 1997 licensing of ANIPRYL® to Pfizer in return for milestone payments, royalties, a manufacturing supply agreement and a research collaboration. Cumulatively, to December 31, 2005, $44.5 million has been received in milestone payments, royalties and royalty-related payments from Pfizer.
May 1998 $11.1 million acquisition of our contract manufacturing facility in Kirkland, Québec.
Beginning in 1998, we embarked on a capital expansion plan for construction of our new lyophilization line, the construction of our radiopharmaceutical manufacturing facilities and the subsequent expansion of our radiopharmaceutical operations.
In late 1999 and early 2000, we undertook a strategic review of our operations from the perspective of enhancing shareholder value. As a result of this review, we resolved to focus our financial and management resources on our radiopharmaceutical and contract manufacturing businesses.
During 2000, we divested our dermatology product lines for aggregate proceeds of $9.0 million. The largest transaction in this regard was the sale of the SpectroPharm® line of products to Block Drug Company (Canada) Limited (now part of GlaxoSmithKline Consumer Healthcare).
In February 2000, we established a strategic alliance with SGF with the sale of a 34.1% equity interest in DRAXIS Pharma Inc. (now known as DRAXIS Pharma, a division of DRAXIS Specialty Pharmaceuticals Inc.) to SGF and certain members of DRAXIS Pharmas management team.
During 2001, we received U.S. and Canadian regulatory approvals for our expanded radiopharmaceutical manufacturing facility and FDA acceptance to manufacture sterile lyophilized and sterile injectable products.
In March 2001, we in-licensed INFECTON®, a Technetium 99m-based radiopharmaceutical for the imaging of infection.
Also during 2001, DRAXIMAGE launched BrachySeed® I-125 in the U.S. and Canada and received regulatory approvals in the U.S. and Canada for BrachySeed® Pd-103.
In 2001, we further implemented our strategic plan by (i) initiating the production of Bracco Diagnostic Inc.s sodium iodide I-131 radiotherapy capsules; (ii) signing a long-term supply agreement to manufacture several GSK products (predominantly sterile) for multiple international markets; and (iii) amending the ANIPRYL® licensing agreement with Pfizer resulting in a $3.1 million cash payment to the Company plus the return of product rights outside of North America to us.
During 2002, we achieved improved financial results from continuing operations. We also received several regulatory approvals, including (i) U.S. and Canadian approval to transfer production of DRAXIMAGEs line of lyophilized medical imaging products to our own manufacturing facility, (ii) U.S. approval to commence production at DRAXIS Pharma of a prescription sterile injectable product for GSK for the U.S. market and (iii) U.S. approval to manufacture solid dosage form products at DRAXIS Pharma.
During 2003, we achieved a number of significant accomplishments, including:
U.K. regulatory approval to manufacture multiple sterile and non-sterile pharmaceutical products at DRAXIS Pharma.
In January 2003, commencement of a Phase I trial in Canada for INFECTON®, a Technetium-99m-based radiopharmaceutical for imaging infection.
Following the termination of the distribution agreement with Cytogen early in 2003, commencement of direct sales of BrachySeed® in the U.S.
In March 2003, launch in the U.S. of a new radiotherapeutic Iodine I-131 kit product for the treatment of thyroid cancer and hyperthyroidism.
In March 2003, receipt of $6.5 million from affiliates of Elan, for the return of Canadian rights for several of Elans neurology products.
In June 2003, appointment of John Durham as President of DRAXIS Pharma, promotion of Mark Oleksiw to Chief Financial Officer and additional realignment of our executive management team.
In July 2003, completion of the divestiture of DRAXIS Pharmaceutica, our Canadian pharmaceutical sales and marketing division to Shire, for $9.6 million in cash plus up to $2.9 million in market-driven contingent milestones.
In July 2003, commencement of Phase II trials in Canada for INFECTON®.
In November 2003, the Company, the University of Toronto and the Universitys Innovations Foundation agreed to dismiss lawsuits between them related to ANIPRYL® without payment by the Company or DAHI.
In December 2003, DRAXIMAGE became certified under ISO 9001:1994, including ISO 13485:1996, an international standard for medical device manufacturers. Said ISO certifications were only required for the marketing and sale of BrachySeedÒ. DRAXIMAGEs ISO certifications will expire on July 14, 2006 and will not be renewed as DRAXIMAGE announced in November 2005 that it would discontinue the manufacture and sale of implantable brachytherapy seeds as of December 15, 2005.
During 2004, the Company achieved a number of significant accomplishments, including:
On April 22, 2004, we issued 3,053,436 units of the Company at a purchase price of $4.82 (CDN$6.55) per unit, for aggregate proceeds net of related expenses of $13.4 million (CDN$18.2 million). Each unit consists of one common share of DRAXIS and one-half of one share purchase warrant. Each whole warrant entitles the holder to acquire one common share of DRAXIS at a price of CDN$8.50 at any time prior to April 24, 2006.
On April 22, 2004, DRAXIS acquired SGFs 32.7% interest in DRAXIS Pharma for cash consideration of $9.6 million (CDN$13 million). DRAXIS used part of the proceeds from the offering completed in April 2004 to pay for the acquisition and to repay $3.1 million (CDN$4.2 million) in debt owed by DRAXIS Pharma to SGF and $1.7 million (CDN$2.3 million) in debt owed by DRAXIS Pharma to Investissement Québec.
In June 2004, we negotiated new credit facilities with our bankers, the National Bank of Canada, providing an operating facility of CDN$15 million (or U.S. equivalent), payable within 364 days of drawing upon the facility and a term facility of CDN$10 million (or U.S. equivalent), repayable in full in three years. As at December 31, 2005, no amount was drawn on either facility.
In November 2004, we received FDA approval for a DRAXIMAGEÒ brand of Iodine-131 therapeutic capsules.
In December 2004, we repaid all of our third-party debt.
During 2005, we achieved a number of significant accomplishments, including:
As of January 1, 2005, we amalgamated our two wholly-owned subsidiaries, DRAXIS Pharma Inc. and DRAXIMAGE Inc., to achieve certain business and tax efficiencies. The amalgamated subsidiary, called DRAXIS Specialty Pharmaceuticals Inc., will continue to conduct business as two divisions, DRAXIS Pharma (contract manufacturing) and DRAXIMAGE (radiopharmaceuticals), and serve as our operating arm.
In February 2005, we announced that DRAXIMAGE had received approval from the Dutch regulatory authority for its kit for the preparation of Technetium Tc-99m Albumin Aggregated Injection (MAA Kit). This approval allowed DRAXIMAGE to initiate the Mutual Recognition Procedure (MRP) in pursuit of further regulatory approvals for the diagnostic imaging product in additional European Union countries.
In April 2005, we announced the appointment of Mr. Jean-Pierre Robert as the new President of the DRAXIMAGE division effective as of May 9, 2005.
In October 2005, we announced the appointment of Mr. Dan Brazier to the newly created position of Chief Operating Officer.
In November 2005, DRAXIMAGE announced that it would discontinue the manufacture and sale of implantable brachytherapy seeds as of December 15, 2005.
In January 2006, we announced we had received approval from the FDA for our supplemental drug application for Sodium Iodide I-131 Capsules USP, Diagnostic-Oral.
In a press release dated March 27, 2006, we provided an update on DRAXIMAGEs research and product development strategy. We indicated that in the near term of one to three years DRAXIMAGE would focus on currently marketed significant radiopharmaceutical and imaging products whose patents have expired or are close to expiring, and sestamibi injection (for cardiac imaging) in particular. We also announced that a major opportunity under development by DRAXIMAGE was the production and distribution of a next generation version of a Technetium Generator, which is the source of Tc-99m in virtually every radiopharmacy. We indicated that for the medium term, in a three to five year horizon, the highest priority opportunity being pursued by DRAXIMAGE is the continued development of INFECTONÒ. We also announced that although our product FIBRIMAGEÒ had met primary end points in its Phase III clinical trial in Canada, further market analysis had shown that new technologies have successfully captured the current deep venous thrombosis indications and there is no longer an economically interesting market opportunity at this time in either the at-risk asymptomatic patient, or those with symptoms. We further indicated that we had decided that no significant further work will be conducted in the development of this product for its current indications but other potential opportunities for this product would be explored.
For information concerning the Companys capital expenditures and methods of financing, please see Item 5: Operating and Financial Review and Prospects.
We believe that both DRAXIMAGE and DRAXIS Pharma have significant long-term growth potential and have invested considerable financial and management resources in developing these businesses, including:
$6.5 million of investments establishing the first of two sterile lyophilization (freeze-drying) units at DRAXIS Pharma to provide in-house manufacturing of the DRAXIMAGEÒ radiopharmaceutical imaging kits as well as third-party contract manufacturing services;
$12.0 million of investments in a three-year capital plan at DRAXIS Pharma announced in April 2002, including a state-of-the-art raw material dispensing facility, additional autoclave capacity, and expansion of our existing lyophilization capacity which was completed in 2004 and which became operational in 2005;
$4.7 million of investments in the construction and later expansion of DRAXIMAGEs radiopharmaceutical production facilities and capabilities, including its robotic manufacturing lines;
the continued development of the DRAXIMAGE product pipeline, specifically INFECTON®. We have spent $1.7 million in developing INFECTONÒ during the period between 1998 and 2005 inclusively.
These initiatives are consistent with our general business strategy to:
Focus on specialty pharmaceutical markets in which we can develop and sustain a competitive advantage.
DRAXIS has focused its operations on two core businesses: radiopharmaceuticals and specialty pharmaceutical contract manufacturing. Both businesses target highly differentiated, specialized markets which feature significant regulatory requirements and specialized manufacturing requirements and standards.
Develop new pharmaceutical products and services consistent with our strengths and capabilities.
DRAXIS has established a growing franchise in the highly differentiated radiopharmaceutical segment with a portfolio of over 34 currently marketed products plus innovative proprietary products in various stages of development. In addition to our radiopharmaceutical platform, our expanding lyophilization capability positions us to offer new services to customers and to take advantage of growth opportunities in contract manufacturing.
Pursue growth opportunities with international market potential.
We are leveraging our capabilities, experience and regulatory compliance in radiopharmaceuticals and manufacturing to expand our product and service offerings in the United States, Europe and other international markets.
Leverage alliances with customers.
We are pursuing multiple opportunities with new and existing customers. Meeting the strict quality and service standards of such customers positions us to expand on these relationships in both our radiopharmaceuticals and pharmaceutical contract manufacturing businesses.
Our primary operational focus for 2006 continues to be: (i) improving near-term financial and operational performance of our radiopharmaceutical and manufacturing businesses through increasing sales of existing products and services, improving manufacturing efficiency and effectiveness, and obtaining additional regulatory approvals; and (ii) securing and advancing our base for long-term growth through the development of our existing product pipeline as well as identifying new business opportunities that are consistent with our capabilities and that contribute to the long-term value of the Company.
Consistent with this strategic focus, we divested our dermatology product lines in 2001 and in 2003 completed the sale of our prescription pharmaceutical sales and marketing business, DRAXIS Pharmaceutica. We also realigned our senior management responsibilities in 2003 to focus on our core businesses and in 2005 created the position of Chief Operating Officer to provide executive oversight to our core operating businesses.
The following is a description of the principal markets in which we operate and a breakdown of total revenues by segment and geographic market for the three most recent financial years(1):
(1) See Note 20 in our 2005 Consolidated Financial Statements and Notes beginning on page F-1
(2) Revenues are attributable to countries based upon the location of the customer.
Our two main operating businesses, radiopharmaceuticals and contract manufacturing (sterile and non-sterile products), are not characterized by significant seasonality. However, plant activities at DRAXIS Pharma (contract manufacturing) are generally reduced or shut down once a year for approximately two to four weeks in order to conduct regular required maintenance.
DRAXIMAGEs principal raw materials are radioactive isotopes that are used to label other compounds that act as carriers or molecular targeting agents. The isotopes are obtained from companies and agencies that are licensed by governmental regulators to produce purified radioactive chemicals. Radioactive materials, by their nature, decay over time some rapidly and some more slowly, depending on specific isotopes. Therefore, DRAXIMAGE receives shipments of chemical-grade radioisotopes several times each week and converts these to finished products within days or weeks. While prices of selected isotopes can be somewhat volatile over the medium term, DRAXIMAGE endeavors to negotiate long-term supply arrangements with appropriate suppliers, especially for the more important isotopes such as radioactive Iodine.
DRAXIS Pharma, as a contract manufacturer of pharmaceutical products, obtains its chemical raw materials from approved chemical suppliers of both active pharmaceutical ingredients (API) and inactive or excipient ingredients such as fillers, stabilizers, preservative agents and coloring agents. In most instances the API is supplied by the customer. DRAXIS Pharma conducts full quality control testing of all ingredients and packaging materials before they are incorporated into the finished product. Prices of principal API are not generally volatile, although prices can vary between alternative suppliers.
Contract Manufacturing (DRAXIS Pharma)
Contract manufacturing accounted for 68.9% of our consolidated revenues for the year ended December 31, 2005. Our DRAXIS Pharma division is responsible for our contract pharmaceutical manufacturing and has capabilities in a broad range of dosage forms, specializing in liquid and lyophilized (freeze-dried) injectables and other sterile products. Operating out of a cGMP-compliant 247,000-square-foot facility located in Kirkland, Québec, DRAXIS Pharma manufactures pharmaceutical
products for DRAXIMAGE, as well as for over 20 other pharmaceutical clients in many international jurisdictions.
Key business development transactions involving DRAXIS Pharma have included:
May 1998 $11.1 million acquisition of DRAXIS Pharmas pharmaceutical manufacturing facility.
July 1999 signing of a five-year manufacturing supply agreement with Warner-Lambert Canada Inc. (now known as Pfizer Consumer Healthcare, a division of Pfizer Canada Inc.). In September 2005, the Company announced that Pfizer Canada had renewed this agreement for a three year term effective January 1, 2005.
February 2000 sale of 34.1% equity interest to SGF and DRAXIS Pharma senior management for net proceeds of $5.4 million.
December 2001 signing of a long-term manufacturing and supply agreement for the renewal and expansion of DRAXIS Pharmas existing contract manufacturing relationship with GSK.
March 2003 initiation of production under a manufacturing and supply agreement with Bone Care International, Inc. (now Genzyme) for Hectorol® Injection.
April 2004 acquisition by the Company of SGFs 32.7% interest in DRAXIS Pharma and repayment of $3.1 million (CDN$4.2 million) in debt owed by DRAXIS Pharma to SGF and $1.7 million (CDN$2.3 million) in debt owed by DRAXIS Pharma to Investissement Québec.
In 2004, we completed a three-year, $12 million capital plan at DRAXIS Pharma, including the installation of a second lyophilizer. The capital plan also included new sterile manufacturing capabilities to support then recently announced contracts, improvements to production line efficiency, improvements to infrastructure, new raw material handling facilities and supporting systems to maintain the DRAXIS Pharma facility at the forefront of regulatory compliance. DRAXIS Pharmas three-year, $12 million capital plan was initially financed through loans and equity investment from DRAXIS Pharmas shareholders, loans from Investissement Québec and internally generated funds. The equity was repurchased and the loans were repaid in April 2004 from the proceeds of the Companys public offering.
Since DRAXIS acquired DRAXIS Pharma, DRAXIS Pharmas revenues have risen from $6.1 million for the eight-month period ended December 31, 1998 to $54.7 million for the year ended December 31, 2005.
DRAXIS Pharmas business goal is to become a leading supplier of high-value-added, high-margin contract pharmaceutical manufacturing services. Key components of DRAXIS Pharmas strategy to achieve this goal include:
obtaining and maintaining all required regulatory approvals for DRAXIS Pharmas manufacturing facility;
securing additional manufacturing contracts with existing and new customers;
focusing on DRAXIS Pharmas distinctive capabilities in sterile and lyophilized product manufacturing;
providing manufacturing and related services to DRAXIS other businesses; and
focusing on operational excellence, including regulatory compliance, cost-effectiveness and customer service.
Overview of Pharmaceutical Contract Manufacturing
In a report prepared by CIBC World Markets (Equity Research) and dated December 3, 2002 entitled Pharmaceutical Contract Manufacturing, it was estimated that the manufacturing portion of the $400 billion global pharmaceutical market was $50 billion, with approximately $13 billion outsourced. Since 2002, we believe that the contract manufacturing market for pharmaceuticals has continued to grow.
The secondary, or dosage-form, manufacturing segment that is currently outsourced was further estimated to be approximately $5.5 billion with an anticipated near-term growth in the 10% 15% range.
The reasons pharmaceutical companies outsource manufacturing include:
productivity benefits plant utilization rates in the pharmaceutical industry are declining and have created increased need to lower operating costs;
moving assets off the balance sheet contract manufacturers are a solution to high levels of industry assets tied up in under-utilized facilities;
leveraging external expertise third-party contractors provide a logical route to specialist services and access to updated technologies; and
pharmaceutical industry consolidation continuing mergers will likely force rationalization of manufacturing capacity.
The Company believes that there is currently a significant global shortage of sterile lyophilization capacity and that this sector offers significantly higher margin growth potential for DRAXIS Pharma due to its technical complexity and its increasing demand as a favored dosage form for biotechnology products in particular.
DRAXIS Pharma believes that the key competitive factors in the contract manufacturing industry include the reliability of supply, quality of product, strict compliance with governmental regulations, capacity availability, competitive pricing and the technical and manufacturing ability to produce a full range of quantities from small pilot batches often required for clinical trials to larger commercial quantities.
DRAXIS Pharma competes with pharmaceutical companies that have in-house manufacturing capabilities as well as with third-party contract manufacturers, including Hospira Inc., Boehringer Ingelheim, Cardinal Health, Inc., Hollister-Stier Laboratories LLC, DPT Laboratories, Haupt Pharma AG, Patheon Inc. and DSM Pharmaceuticals, Inc.
DRAXIS Pharma is a customer-driven pharmaceutical contract manufacturing division that is positioned to manufacture a variety of dosage forms. DRAXIS Pharma is one of a few existing full-scale pharmaceutical contract manufacturing facilities in Canada that has FDA-approved sterile manufacturing and sterile lyophilization capabilities.
Plant operations at our manufacturing facilities in Kirkland, Québec are organized into four manufacturing areas, supported by packaging and warehousing and distribution functions.
Lyophilization is the preferred dosage form for a broad range of sterile products that are unstable in liquid form. Lyophilization is a complex process of freeze-drying in which a liquid solution is frozen under vacuum and all water is removed, leaving behind a stable, dry, sterile powder that has a relatively long shelf life and is easily reconstituted into a liquid form prior to use. Products delivered in a lyophilized dosage form include injectable pharmaceuticals, vaccines, biotechnology proteins or peptides and diagnostic products.
DRAXIS Pharmas existing sterile manufacturing capabilities were enhanced by the addition of sterile lyophilization, which became fully operational and approved by the FDA in the latter half of 2001. This fully automated line includes a vial washer, a depyrogenation tunnel, an in-line filling machine, robot loaders and unloaders, the freeze-drier unit and a capper. This first freeze-drier has a capacity based on 11 square meters (120 square feet) of shelf space, while the second unit installed in 2004, at 24 square meters (254 square feet) of shelf space, has double the shelf space.
In 2004, the Company completed a three-year, $12 million capital plan for DRAXIS Pharma, including the addition of the second lyophilizer, new sterile manufacturing capabilities to support recently announced contracts, improvements to production line efficiency, improvements to infrastructure, new raw material handling facilities and supporting systems to maintain DRAXIS Pharma at the forefront of regulatory compliance.
The second lyophilizer was incorporated into DRAXIS Pharmas existing lyophilization facility. The specialized facility was originally designed to readily accommodate this second lyophilizer at a cost significantly less than that of the initial installation with minimal disruption to ongoing production.
The second lyophilization unit completed validation and began commercial production during 2005. At optimum configuration and given the appropriate mix of lyophilization cycles, the second lyophilizer could potentially allow us to approximately triple existing lyophilization capacity over time. We did not achieve full capacity utilization on this new lyophilizer in 2005. The transfer and introduction of some current products and new products to this lyophilizer will continue to occur in 2006 and beyond.
The Sterile Products Department (SPD) includes preparation and pharmaceutical areas with manufacturing, filling and inspection rooms for the manufacture of injectable liquids, ophthalmic and otic products. We believe that DRAXIS Pharma possesses one of the most modern facilities of its kind in Canada approved for the manufacture of sterile prescription pharmaceuticals for Canada, the United States and other global markets.
Including the new lyophilization line, SPD covers approximately 17,100 square feet and is designed for segregated operations complemented by secure access controls.
Computerized systems are utilized for both topical and automated ointment lines in order to optimize process control. Both of these lines are closed-loop systems to ensure sterile integrity. The sterile ointment system utilizes a patented automated system to place tubes on the fillers, thereby minimizing human intervention.
The processes that are incorporated in the operation include aseptic manufacturing and filling, terminal sterilization, clean in place (CIP), and sterilize in place (SIP). The dosage forms/product types manufactured include solutions in ampoules and vials, suspensions and solutions in drop dose form and ointments in tubes. The department currently has the capacity to fill vials ranging in size from 5 ml to 30 ml, ampoules ranging in size from 1 ml to 10 ml, and 3.5 g tubes.
The 16,000-square-foot Ointments, Creams and Liquids (OCL) Department offers substantial flexibility in production scale. Production of ointments and creams utilizes a gravity-fed system and incorporates segregated wash areas and clean storage areas for equipment.
Batch capability in the OCL Department varies from 200 to 18,000 liters and incorporates four dedicated packaging lines. Interconnecting tanks can be utilized where required, thereby providing production flexibility. Fully automatic validated CIP systems ensure the purity of each customers product. Product is pumped to two of the packaging lines and gravity fed to the other two lines. Dosage forms/product types manufactured include creams, ointments, lotions, syrups, shampoos, gels and suspensions.
The Solid Dosage Department covers approximately 10,300 square feet of space and is comprised of two suites for granulating powders prior to compression plus four isolated compression suites in which the powders are pressed into tablets and caplets of various forms and sizes. The first granulation suite is designed for large-batch blending, granulating and drying, while the second granulation suite is equipped with smaller scale equipment that can be used for small production or pilot batches.
Each granulation and compression suite has its own testing equipment and cleaning area. The rooms are isolated and have purpose-built airflow systems to contain powder.
Dosage forms and product types manufactured in this department include tablets in bottles and blisters, caplets in bottles and blisters, and powders.
The Packaging Department covers approximately 51,000 square feet and incorporates an open space with movable separations that provide flexibility in the packaging area featuring several packaging lines. Segregated zones are defined for de-boxing, filling and secondary packaging. Bar coding ensures complete control of all packaging components.
Within the department there are packaging lines for ointments and creams, a line for liquid packaging, lines for tablets (bottles and blisters), a sterile product packaging line which includes automatic inspection and a line dedicated for lyophilized products and topical packaging. The inspection
of finished sterile products in glass ampoules includes automated inspection by a leak pinhole detector. An automatic inspection machine has been validated to detect particles in sterile products packaged in vials and ampoules. These products may also be inspected manually.
Several packaging types can be accommodated, including jars, bottles (glass and plastic), blisters, vials and ampoules. The department handles a wide variety of product types, including caplets, tablets, creams, ointments and liquids.
Manufacturing operations at DRAXIS Pharma, from receipt of raw material and packaging ingredients, through compounding, dosage form processing, filling, labeling and packaging, to final product release by quality control, are all conducted in accordance with cGMP requirements and other appropriate international regulatory standards. Regular inspections of facilities, production processes, and control and validation systems, as well as employee training programs, are conducted by DRAXIS Pharma, by U.S., Canadian and international governmental regulatory agencies and by customer inspection teams throughout the year. DRAXIS Pharma maintains a distinct internal team to provide effective liaison with various external inspection groups.
DRAXIS Pharma has a strong regulatory track record. This includes 12 successful audits of its facilities in 2005 (2 regulatory inspections and 10 clients audits) and 5 successful audits of its facilities in 2004 (1 regulatory inspection and 4 client audits).
Warehousing and Distribution
The warehousing and distribution facilities at DRAXIS Pharma at our facilities in Kirkland, Québec, allow additional manufacturing flexibility and efficiency. A five-tier pallet-racking warehouse has a full height of 29 feet, covers approximately 48,900 square feet of space and has six shipping and receiving docks. The warehouse has separately locked areas, including refrigeration units to control sensitive raw materials and finished goods. In 2004, a third autoclave was installed to support terminal sterilization of products.
DRAXIS Pharma also has a raw material storage and dispensing area, which provides an improved environment for the handling and accurate dispensing of raw materials. This installation improves the flow of material and personnel and is equipped with a ventilation system and state-of-the-art dust containment technology.
DRAXIS Pharma manufactures prescription and non-prescription pharmaceutical products for more than 20 pharmaceutical companies (excluding Inter-Company) pursuant to manufacturing supply contracts. Such contract manufacturing represented 68.9% of our consolidated revenues for the year ended December 31, 2005. A significant portion of this contract manufacturing business is focused on our three largest customers, Genzyme, GSK and Pfizer. See Risk Factors Risks Related to our Company A Significant Portion of our Business is Dependent on a Small Number of Key Customers.
In April 2002, DRAXIS Pharma entered into an agreement with Bone Care International, Inc. (now Genzyme) to produce Hectorol® Injection for sale in the U.S., and we began commercial shipments of the sterile injectable product in March 2003. A Manufacturing and Supply Agreement was signed on
March 3, 2003. Production of Hectorol® Injection increased substantially throughout 2005. The agreement is for a five-year term.
On December 18, 2001, DRAXIS Pharma finalized supply and related agreements with GSK for the renewal and expansion of an existing contract manufacturing relationship between the companies. The products transferred to DRAXIS Pharma were all established, sterile products marketed by GSK in multiple international markets. In 2002, a prescription sterile injectable product for the U.S. market was added under this contract and commercial production of this product commenced in the second quarter of 2002. During 2002, site transfer and related activities associated with the other GSK products continued and production started in the second quarter of 2003 and ramped up through 2003 and 2004 with full production achieved by the end of 2004. DRAXIS Pharma will manufacture the products covered by the agreement until it receives a termination notice from GSK which may be given by a two-year advance written notice given on or after December 31, 2007.
On July 1, 1999, DRAXIS Pharma entered into a five-year manufacturing and supply agreement with Warner-Lambert Canada Inc. (now known as Pfizer Consumer Healthcare, a Division of Pfizer Canada Inc.) covering several non-prescription products for the Canadian market, including Polysporin®, Sudafed®, Actifed® and Zincofax®. Manufacturing of these products commenced in early 2000. On September 1, 2005, DRAXIS announced it had renewed its agreement with Pfizer Canada for a three year term, effective January 1, 2005.
Commencing in early 2002, DRAXIS Pharma became the FDA-approved manufacturing site for DRAXIMAGEs lyophilized Tc-99m Kits. In addition, DRAXIS Pharma has been qualified as the manufacturing site for ANIPRYL® tablets.
As at December 31, 2005, DRAXIS Pharma had 385 employees (representing 78.2% of the Companys employees), consisting of: 36 managerial employees, 41 clerical employees, 61 quality operations employees and 247 unionized hourly employees. The unionized hourly employees are represented by the United Food & Commercial Workers International Union, Local 291 (AFL-CIO). A collective agreement with a five-year term to April 30, 2008 was ratified in February 2004. DRAXIS Pharma has no significant unresolved issues with the union. See Risk Factors Risks Related to our Company Our Business Could be Harmed if there were a Dispute or Disruption with our Unionized Employees.
Former Equity Partners
From February 2000 to April 2004, SGF and senior management of DRAXIS Pharma held a non-controlling equity interest in DRAXIS Pharma Inc. (now known as DRAXIS Pharma, a division of DRAXIS Specialty Pharmaceuticals Inc.). In 2002 and 2003, DRAXIS Pharma Inc. (now known as DRAXIS Pharma, a division of DRAXIS Specialty Pharmaceuticals Inc.) repurchased and cancelled shares held by a former DRAXIS Pharma employee and members of DRAXIS Pharmas management team in exchange for cash and settlement of existing loans. In April 2004, the Company acquired from SGF its 32.7% interest in DRAXIS Pharma and also repaid $3.1 million (CDN$4.2 million) in debt owed by DRAXIS Pharma to SGF.
Radiopharmaceuticals accounted for 24.3% of our consolidated revenues for the year ended December 31, 2005. Our DRAXIMAGE division is responsible for discovering, developing, manufacturing, and marketing our diagnostic imaging and therapeutic radiopharmaceutical products for the global nuclear medicine marketplace. Nuclear medicine entails the use of radioactive drugs (radiopharmaceuticals) for imaging and therapeutic purposes. The energy released as these products decay can be harnessed to: (i) elicit a visual representation of various organs and tissues (nuclear imaging); or (ii) destroy cancerous cells (radiotherapy). Products currently marketed by DRAXIMAGE include a line of lyophilized Technetium-99m kits used in nuclear imaging procedures and a line of imaging and therapeutic products labeled with a variety of isotopes, including radioiodine. DRAXIMAGE also has a number of products in development, including a Technetium-99m-based diagnostic imaging product, INFECTON®, for which two of four Phase II trials conducted in Canada and the U.S. have been completed as of December 31, 2005. Market research studies to define the target market population and appropriate clinical applications are underway and are expected to be completed in time to guide the design of future studies, which are expected to begin in 2006 or 2007. In April 2006, an expert panel is scheduled to review preliminary Phase II clinical results and to discuss potential target markets and to advise the Company on the design of further clinical studies and appropriate indications. Given the inherent uncertainties associated with new drug development, it is difficult to predict if, or when, this product will achieve commercialization.
Founded in 1950 as a division of Charles E. Frosst & Co., the predecessor business to DRAXIMAGE pioneered and became a leader in the medical application of nuclear technology after assuming the development function from Atomic Energy of Canada Ltd. Following the 1965 acquisition of Charles E. Frosst & Co. by Merck Inc. (Merck), the business continued operations as a division of Mercks Canadian subsidiary, Merck Frosst Canada and Co. (Merck Frosst), until its acquisition by DRAXIS in 1997. As part of the acquisition, the Company retained all of the businesss managers, scientists and employees as well as its existing products and intellectual property.
The acquisition of this business was consistent with our strategy of acquiring specialty pharmaceutical platforms with potential for expansion into global markets. We believe that DRAXIMAGE is the only company that manufactures I-131 radiopharmaceutical products in Canada.
DRAXIMAGE and its predecessor have a long history of technological and scientific progress in the field of radiopharmaceuticals. Notable achievements include the development of lyophilized kits for the in-situ preparation of Technetium-99m (Tc-99m) radiopharmaceutical products for nuclear medical imaging (Tc-99m Kits); the development of chelates for the indium/yttrium and Technetium/rhenium groups of metals; and the development of stabilizers for use in iodinated radiopharmaceuticals, which resulted in DRAXIMAGE being one of the few providers to market iodinated products that do not require refrigeration.
Key business development transactions involving DRAXIMAGE have included:
July 1997 $8.6 million acquisition of the Canadian radiopharmaceutical division of Merck Frosst, which began operations through DRAXIMAGE Inc. (now known as DRAXIMAGE, a division of DRAXIS Specialty Pharmaceuticals Inc.).
June 1988 establishment of a strategic alliance with Molecular Targeting Technology, Inc. (MTTI), to develop, manufacture and market potential novel imaging agents. The first opportunity pursued under this alliance was AMISCANÔ, an agent for the imaging of acute myocardial infact.
October 1999 licensing from Isogenic Science Ltd. (Isogenic) of the rights to Isogenics proprietary technology related to radioactive brachytherapy implants (BrachySeed®) for the treatment of various localized cancers.
July 2000 signing of a non-exclusive distribution agreement with Syncor International Corporation (now known as Cardinal Health 414, Inc.) for the production of a kit for the preparation of Sodium Iodide I-131 Capsules and Oral Solution indicated for the treatment of thyroid cancer and hyperthyroidism for sale in the U.S.
December 2000 entering into license, distribution and supply agreements for BrachySeed® for the U.S. market with Cytogen Corporation.
March 2001 licensing from BTG International Limited (formerly known as the British Technology Group) of the rights to INFECTON®, an agent for imaging infection.
October 2001 long-term third-party manufacturing agreement to supply Bracco Diagnostics Inc. with sodium iodide I-131 radiotherapy capsules for the U.S. market.
April 2003 termination of license, distribution and supply agreements with Cytogen Corporation for BrachySeed® for the U.S. market.
May 2003 expansion of agreements with Isogenic for global rights to proprietary technology related to brachytherapy implants.
July 2003 extension and expansion of strategic partnership with Bristol-Myers Squibb Canada Co. (Bristol-Myers Canada) for the marketing and distribution of radiopharmaceutical products in Canada.
August 2003 amendment to the July 2000 agreement with Cardinal Health, 414 Inc. to enable DRAXIMAGE to distribute the new radioactive Iodine I-131 kit product to independent radiopharmacies in the U.S.
February 2005 announcement that DRAXIMAGE had received approval from the Dutch regulatory authority for its kit for the Preparation of Technetium Tc-99m Albumin Aggregated Injection (MAA Kit). This approval allowed DRAXIMAGE to initiate the Mutual Recognition Procedure (MRP) in pursuit of further regulatory approvals for the diagnostic imaging product in additional European Union countries.
August 2004 termination of Phase II clinical trial in Canada and U.S. with respect to AMISCANÔ and discontinuance of any further development work with respect to AMISCANÔ.
April 2005 announcement of the appointment of Mr. Jean-Pierre Robert as the new President of the DRAXIMAGE division.
November 2005 DRAXIMAGE announced it would discontinue the manufacture and sale of implantable brachytherapy seeds as of December 15, 2005.
January 2006 DRAXIMAGE announced it had received approval from the FDA for its supplemental new drug application for Sodium Iodide I-131 Capsules USP, Diagnostic-Oral
DRAXIMAGEs growth strategy is to leverage its history and experience in the research, development, manufacture and distribution of radiopharmaceutical products and services and to capitalize on its manufacturing capabilities. In particular, DRAXIMAGEs business strategy includes:
Increasing the market penetration of its radioactive products, particularly in the U.S.;
Increasing international sales of its key Tc-99m Kits and Iodine I-131 products, particularly in Europe;
Timely, cost-effective development of its portfolio of proprietary, innovative imaging and therapeutic radiopharmaceutical products; and
Identifying and capitalizing on additional new business opportunities and strategic partnerships which are consistent with DRAXIMAGEs capabilities, including the monitoring of products that will come off patent protection in key markets that can be manufactured, marketed and sold by DRAXIMAGE and monitoring products that are owned by third parties and which could be divested in the consolidation that is taking place in the radiopharmaceutical industry.
Overview of Radiopharmaceuticals
The medical specialty of nuclear medicine involves the use of short-lived radioisotopes for both diagnostic imaging and therapeutic applications. Pharmaceutical products used in such applications are commonly called radiopharmaceuticals. Radiopharmaceuticals represent a well-defined, growing niche market that involves challenges such as regulatory approvals, specialized manufacturing standards, access to supply and critical delivery logistics.
The diagnostic imaging applications of nuclear medicine normally involve the intravenous administration of a radiopharmaceutical consisting of a targeting molecule that has a particular binding affinity for a specific organ or tissue linked to a low intensity, short-lived, gamma-emitting radioisotope such as Tc-99m. Following administration, the radiopharmaceutical with its radioactive isotope concentrates at the biological target, which is then imaged using a scanning device such as a gamma camera. A gamma camera consists of a scintillation crystal which, when placed over a region of the body, is capable of detecting gamma rays emitted by radionuclides in underlying tissues. This imaging modality is also referred to as gamma scintigraphy. The gamma camera and its associated computerized peripheral devices accurately measure the radiation being emitted by the radioisotope and so provide both a visual picture of the target and quantitative data concerning the distribution of radioactivity.
A nuclear medicine image provides both static and functional, or dynamic, information about a biological target, thereby revealing functional and morphological information normally unobtainable by other imaging techniques such as X-ray, magnetic resonance imaging, computer tomography, and ultrasound, all of which provide primarily anatomical information.
Nuclear medical imaging procedures are established and trusted medical procedures with many years of safe and effective use. Most procedures are non-invasive, are performed with a minimum of discomfort and inconvenience to the patient and are normally less costly and involve less risk than other currently available high-tech alternative techniques.
Increasingly, therapeutic radiopharmaceuticals are being used and new products are being developed for the treatment of disease, particularly for the treatment of various cancers. Examples of currently marketed therapeutic radiopharmaceuticals include:
various sodium iodide I-131 products for the diagnosis and treatment of thyroid cancer and hyperthyroidism;
phosphorous-32 for the palliation of bone pain for patients with advanced bone metastases; and
I-131 meta-iodobenzylguanidine (MIBG) for the treatment of neuroblastoma.
New generations of anti-cancer agents based on targeting molecules such as peptides, proteins, metabolites and monoclonal antibodies that have binding affinities to the surface of cancerous cells are being developed to be linked to more potent, higher-intensity, beta-emitting radioisotopes such as yttrium-90, rhenium-186, holmium-166 and lutetium-199. There is a growing body of scientific evidence that molecules, thus bound, will permit the delivery of therapeutic quantities of radiation directly to malignant cells.
The radiopharmaceutical field is highly specialized, particularly in the therapeutic area. Challenges include meeting pharmaceutical product and nuclear regulatory requirements, having the ability to handle radioactive materials and establishing facilities and procedures to manufacture products in a sterile lyophilized or freeze-dried form, which involves manufacturing standards higher than those typically employed for most pharmaceutical products. In addition, manufacturing and distribution logistics systems must be well-integrated and supportive to ensure that radiopharmaceutical products can be produced rapidly and delivered to the end user in a timely manner with the prescribed level of strength.
Companies with significant radiopharmaceutical operations include Bristol-Myers Squibb Company, Cardinal Health, Inc., GE Amersham Healthcare, Tyco International Ltd., Schering AG, and Bracco SpA. In addition, there are a number of companies that are developing and/or marketing other radiopharmaceutical products, including MDS Nordion Inc., Immunomedics, Inc., Biogen Idec Inc. and NeoRx Corporation.
DRAXIMAGEs products are divided into two groups: (i) radioactive products, which are in a radioactive and ready-to-use form when shipped to customers, and (ii) non-radioactive products (predominantly Tc-99m Kits). The kit products are sold in lyophilized (freeze-dried), non-radioactive form consisting of sterile, pyrogen-free complexes of chemical and/or biological substances. Tc-99m Kits are reconstituted with radioactive Tc-99m in the nuclear medicine laboratory of a hospital or a unit-dose service supplier, or radiopharmacy, prior to use.
Radioactive products, which are shipped by DRAXIMAGE with the radioactive isotope already incorporated, are distributed to the nuclear medicine departments of hospitals or diagnostic clinics in a ready-to-use form.
The following table summarizes the DRAXIMAGE radioactive products. All products listed have received approval for sale by the applicable regulatory body in the territory in which the product is sold.
Sodium Iodide I-131 Radiotherapy
In October 2001, DRAXIMAGE entered into a third-party manufacturing contract to supply sodium iodide I-131 radiotherapy capsules for Bracco Diagnostics Inc. for the U.S. market for the treatment of thyroid cancer and hyperparathyroidism.
In January 2003, DRAXIMAGE received FDA approval to produce and market a new radiopharmaceutical kit product for the preparation of Sodium Iodide I-131 Capsules and Oral Solution for the treatment of thyroid cancer and hyperthyroidism. This was the first such product on the market that allows physicians and radiopharmacists to prepare an FDA-approved I-131 gelatin capsule or oral solution. In March 2003, DRAXIMAGE launched the new kit product and initiated shipments to the Nuclear Pharmacy Services group of Cardinal Health 414, Inc., under a five-year, non-exclusive distribution agreement for the product for the United States and its possessions. As of 2003, this product was made available to other customers and distributors in the U.S.
In November 2004, DRAXIMAGE received FDA approval for a DRAXIMAGEÒ brand of I-131 therapeutic capsules.
In November 2005, DRAXIMAGE announced it had received FDA approval for a new larger format of its I-131 kit for the preparation of Sodium Iodide I-131 Capsules and Oral Solution.
In January 2006, DRAXIMAGE announced it had received approval from the FDA for its supplemental new drug application for Sodium Iodide I-131 Capsules USP, Diagnostic-Oral. These diagnostic Sodium Iodide I-131 Capsules are intended to be used by physicians to perform the radioactive iodide (RAI) uptake test to evaluate thyroid function prior to treatment with stronger therapeutic doses of Sodium Iodide I-131. Diagnostic doses of Sodium Iodide I-131 may also be employed in localizing metastases associated with thyroid malignancies. DRAXIMAGE plans to introduce the new diagnostic capsules in the U.S. market during the first half of 2006.
In November 2005, DRAXIMAGE announced it had initiated a process to discontinue the manufacture and sale of implantable brachytherapy seeds by December 15, 2005 as part of an orderly exit from the brachytherapy market. To minimize inconveniences to customers, we announced that DRAXIMAGE had established a customer supply alternative with Oncura, Inc.
DRAXIMAGE currently markets the following non-radioactive products. All products listed have received approval for sale by the applicable regulatory body in the territory in which the product is sold.
DRAXIMAGEs major non-radioactive products are its MDP, DTPA and MAA Tc-99m diagnostic imaging kits. While these products would technically be classified as generic pharmaceutical products, DRAXIMAGEs versions are proprietary and are sold under the DRAXIMAGEÒ trademark or that of its local distributors. All three of these products feature a proprietary formulation that provides additional shelf life following reconstitution compared to competitive products.
On October 25, 1995, Frosst Radiopharmaceuticals, a division of Merck Frosst Canada Inc. (now known as DRAXIMAGE) entered into a non-exclusive distribution agreement with Syncor International Corporation (now known as Cardinal Health 414, Inc.) for distribution in the U.S. of DTPA, a kit used to prepare Tc-99m Pentetate to study kidney clearance, and MDP, a kit used to prepare Tc-99m Methylene
Diphosphonic Acid to study bone metabolism. The initial term was for five years, with automatic renewal of the agreement for successive two-year periods.
Prior to 2002, DRAXIMAGE produced Tc-99m kits at its Merck Frosst location. Following FDA approval of the Companys new lyophilization production facilities in early 2002, the resulting increased manufacturing capacity provided the opportunity to increase sales volumes of these products in existing markets in the U.S. and Canada and to build new markets in Europe and Asia, territories in which product approvals are either already in place or expected to be granted in the near future.
In March 2004, DRAXIMAGE received approval from the FDA to produce and market a new formulation of MDP, called MDP-25, a kit for the preparation of Technetium Tc-99m Medronate Injection. In September 2005, MDP-25 was approved by Health Canada.
Products under Development
As of March 31, 2006, DRAXIMAGE had the following products under development:
The clinical development of radiopharmaceutical imaging agents differs from that of therapeutics in several areas. While therapeutics are developed to offer improved efficacy and safety in the treatment of a specific disorder, radiopharmaceutical imaging agents are elaborated for demonstrating the existence and extent of a specific condition. Therefore the trial design for establishing efficacy is not the same. In the case of radiopharmaceutical imaging agents the endpoint is the actual image. The analysis is therefore centered around various quantitative and qualitative aspects of the image. For example, the image quality is assessed at various time points to determine the time to best quality. Also a blinded read of images is conducted to determine the accuracy as well as the sensitivity and specificity of the test in comparison to the modality that is currently accepted as the gold standard. In order for the test to be useful across clinical sites the inter-rater reliability should also be high. This is an important endpoint that is measured by a weighted Kappa test. These are the main efficacy considerations for radiopharmaceutical imaging agents. The analysis of safety is similar to that of therapeutic agents and includes the usual vital sign monitoring as well as the capturing of side effects through adverse event reporting.
Description - INFECTON®, a complex of Tc-99m and the anti-bacterial agent ciprofloxacin, is a novel agent for the specific imaging of infection. INFECTON® acts by binding directly to infecting
organisms and so is expected to be highly specific for imaging infection. It is anticipated that INFECTON® may be used to image a number of serious medical conditions, including fever of unknown origin, osteomyelitis (bone infection), wound infection, abdominal abscess, pneumonia, appendicitis, and tuberculosis. Many of these conditions are difficult to diagnose even by invasive means or by surgery.
Technology Partner - INFECTON® was discovered by Drs. Britton and Solanki at St. Bartholomews Hospital in London, England. In March 2001, DRAXIMAGE entered into an agreement with BTG International Limited (formerly known as the British Technology Group). The agreement gives DRAXIMAGE exclusive rights to manufacture and sell INFECTON® in the U.S., Canada, South America and Europe. DRAXIMAGE has a sub-license from Bayer AG for the diagnostic imaging use of their ciprofloxacin.
Regulatory Status - INFECTONs® proof of principle was established in a series of clinical trials sponsored by the International Atomic Energy Agency involving 879 patients in several countries outside North America in which INFECTON® displayed excellent results, with a sensitivity of 88.3%, a specificity of 86.5%, and an accuracy of 87.6%. The clinical studies showed that the agent achieves up to 96% specificity in detecting bacteria in the lungs, bones and tissues areas where other diagnostics have failed in the past.
In January 2003, DRAXIMAGE initiated a Phase I clinical trial of INFECTON® in Canada, conducted by Dr. Raymond Taillefer at Hôpital Hotel-Dieu at the Centre Hospitalier du lUniversité de Montréal. The study involved 10 healthy subjects in an open-label, single-center, single-dose safety, pharmacokinetic and radiation dosimetry study. Whole body images were taken at various intervals after injection of INFECTON® to visualize distribution of the imaging agent throughout the body over time. The Phase I study was completed during the first half of 2003. INFECTON® was found to be safe and well tolerated by the subjects at the administered dosages. The results of a Phase I trial do not provide enough evidence regarding safety to support an application for marketing with the FDA or the HPFBI, as applicable, and additional tests are conducted and submitted in support of any application for approval. Subsequent results often do not corroborate earlier results.
In July 2003, DRAXIMAGE initiated two Phase II clinical studies of INFECTON® in Canada. The first of the Phase II studies was a single-dose, open-label, multi-center trial involving 30 diabetic patients suffering from clinically confirmed bacterial infections of the foot. The second study examined and compared the uptake of INFECTON® in patients with either a known soft tissue infection or a chronic inflammatory condition that is sterile. A total of 50 patients with definitive bacterial infections or confirmed chronic aseptic inflammatory conditions were enrolled in the single-dose, open-label, multi-center trial. Twenty-five patients from each group were included in the trials. By the end of 2005, enrollment in the first study was 97% complete and enrollment in the second study fully completed. In September 2004, the Company received approval from the FDA to initiate a Phase II clinical trial in the U.S. - single-dose, open-label, multi center trial involving 22 patients suffering from bacterial osteomyelitis. Enrolment in this Phase II trial was fully completed by the end of 2005. In March 2005, the Company initiated a fourth Phase II clinical trial in the U.S. This trial is a single-dose, open-label, multi-center trial involving 21 patients and will examine patients suffering from suspected appendicitis. This study also recruited patients in the U.K. Market research studies to define the target market population and appropriate clinical applications are underway and are expected to be completed in time to guide the design of future studies, which are expected to begin in 2006 or 2007. In April 2006, an expert panel is scheduled to review preliminary Phase II clinical results and to discuss potential target markets and to advise the Company on the design of further clinical studies and appropriate indications. Given the inherent uncertainties associated with new drug development, it is difficult to predict if, or when, this product will achieve commercialization.
Competing Diagnostic Modalities - The most specific current procedure for medical imaging of inflammation due to infection involves removing blood from the patient, isolating white blood cells in the patients blood, radiolabelling the white blood cells with an isotope such as indium-111 or Technetium coupled with a carrier molecule and then injecting the white blood cells back into the patient. These white blood cells localize around the site of the infection and the associated radiation can be detected using a gamma camera. White blood cells are not highly specific and cannot readily distinguish infection from inflammation. In July 2004, Mallinckrodt, a business unit of Tyco Healthcare, and Palatin Technologies, Inc. announced that they had received approval from the FDA to market and distribute NeutroSpec® (formerly known as LeuTech®), a Technetium-labeled monoclonal antibody that binds to white blood cells and is indicated, for difficult-to-diagnose appendicitis. On December 19, 2005, Palatin announced that, as a result of the safety concerns raised in connection with the use of NeutroSpec® identified during routine pharmacovigilance, Palatin and Mallinckrodt decided to voluntarily suspend the sales, marketing and distribution of NeutroSpec® and recall all existing customer inventories of this product. In addition, Immunomedics, Inc. announced in January 2005 that it had received Health Canada approval for the marketing and use of its product LeukoScan® for the detection of osteomyelitis. LeukoScan® is a murine monoclonal IgG antibody fab fragment labeled with Tc-99m. We believe that INFECTON® will be capable of distinguishing inflammation from infection and as such would offer an advantage over agents that bind to white blood cells and which cannot distinguish between infection and inflammation.
Potential Advantages of INFECTON® - Preliminary investigations suggest the possibility that INFECTON® may be capable of distinguishing inflammation from infection.
We have spent $1.7 million in developing INFECTON® during the period between 1998 and 2005 inclusively.
Description - SOMATOSCAN® and Somatostatin Therapy are radiolabelled somatostatin peptides derived from a synthetic peptide based on MK-678, originally developed by Merck, which shows a high binding affinity for the somatostatin receptors expressed in neuroendocrine tumors, lymphoma and carcinoid and small-cell lung cancer. This peptide is being developed as both a diagnostic imaging agent (SOMATOSCAN®) and therapeutic product (Somatostatin Therapy) and we believe that it may permit the identification and treatment of primary tumors and the correct diagnosis of metastatic lesions. No substantial work was conducted in 2005 on SOMATOSCAN®/Somatostatin Therapy.
Technology Partner - SOMATOSCAN® and Somatostatin Therapy are based on innovative research by DRAXIMAGE and the University of Pennsylvania, for which DRAXIMAGE has an exclusive world-wide license for development and commercialization.
Regulatory Status - A pilot study conducted at the Montreal General Hospital in 1997, involving over 30 patients using an Iodine-131-MK-678, demonstrated good uptake in all of the target tumor types. DRAXIMAGEs clinical studies will be designed to confirm SOMATOSCAN®s earlier successful results observed with the Iodine-131 formulation.
Competing Products To our knowledge, there are two approved somatostatin-based imaging products in the marketplace: OctreoScan® from Tyco International Ltd. and NeoTectÒ from Berlex Laboratories Inc. Both of these molecules offer similar information but OctreoScan® is based on indium-111 and is more expensive than Tc-99m-based NeoTect® and must be delivered in radioactive form. We
are aware that development work is also being done on other somatostatin-based cancer therapy products that would compete with Somatostatin Therapy.
Potential Advantages of SOMATOSCAN® - DRAXIMAGE believes that by enabling the same molecule to be used for both diagnosis and therapy, physicians may have a greater ability to deliver therapeutic quantities of radiation specifically to well-defined targets in the body.
DRAXIMAGE has conducted preclinical development of atrial natriuretic peptide (ANP). ANP is a natural peptide produced in the atrium of the heart and is intended for development as an imaging agent for kidney structure and function. Radiolabelled ANP has demonstrated high binding affinity to receptors in both the lung and kidney. Experimental results in animals have shown that ANP is effective in the detection of kidney dysfunction associated with such diseases as diabetes, essential hypertension and reno-vascular hypertension induced by the stenosis of renal arteries. ANP is based on innovative research by DRAXIMAGE, the Clinical Research Institute of Montréal and the Research Institute of Hôtel Dieu de Montréal, from which DRAXIMAGE has an exclusive worldwide license. DRAXIMAGE did not conduct any work related to ANP in 2004 and 2005.
Description - Paclitaxel is a novel, anti-tumor agent referred to in some scientific and medical literature as taxol. Paclitaxel is currently marketed in the U.S. under the brand name TaxolÒ by Bristol-Myers Squibb Company. In January 1997, DRAXIS acquired from Mylan Laboratories Inc. (Mylan) the exclusive Canadian marketing rights to the Mylan formulation of paclitaxel. In June 1998, DRAXIS filed with the HPFBI a New Drug Submission in Canada for paclitaxel, and the HPFBI has completed its review process. Prior to approval, DRAXIS must comply with Canadian Patented Drugs Regulations with respect to generic competition. Mylan is currently assessing the status of patent infringement litigation in Canada regarding paclitaxel, and the Company has agreed to defer launch in Canada until such issues have been clarified.
According to the agreement, DRAXIS and Mylan will share the profits from marketing and selling paclitaxel in Canada according to a formula agreed to between the parties.
DRAXIMAGE manufactures its radioactive products in its cGMP compliant manufacturing facility located in Kirkland, Québec supported by a full quality control department licensed by regulatory agencies in Canada and the U.S.
In 2001, DRAXIMAGE completed the expansion of its radiopharmaceutical production area in anticipation of increasing sales volumes of its radiopharmaceutical line in the U.S. and other markets. This expansion has approximately doubled the size of the original facility to 19,000 square feet.
Most of the radioisotopes used to produce radiopharmaceuticals are supplied to DRAXIMAGE primarily, but not exclusively, by MDS Nordion, a subsidiary of MDS Inc. and the worlds largest supplier of chemical-grade isotopes for use as medical radioisotopes.
A key distinguishing characteristic of the radiopharmaceuticals business is the need for a sophisticated logistics system. Radiopharmaceuticals, by their nature, decay continually over time, thereby losing their potency. Therefore, manufacturing and product delivery systems must be well coordinated to ensure that the level of radioactivity present in the product supplied to the physician is correct at the time of administration.
DRAXIMAGEs Tc-99m Kits are currently manufactured by DRAXIS Pharma in its Kirkland, Québec facility, which was first accepted as a manufacturing site by the FDA in October 2001. Subsequent manufacturing site transfer approvals for the Tc-99m Kits were received during the period December 2001 to March 2002.
In the period December 2001 through March 2002, DRAXIMAGE was approved by the FDA to transfer production of its line of lyophilized medical imaging products in-house to the DRAXIS Pharma lyophilization production facility.
In January 2003, DRAXIMAGE received FDA approval to produce and market a new radiotherapeutic kit product for the preparation of Sodium Iodide I-131 Capsules and Oral Solution.
In December 2003, DRAXIMAGE obtained certification under ISO 9001: 1994, including ISO 13485: 1996, an international standard for medical device manufacturers.
In March 2004, DRAXIMAGE received FDA approval to produce and market a new formulation of MDP called MDP-25, a diagnostic product for preparing a skeletal imaging agent.
In November 2004, DRAXIMAGE received FDA approval for a DRAXIMAGE brand of I-131 therapeutic capsules.
In September 2005, MDP-25 was approved by Health Canada.
In November 2005, DRAXIMAGE announced it had received FDA approval for a new larger format of its I-131 kit for the preparation of Sodium Iodide I-131 Capsules and Oral Solution.
In January 2006, DRAXIMAGE announced it had received approval from the FDA for its supplemental new drug application for Sodium Iodide I-131 Capsules USP, Diagnostic-Oral. These diagnostic Sodium Iodide I-131 capsules are intended to be used by physicians to perform the radioactive iodide (RAI) uptake test to evaluate thyroid function prior to treatment with stronger therapeutic doses of Sodium Iodide I-131. Diagnostic doses of Sodium Iodide I-131 may also be employed in localizing metastases associated with thyroid malignancies. We plan to introduce the new diagnostic capsules in the U.S. market during the first half of 2006.
DRAXIMAGE has a strong regulatory track record. This includes 4 successful audits of its facilities in 2005 (2 regulatory inspections and 2 client audits) and 2 successful audits of its facilities in 2004 (1 regulatory inspection and 1 client audit).
Sales and Marketing
At the present time, DRAXIMAGEs products are marketed primarily in the U.S. and Canada. As many of the products marketed by DRAXIMAGE have the potential for global approvals, it is expected that non-North American based revenues will increase in the future. The most active growth areas are expected to be Europe and South America. In January 2003, DRAXIMAGE entered into a marketing and distribution agreement with Netherlands-based IDB Holland B.V. for the Benelux countries.
DRAXIMAGE sells Tc-99m Kits in the U.S. to several customers and distributors including Cardinal Health, Inc., which operates the largest chain of radiopharmacies, Tyco Healthcare division of Tyco International Ltd., GE Amersham Healthcare, CIS bio international (a subsidiary of Schering AG), United Pharmacy Partners Inc. and large university hospitals.
Tc-99m Kits sold in the U.S. are marketed under the DRAXIMAGE trademark with the exception of selected Tc-99m Kits sold through CIS bio international, which carry the distributors trade name.
In Canada, DRAXIMAGE currently markets most of its products directly to end-users through a co-operative agreement with Bristol-Myers Canada, pursuant to which Bristol-Myers Canadas sales force promotes the non-competitive product lines of each party. This arrangement allows for enhanced coverage of the Canadian market while reducing administrative and shipping costs. In July 2003, DRAXIMAGE renewed and expanded its distribution agreement with Bristol-Myers Canada for another five years.
For many years, DRAXIMAGE has been the primary Canadian supplier of Iodine-131 and Iodine-125 labeled radiopharmaceuticals, including solutions and capsules used primarily for the diagnosis and treatment of thyroid gland disorders.
The radiopharmaceutical market in Europe is characterized by strong regional fragmentation, which gives the leading market share to the individual manufacturer located in each of the major countries (i.e. GE Amersham Health in the UK, Tyco Healthcare in Holland and CIS bio in France). DRAXIMAGEs marketing activities in Europe are at their earliest stages pending regulatory approvals in this jurisdiction. As of December 31, 2005, DRAXIMAGE had five regulatory submissions filed with European regulatory authorities: four with the Medicines Evaluation Board in the Netherlands and one with the Danish Medicines Agency. The submission dates for these radiopharmaceutical products range from June 2003 to December 2004. All of the approvals sought by DRAXIMAGE in Europe are for marketing authorizations through the mutual recognition procedure which involves obtaining approval in one state (the reference member state) and recognition of that approval in other member states. All of the approvals being sought in Europe are for radiopharmaceutical products already approved in Canada or the U.S. One of these five European submissions was for DRAXIMAGEs kit for the Preparation of Technetium Tc-99m Albumin Aggregated Injection (MAA Kit) for which DRAXIMAGE received approval for in one reference member state, the Netherlands, in February 2005.
One distribution agreement for the Benelux countries, with the Netherlands-based IDB Holland B.V., has been concluded, and others are being sought.
Research and Development
DRAXIMAGE conducts both basic research on its own products and development work on in-licensed products and technology developed by other firms, predominantly in the biotechnology field. DRAXIMAGE applies its chelating expertise and technologies to link these compounds with radioisotopes to create innovative diagnostic and therapeutic radiopharmaceuticals.
In October 2003, DRAXIMAGE received a U.S. patent for a new family of chelating compounds that have significant potential for the development of imaging and radiotherapeutic agents to diagnose and treat diseases, including cancerous tumors or metastases. We believe that the new family of chelating compounds will permit the discovery of diagnostic imaging agents to visualize important biological receptors or receptor-positive tumors when combined with gamma-emitting radioisotopes. We believe that the compounds are also potentially useful as therapeutic radiopharmaceuticals for the in-vivo treatment of tumors and metastases.
DRAXIMAGE is also able to provide labeling technology for other companies for use with monoclonal antibodies and peptides. We are also working on the development of novel therapeutic uses of radioactivity.
DRAXIMAGE personnel have extensive experience developing and optimizing formulations applicable to the lyophilization manufacturing processes used in the production of cold Tc-99m Kit products.
As at December 31, 2005, DRAXIMAGE had 82 employees (representing 16.7% of the Companys employees), consisting of: 9 general management and administration employees, 12 marketing, selling and customer service employees, 15 quality operations employees, 33 manufacturing employees, and 13 research and development employees. None of these employees are unionized.
Most of DRAXIMAGEs products are covered by patents held by DRAXIMAGE or licensed from third parties. DRAXIMAGE has numerous patents issued and allowed and patent applications pending in the United States, Canada, Europe and Japan. For example, DRAXIMAGE has various U.S. issued patents related to chelates for radiopharmaceutical applications and process patents for the preparation of certain radiopharmaceuticals. In addition, DRAXIMAGE has licensed from BTG International Limited (formerly known as the British Technology Group) certain U.S. patents covering its INFECTONÒ product.
DRAXIMAGE also relies on trade secrets, know-how and other proprietary information to protect its current products and technologies. To protect DRAXIMAGEs rights in these areas, it requires all licensors, licensees, customers and significant employees to enter into confidentiality agreements. There can be no assurance, however, that these agreements will provide meaningful protection to DRAXIMAGEs patents, trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure of such patents, trade secrets, know-how or other proprietary information.
Other Collaboration Agreements
We have continuing financial interests associated with our collaboration agreements with Pfizer with respect to ANIPRYL® and with Shire with regard to Canadian sales of products divested in 2003. As of January 1, 2005 all deferred revenue related to the SpectroPharmÒ line of products from GSK was fully amortized by the Company.
Beginning in 1990, we expanded on our knowledge and experience with selegiline by initiating directly on our own behalf, as well as through contract research arrangements, studies designed to investigate the potential of selegiline for companion animal use. This initiative ultimately resulted in the formation of our subsidiary DAHI, through which the Company developed and commercialized a companion animal health product, ANIPRYL®.
ANIPRYL® is a selegiline product developed for use in veterinary prescriptive applications, particularly in dogs. The two indications for which ANIPRYL® is currently approved are canine Cushings disease and canine cognitive dysfunction syndrome (CDS).
Cushings disease refers to increased blood cortisol and the presence of one or more typical clinical signs, such as change in appetite, obesity, frequent urination, abdominal distension, loss of hair, lethargy and other behavioral changes. Canine Cushings disease is the form of the disorder that is due to primary hyperfunction of the pituitary gland.
CDS, sometimes known as Old Dog Syndrome, refers to the onset in elderly dogs of behavioral problems unrelated to a generalized medical condition such as neoplasia, infection or organ failure. Typical signs of this disorder can include confusion, disorientation, decreased activity, changes in sleep/wake cycles, loss of house training and loss of interest in or ability to interact with its owner and environment.
From March 1991 to November 1996, DAHIs common shares were publicly traded on NASDAQ. In November 1996, the Company took DAHI private in a mandatory share exchange transaction.
In December 1997, we entered into an alliance with Pfizer whereby Pfizer was granted a perpetual exclusive license to market, sell and distribute ANIPRYL® in exchange for non-refundable fees, royalties based on the worldwide sales of ANIPRYL®, a manufacturing and supply agreement and a research collaboration.
In December 1999, the Company and Pfizer amended the terms of the alliance (the First Amendment) whereby $9.0 million of potential additional non-refundable fees were eliminated in exchange for the Company receiving additional regulatory support for a potential new indication and additional manufacturing data. These potential additional non-refundable fees would have become payable if Pfizer had exercised its rights to acquire product registrations following regulatory approval of ANIPRYL® in designated European countries.
In April 2001, we received a payment of $1.5 million with respect to minimum royalty entitlements for the first three-year period ended December 31, 2000.
In December 2001, the Company and Pfizer further amended the term of the alliance (the Second Amendment) whereby the Company received a payment of $3.1 million with respect to
minimum royalty entitlements for the second and third three-year periods ended December 31, 2001 and 2002 and modifications to future royalty entitlements. The Second Amendment also resulted in all rights to ANIPRYL® outside of North America reverting back to the Company, forfeiture of any additional minimum royalty entitlements and the termination of any future collaborative research on new indications or formulations for ANIPRYL®.
Cumulatively to December 31, 2005, we received a total of $28.1 million in non-refundable fees and $16.4 million in royalties and royalty-related payments relating to ANIPRYLÒ.
Under the amended arrangement, we will not be entitled to receive any additional non-refundable fees but will continue to earn royalties on Pfizers sales of ANIPRYL® in the United States and Canada. The $28.1 million of non-refundable fees already received from Pfizer have been deferred and are being recognized as revenue on a straight-line basis over the period to December 31, 2006 in conformity with Staff Accounting Bulletin No. 101 published by the U.S. Securities and Exchange Commission.
We currently do not intend to pursue any additional or expanded indications for ANIPRYL®.
ANIPRYL® is currently approved for sale in Canada, the United States, Australia, United Kingdom, New Zealand and Brazil.
In 1997, DAHI filed for regulatory approval of ANIPRYL® in Europe by using the decentralized procedure. This procedure allows DAHI to file the ANIPRYL® submission in a country of its choice, and to designate five additional member states of the European Union as the countries that will review and approve the regulatory submissions. DAHI chose the United Kingdom as the country in which to file the initial ANIPRYL® applications. In July 2003, DAHI received authorization from the Veterinary Medicines Directorale (VMD) to market ANIPRYL® tablets for dogs in the United Kingdom. The United Kingdom submission is currently being reformatted in order to be suitable for submission to other European Union member states. The VMD will act as DAHIs advocate in this procedure.
DRAXIS may continue to seek veterinary regulatory approvals for ANIPRYL® in other jurisdictions, as appropriate.
Sales and Marketing
Under the terms of the amended arrangement, Pfizer will continue to market and sell ANIPRYL® in the United States and Canada.
In July 2003 DRAXIS granted Ceva Santé Animale S.A. (CEVA) an exclusive license for Europe for the marketing and distribution of ANIPRYL®.
DRAXIS may continue to seek ANIPRYL® marketing partnerships for additional countries outside North America and Europe.
DAHIs primary supplier of selegiline for the production of ANIPRYL® is Chinoin Pharmaceutical and Chemical Works Co. Ltd (Chinoin). In 1995, DAHI developed the data required to qualify an alternative source of supply for selegiline, and the BVA and the FDA have accepted the data.
Under its supply agreement with Pfizer, DAHI is entitled to designate a third-party supplier or to manufacture ANIPRYL® itself in a qualified facility.
During 2000, Pfizer qualified one of its own facilities to manufacture ANIPRYL® for the North American marketplace. During 2000 and up to the second quarter of 2005, Pfizer manufactured ANIPRYL®.
Since the second quarter of 2005, DRAXIS Pharma manufactures ANIPRYL® at its manufacturing facilities in Kirkland, Québec.
The animal health marketplace is generally served by veterinary, agricultural or animal health divisions of large international pharmaceutical and chemical companies that are involved in research and development activities. Products resulting from their activities may, in the future, compete directly with ANIPRYL®.
We are not aware of any other HPFBI, BVA or FDA approved product available at this time that competes directly with ANIPRYL®. In the United States, the 1988 generic animal drug law offers marketing protection from veterinary generic applicants in the United States for a period of five years. This period ended in 2002, in the case of ANIPRYL®. However, that law does not prevent other companies from repeating the full clinical New Drug Application process to seek FDA approval for a bio-equivalent product, nor does it prohibit human generic versions of ANIPRYL® from being sold to veterinarians. Any such competitor, including sellers of a human or veterinary generic selegiline, would be subject to DAHIs U.S. and international patent rights.
No significant competition for ANIPRYL® has been experienced to date in Canada or the United States from products approved for veterinary or human use. However, there are two other treatments available that have not been approved in Canada or the United States to treat canine Cushings disease, that we believe may be being used off-label for canine Cushings disease: LYSODREN® (mitotane) by Bristol-Myers Squibb Co., which was approved for use in the treatment of human inoperable cancer of the adrenal gland and NIZORAL® (ketoconazote) tablets by Johnson & Johnson Inc., an anti-fungal medication, which was approved for the treatment of various internal and external fungal and yeast infection in humans. These competitive treatments work by selectively killing the outer layer of the adrenal gland, thereby limiting production of corticosteroid. The human generic version of ELDEPRYL® is not approved for the treatment of canine Cushings disease or CDS in Canada, the United States or elsewhere. However, we believe that such use of human selegiline may compete with the use of ANIPRYL® in dogs. The dosage required for dogs suffering from canine Cushings disease and CDS, in most cases, is much higher than the human 5mg dose for selegiline.
Patents for the use of ANIPRYL® for the treatment of dogs with conditions including canine Cushings disease and CDS are issued in Canada, the United States and other jurisdictions. DAHI is positioned to enforce its proprietary patent rights and defend itself against infringement by other parties.
In September 1992, the United States Patent and Trademark Office issued a patent to DAHI entitled Use of l-deprenyl for Retention of Specific Physiological Function. The patent claims specific uses of l-deprenyl for use in treating dogs and covers currently sold products. Similar patents have also issued to DAHI in many foreign jurisdictions, including Canada, New Zealand, Venezuela and Europe. Six additional U.S. patents have also issued to DAHI. These patents cover various veterinary pharmaceutical uses of l-deprenyl such as treatment of Cushings Disease, weight loss, treatment of immune system dysfunction, extension of life expectancy of dogs, and treatment of hearing loss. Four of
these six patents were also filed in foreign countries that have major companion animal markets. The markets for the cognitive disease patents are Canada, U.S., Europe, Japan, Mexico, Venezuela, New Zealand and Malaysia. The markets for the Cushings Disease patent are Europe, Canada and the U.S. The markets for the survival cure shifting patent are Canada, Norway, Finland and Europe. The markets for the treatment of hearing loss patent are Japan and Canada. The patents held by DAHI have expiry dates ranging from August 31, 2010 to June 3, 2016.
The European CDS patent was subject to an opposition procedure initiated by Ceva. Ceva holds patents in the United States, Canada and Europe relating to the use of selegiline for treating behavioral disorders with change of mood in dogs and cats. Cevas European patent was subject to an opposition procedure by DAHI. In July 2003, DRAXIS and Ceva agreed to discontinue the opposition proceedings between them before the EPO. DRAXIS also granted Ceva an exclusive license for Europe for the marketing and distribution of ANIPRYL® or the use of ANIPRYL® claims. In return, Ceva agreed to pay DAHI a percentage royalty on European sales of ANIPRYL® and/or the use of ANIPRYL® claims, in addition to nominal milestone payments upon the regulatory approval of ANIPRYL® in the UK and in subsequent additional jurisdictions within the European Community. The agreement also gave DAHI the rights to use Chinoin selegiline in any jurisdiction.
SpectroPharm® Product Line
In May 2000, we entered into an arrangement with Block Drug Company (Canada) Limited, now part of GlaxoSmithKline Consumer Healthcare, with respect to the SpectroPharm® line of non-prescription dermatology products, which included the sale of product rights by the Company in exchange for a non-refundable fee, the acquisition of inventory on hand, a supply agreement and a technical services arrangement. The $9 million we received with respect to the SpectroPharm® product rights was deferred and was recognized as revenue on a straight-line basis over the period to January 31, 2005. As of January 31, 2005, all deferred revenue related to the SpectroPharmÒ line of products was fully amortized.
Discontinued Operations (DRAXIS Pharmaceutica)
In July 2003, we completed the divestiture of our Canadian pharmaceutical sales and marketing division, DRAXIS Pharmaceutica, with the sale to Shire of substantially all remaining products of the division, including the Canadian product rights for Alertec®, Diastat®, Hectorol®, Permax® and Zanaflex®. Shire agreed to pay DRAXIS through a combination of cash and contingent milestone payments plus royalties on future product sales. We have received $9.6 million in cash from Shire and could receive up to an additional $2.9 million in market-driven contingent milestones over the next several years. In addition, Shire assumed responsibility for the financial provisions of the license agreement related to Permax®. This transaction is in addition to the $6.5 million received by DRAXIS in March 2003 from affiliates of Elan for the return of Canadian rights for several of Elans neurology products that had not achieved regulatory approval in Canada.
Our business is governed by a variety of industry-specific statutes and regulations in Canada, the United States and other countries.
Drug Approval Process
In Canada, pharmaceutical research, development and marketing activities are regulated by the Food and Drugs Act (Canada) and the rules, regulations, policies and guidelines made thereunder. The Food and Drugs Act (Canada) is administered by the Therapeutic Products Directorate of the HPFBI (TPD), which regulates the use and sale of diagnostic and therapeutic products in Canada. In the United States, these activities are regulated under laws administered by the Food and Drug Administration (FDA), which also have a significant impact on the Companys activities.
The drug research and development process consists of both pre-clinical and clinical phases. The pre-clinical phase consists of screening compounds to identify the most promising leads for continued drug development prior to human clinical trials and evaluating the drugs toxic and pharmacologic effects to show that the drug is reasonably safe for use in the initial clinical studies. The clinical phase involves clinical trials with healthy participants, as well as patients with specific diseases or conditions.
Before commencing clinical trials in Canada or the United States, an Investigational New Drug (IND) application must be submitted with the TPD (in the United States, with the FDA). The IND application includes manufacturing data, pre-clinical data, information about use of the drug in humans for other purposes and a detailed protocol for the conduct of clinical trials.
In Canada and the United States, clinical trials of new pharmaceutical products involve three phases. In Phase I, the products safety is assessed during clinical trials involving a limited number of healthy volunteers or patients. In Phase II, the products efficacy, dosage and safety are tested on a small number of patients with a known disease. In Phase III, controlled clinical trials are conducted in which the product is administered to a larger number of patients with a known disease, and further information relating to safety and efficacy is gathered. Further, in Phase III, the effectiveness of the product is, in certain cases, compared to that of accepted methods of treatment. If clinical studies establish that the product has value, an applicant files a New Drug Submission with the TPD (or a New Drug Application, or Product License Application or Biologic License Application (for biological products) with the FDA) to obtain marketing approval for the product. The New Drug Submission/New Drug Application/Product License Application/Biologic License Application includes a comprehensive summary and analysis of the results of the clinical trials, information relating to proposed labeling and packaging materials, and data relating to the proposed manufacturing and quality control procedures. If the New Drug Submission/New Drug Application/Product License Application/Biologic License Application is found to be satisfactory, a marketing authorization is issued (in Canada, the TPD issues a Notice of Compliance).
The process of completing clinical trials and obtaining regulatory approvals for a new drug will, in general, take a number of years and require the expenditure of substantial resources. Once a New Drug Application/New Drug Submission or Product License Application/Biologic License Application is submitted, there can be no assurance that the TPD or FDA will review and approve the application in a timely manner. In certain limited circumstances, the TPD will permit a New Drug Submission to be subject to a priority review. The TPDs Priority Review Process allows for a faster review to make available promising drug products for a serious, life-threatening or severely debilitating illness or condition for which there is substantial evidence of clinical effectiveness that the drug provides: (i) effective treatment, prevention or diagnosis of a disease or condition for which no drug is presently marketed in Canada; or (ii) a significant increase in efficacy and/or significant decrease in risk such that
the overall benefit/risk profile is improved over existing therapies, preventatives or diagnostic agents for a disease or condition that is not adequately managed by a drug marketed in Canada.
Even after initial approval has been obtained, further studies, including post-marketing studies, may be required to provide additional data on safety necessary to gain approval for the use of the product as a treatment for clinical indications other than those for which the product was initially tested. The TPD and FDA may also require post-marketing surveillance programs in order to monitor long-term risks and benefits of the drug, to study different dosages or evaluate different safety and efficacy parameters. Results of post-marketing studies may limit or expand the further marketing of products. A serious safety or effectiveness problem involving an approved new drug may result in TPD or FDA action requiring withdrawal of the product from the market and possible civil action.
The Special Access Program of the TPD provides practitioners with access to pharmaceutical, biologic and radiopharmaceutical products that are not yet approved for sale in Canada to treat patients with serious or life-threatening illness or conditions when conventional therapies have failed, are unsuitable or unavailable. The FDA administers a similar program in the United States to treat patients with immediately life-threatening diseases.
Outside of Canada and the United States, the regulatory approval process for the manufacture and sale of pharmaceuticals varies from country to country, and the time required may be longer or shorter than that required for TPD or FDA approval. To the extent it chooses to explore foreign markets, the Company may rely on foreign licensees to obtain regulatory approval for marketing its products in foreign countries.
In Canada, the drug approval process for veterinary pharmaceuticals is similar to the process for obtaining approvals for human pharmaceuticals. To receive regulatory approval, a new animal drug must successfully complete a number of developmental phases which include the establishment of safety and efficacy in target species, establishment of manufacturing procedures and the conduct of controlled clinical trials in which the drug is administered to a large number of animals in order to gather further information relating to safety and efficacy.
Following the completion of clinical trials, an applicant files a New Drug Submission to the Veterinary Drugs Directorate.
Prescription drug products generally are made known to healthcare professionals through advertisements and visits to such professionals, known as detailing. In Canada, unlike the United States, product-specific advertising to the general public is generally not permitted, subjected to very limited exceptions.
An increasing percentage of sales of prescription pharmaceuticals relates to sales of products which are paid for, in whole or in part, by government or private insurance drug plans. In many jurisdictions, governments have established regimes to control drug pricing at the retail pharmacy level. Most Canadian provinces have implemented drug benefit formularies. A formulary lists the drugs for which a provincial government will reimburse qualifying persons and the prices at which those drugs will be reimbursed. Although there is not complete uniformity among provinces, generally speaking,
provincial governments will reimburse an amount equal to the lowest available price of the generic versions of any drug listed on the provincial formulary. The legislative regimes of most provinces also permit generic drug substitution, even for patients who do not qualify for government reimbursement. The effect of these initiatives is to encourage the sale of lower-priced generic versions of pharmaceutical products. In the United States, beginning in 2006, Medicare beneficiaries will be offered a prescription drug benefit. Medicare will contract with at least two risk-bearing drug plans in each of 34 regions to provide the new benefit. The prescription drug plans will cover at least two drugs in each therapeutic class or category of covered drugs, but may establish formularies and tiered-cost amounts. The prescription drug plans may limit their coverage to two drugs in each therapeutic class or category of covered drugs. The effect of this new program will allow prescription drug plans to negotiate price discounts and rebates with drug companies.
Furthermore, there have been, and the Company expects that there will continue to be, an increasing number of proposals to implement government and other third-party payer restrictions on the pricing of prescription pharmaceuticals as a result of continuing efforts to contain or reduce the costs of healthcare throughout North America. See Item 3: Key Information - Risk Factors. Notably, in Canada, the Patented Medicines Prices Review Board (PMPRB) sets the maximum price that can be charged for a patented drug (see below).
In Canada, veterinary prescription pharmaceuticals are available only through veterinarians. Veterinary prescription drugs are generally promoted by manufacturers through advertisements to veterinarians and sales visits to animal health clinics. In Canada, unlike the United States, product-specific advertising to the general public is generally not permitted, subjected to very limited exceptions.
The PMPRB has the jurisdiction to regulate maximum pricing of veterinary drugs (see below). There are no government reimbursement plans in the veterinary pharmaceutical marketplace. There are a few private pet insurance plans; however, these plans do not cover a significant portion of the purchase for veterinary drugs. Accordingly, the veterinary marketplace is not subject to the same cost containment measures that are prevalent in the human pharmaceutical market.
Patent Protection and Price Controls
Companies that have invented human or veterinary drugs can apply for patent protection virtually worldwide, subject to strict rules relating to timing, subject matter and the scope of protection sought. Patents can cover many aspects of a pharmaceutical product, including the drug itself, processes for preparing the drug, delivery systems and new uses for the drug. Patents do not, however, guarantee that the owner of the patent or its licensee can utilize the patented invention because there may be pre-existing patent rights owned by a third party. While a patent permits the owner or its licensee to prevent others from doing what is covered by the patent, competitors are always free to market products that do not infringe the particular patent, provided such competitors otherwise comply with health regulatory requirements.
Historically, pharmaceutical companies have relied heavily upon patents to protect proprietary positions in respect of drug products. The Companys policy is to protect its technology, inventions and improvements by, among other things, filing patent applications for technology it considers important to the development of its business. The Company also relies upon trade secrets, know-how and licensing opportunities to develop and maintain its competitive position.
Under United States patent law, a patent is issued to the person who made the invention first, rather than to the first person to file an application therefor, as is common in other countries, such as Canada. Consequently, in determining who is entitled to a United States patent for a particular technology, it is important to consider that it is possible for an inventor to establish an entitlement based on a prior invention, notwithstanding an earlier filed patent application. Prior invention may not be established before December 8, 1993, in a NAFTA country other than the United States, or before January 1, 1996, in a WTO member country other than a NAFTA country.
Remedies for patent infringement are created under the laws of Canada and the United States. In addition to the standard legal action for patent infringement, in 1993, the Canadian Government enacted Regulations under the Patent Act (Canada) whereby a company proposing a generic version for a drug which has been marketed in Canada under a Notice of Compliance and in respect of which patents have been listed on the Patent Register, must address those patents before a Notice of Compliance may be granted. The originator of the drug may apply to the Federal Court of Canada for an order prohibiting the Minister of National Health and Welfare from issuing a Notice of Compliance until the issue of possible patent infringement has been resolved. Similar proceedings are available in the United States if a generic drug manufacturer seeks approval for a drug in respect of which patents have been listed in the Orange Book (the United States equivalent of the Patent Register).
As mentioned above, in Canada, the PMPRB monitors and controls prices of drug products marketed in Canada by persons holding, or licensed under, one or more patents relating to those drug products. The PMPRB approves the introductory price of a drug product (based on a comparative analysis) and requires that subsequent price increases do not exceed the annual increase of the Canadian Consumer Price Index. Thus, in Canada, the existence of one or more patents relating to a drug product, while providing some level of proprietary protection for the product, also triggers a governmental price control regime which significantly impacts on the Canadian pharmaceutical industrys ability to set pricing.
Pharmaceutical companies are required to submit as part of their New Drug Submission in Canada, or as part of their New Drug Application in the United States, detailed descriptions regarding the proposed manufacturing and packaging process and the identities of the manufacturers in respect of a particular drug. A decision to manufacture or package products in a facility other than that originally approved under the New Drug Application or New Drug Submission (as may be the case with contract manufacturing outsourcing) requires notification of the regulatory authorities and can result in significant delays in production.
Pharmaceutical manufacturing facilities are subject to strict quality control standards including current good manufacturing practices (cGMPs). Production processes within a facility are subject to one-time validation testing, as well as periodic review. In the case of sterile product manufacturing, including lyophilized products, the standards are even higher than for the manufacturing of non sterile products. The manufacture of radioactive drugs is subject not only to cGMPs but also the environmental safety, handling and transportation requirements of the Canadian Nuclear Safety Commission (CNSC) and the United States Nuclear Regulatory Commission (NRC). There are no issues with respect to radioactive waste disposal since all of the isotopes used in nuclear medicine are short-lived and can be easily stored on site until decayed and then disposed of.
The FDA, HPFBI, CNSC and NRC conduct regular audits of the Companys facilities to ensure compliance with cGMPs and other statutory requirements. See Item 3: Key Information - Risk Factors.
In Canada, the development, testing, manufacture, labelling and promotion of medical devices is regulated by the Food and Drugs Act (Canada) and the rules, regulations, policies and guidelines made thereunder. The Food and Drugs Act is administered by the TPD. In the United States, these activities are regulated under laws administered by the FDA which also have a significant impact on the Companys activities.
Canadian regulation of medical devices relies on a risk-based categorization of devices into four classes, with class III and IV devices being those that present the higher degrees of risk. In Canada, Class III medical devices may not be imported or sold unless the manufacturer of the device holds a device-specific license issued by the TPD. Medical devices must meet safety and effectiveness requirements relating to the design, manufacture and performance of the devices, and are also subject to quality control, labelling, advertising, record-keeping and reporting requirements. Manufacturers must comply with these requirements, as well as the terms and conditions set out in the license permitting sale of a device, such as completion of mandatory post-marketing testing and/or surveillance activities. Failure to comply with all applicable requirements or the occurrence of problems with a device could lead to product recall, suspension of the license permitting sale of the device and/or product seizure, which would prevent further sales until the product is brought into compliance. If certain changes are made to a medical device (for example, changes that would affect its class) an amended license must be obtained prior to marketing it.
The Special Access Program of the TPD provides practitioners with access to medical devices that are not yet approved for sale in Canada in emergency use cases or when conventional therapies have failed, are unavailable or are unsuitable to treat a patient.
In the United States, the FDA regulates the design, manufacture, distribution, quality standards and marketing of medical devices. If a device is substantially equivalent to one that is currently marketed, the device is not required to undergo a detailed approval process involving the conduct of clinical trials. The time to obtain approval can be as short as 90 days. In the United States this process is called a 510(k) clearance. If a device does not qualify for 510(k) clearance, a pre-market approval (PMA) is required. As part of the approval of a PMA application, the FDA typically requires human clinical testing to determine safety and efficacy of the device. The review period for a PMA application is fixed at 180 days, but the FDA typically takes much longer to complete the review.
Medical devices are generally made known to healthcare professionals through advertisements and visits to such professionals. In Canada, medical devices are not subject to the same restrictions on advertising to the general public as pharmaceutical products. Medical device manufacturing facilities are subject to strict quality control standards including current good manufacturing practices (cGMPs).
Canadian and U.S. federal, state, local and provincial regulations govern extensively the use, manufacture, storage, handling, transport and disposal of hazardous materials and associated waste products. The Company is not aware of any material environmental issues that affect the Companys utilization of its assets. The Company has not received any notice stating that it is not in compliance with environmental legislation applicable to it.
The following chart illustrates the corporate organization and jurisdictions of the Company and its significant affiliates as at March 31, 2006.
(1) DRAXIS Specialty Pharmaceuticals Inc. has two divisions, DRAXIMAGE (radiopharmaceuticals) and DRAXIS Pharma (contract manufacturing).
All of the above-depicted companies are wholly owned subsidiaries of DRAXIS Health Inc.
PROPERTY, PLANTS AND EQUIPMENT
Our sole operating facility is a 247,000-square-foot pharmaceutical manufacturing facility which houses the DRAXIMAGE and DRAXIS Pharma operations. The facility is owned by DRAXIS Specialty Pharmaceuticals Inc., a wholly-owned subsidiary of the Company and is located at 16751 Trans-Canada Road, Kirkland, Québec, Canada, H9H 4J4. See Risk Factors Risks Related to our Company Our Manufacturing Operations are Concentrated in One Location. Factors beyond our control could cause an interruption in our manufacturing operations, which could adversely affect our reputation in the market place and our results of operations.
We believe that the above-noted property is suitable and adequate for its business purposes as presently contemplated. We have an undrawn credit line issued by our principal bankers, the National Bank of Canada who have a first ranking mortgage on all of our assets. However, as of March 31, 2006, we had no third-party debt outstanding.
The following management, discussion and analysis (MD&A) of the financial condition and results of operations of DRAXIS Health Inc. (DRAXIS or the Company) should be read in conjunction with the Companys consolidated audited financial statements and notes thereto for the year ended December 31, 2005.
All amounts referred to herein are expressed in US dollars and are in accordance with U.S. generally accepted accounting principles (GAAP), unless otherwise indicated. Other noteworthy accounting issues are discussed under: Accounting Matters.
Readers are cautioned not to place undue reliance on forward-looking statements contained in this MD&A since actual results could differ materially from what we expect if known or unknown risks affect our business or if an estimate or assumption turns out to be inaccurate. We disclaim any intention and assume no obligation to update any forward-looking statement even if new information becomes available as a result of future events or any other reason. See Forward-Looking Statements on page 77 hereof.
The discussion and analysis contained in this MD&A are as of February 28, 2006.
DRAXIS is a specialty pharmaceutical company providing pharmaceutical products in three major categories: sterile, including sterile lyophilized (freeze-dried) pharmaceuticals; non-sterile specialty pharmaceuticals; and radiopharmaceuticals. In the radiopharmaceutical category, DRAXIS has its own products and a targeted research and development (R&D) program for new products.
The Company is increasingly focusing on the use of GAAP measures both in reporting externally and monitoring management performance. Specifically, the key metrics the Company uses to evaluate divisional and consolidated performance are gross profit margin, operating income, net income and operating cash flow. Non-GAAP measures, specifically EBITDA, will continue to be disclosed to provide a comparative link between our historical disclosures as the Company transitions to more traditional GAAP measures. The Company will continue to reconcile any non-GAAP measures used with GAAP line items. The Company additionally uses, as a performance measure, cash flows from operating activities less cash flows used in investing activities.
During the third quarter of 2005, the Companys contract manufacturing operation extended its scheduled shutdown period at the beginning of the third quarter in the sterile areas, in order to correct an electrical panel failure and make associated repairs, and the decision to revalidate the entire sterile area following these repairs and to recalibrate production schedules had material financial implications which hindered third and fourth quarter results. This resulted in downward revisions to the Companys revenue and earnings per share (EPS) guidance when production was recommenced and when production schedules and shipping schedules were finalized. Finalizing and executing on production schedules in the fourth quarter of 2005 were further hindered by delays in receiving some component materials from suppliers. Production in contract manufacturing was ramping up towards normalized production levels by the end of the third quarter of 2005. The overall effect of the extended shutdown was to negatively affect the Companys key financial metrics over the second half of 2005 and offset the significant growth achieved over 2004 in the first half of 2005.
Highlights for 2005, which include the negative effects of the extended shutdown, were as follows:
Record revenues of $79.4 million, up 15% from 2004:
Operating income of $9.8 million and not significantly different from 2004.
Basic EPS from continuing operations of 19 cents per share, down 1 cent per share from 2004.
Record net operating cash flows from continuing operations of $9.3 million, up $4.6 million from 2004.
CONSOLIDATED RESULTS OF OPERATIONS(1) AND RECONCILIATION OF NON-GAAP MEASURES
(in thousands of US dollars, except share related data) (U.S. GAAP)
(1) Commencing with the quarter ended December 31, 2001, the results of operations of DRAXIS Pharmaceutica have been reported as discontinued operations (see Accounting Matters Discontinued Operations).
(2) Includes $1,436 of deferred revenue related to the termination of agreements for BrachySeed®.
(3) Includes $730 of insurance proceeds.
(4) Income from continuing operations before depreciation and amortization, financial expense, foreign exchange loss, other income, income taxes and minority interest. This earnings measure does not have a standardized meaning prescribed by U.S. GAAP and therefore may not be comparable to similar measures used by other companies. Such measures should not be construed as the equivalent of net cash flows from operating activities (see Accounting Matters Non-GAAP Measures).
The following provides a high level overview of the consolidated results of the Company. Please refer to the segmented results for more detailed explanations.
Comparison of Years Ended December 31, 2005 and 2004
Consolidated revenues of $79.4 million for the year ended December 31, 2005 represent an increase of 15% compared with the same period in 2004.
Product sales increased 18% or $11.3 million for the year ended December 31, 2005 compared to 2004. The increase relates to continued growth in contract manufacturing revenues, specifically sterile operations, coupled with growth in the radiopharmaceutical segment and specifically sodium iodide I-131 sales to the U.S. The growth in contract manufacturing was restrained during the second half of 2005 as a result of the extended shutdown period in contract manufacturing.
Product gross margin percentages for the year ended December 31, 2005 were similar compared to the same period of 2004. While overall volumes have increased, the business mix has shifted from the higher margin radiopharmaceutical business to the relatively lower margin contract manufacturing businesses. Furthermore, as a result of the extended shutdown period in contract manufacturing, unabsorbed fixed manufacturing costs and the cost of unused capacity related to reduced production had a negative impact on margins for the second half of 2005.
Since increased revenues related to growth in the sterile contract manufacturing operations and sterile product margins generally are lower than radiopharmaceutical margins, the overall result is that the increased volumes do not result in an overall increase to consolidated gross profit margins. Accordingly, the Company believes that product gross margins are best reviewed at the segmental level.
Absolute product gross margins have increased for the year ended December 31, 2005 as a result of a stronger Canadian dollar and its positive impact on margins for products priced in Canadian dollars. However, the impact is largely offset by the increase in selling, general and administrative costs strictly related to foreign currency translation. Since almost all selling, general and administrative (SG&A) expenses are incurred in Canadian dollars, the strengthening of the Canadian dollar since early 2004 has resulted in an increase in selling, general and administrative expenses in 2005 relative to 2004. Changes to foreign exchange rates have, however, not had a material impact on product gross margin percentages or net income.
For the year ended December 31, 2005 compared with 2004, royalty and license revenues decreased 16%; however, the impact of the completion of the amortization of the deferred revenue related to the SpectroPharm product line as of January 31, 2005 was partially offset by the receipt of $0.9 million in contingent milestones from Shire BioChem Inc. (Shire), which the Company earned in the first quarter of 2005.
In absolute dollar terms, the increase in selling, general and administrative expenses was 22% for the year ended December 31, 2005 (or 14% excluding foreign currency fluctuations) over 2004. Excluding the impact of foreign currency reporting as described below, the increase in selling, general and administrative is due to the one-time costs related to the Companys exiting the BrachySeed® product
line, severance costs related to the Companys initial steps taken to reduce its overhead cost structure and process improvement initiatives focused in contract manufacturing.
Approximately $1.1 million of the increase in selling, general and administrative spending for the year ended December 31, 2005 is a consequence of increased costs in Canadian dollars relative to US dollars as a result of the strengthening of the Canadian dollar since early 2004. This results from virtually all selling, general and administrative costs being denominated in Canadian dollars.
For the year ended December 31, 2005, research and development costs increased 8% due to activities related to FIBRIMAGE® and INFECTON®. The increased expenditures were primarily attributable to clinical trial activities for INFECTON®, coupled with costs associated with the detailed review of FIBRIMAGE® Canadian Phase III results and the assessment of optimal Phase III protocols for the U.S. by the expert medical advisory panel assembled by the Company.
Depreciation and amortization expenses for the year ended December 31, 2005 increased 1% over the same period of 2004 following the completion of the installation and the validation of the Companys second lyophilization unit. This expense was offset by the completion of amortization of intangibles related to the SpectroPharm product line.
For the years ended 2004 and 2005, the impact of foreign exchange on the Companys results was similar due to the strengthening of the Canadian dollar over the past two years.
Interest expense and bank charges decreased for the year compared to 2004 due to repayment of third party debt at the end of 2004.
The effective tax rate for the year ended December 31, 2005 was 17% or 24% excluding the benefits of research and development tax credits. The Company benefited during 2005 from statutory tax rate changes which increased the value of the Companys loss carryforwards and from tax credits related to research and development spending. During 2005 the Company further benefited by approximately $400,000 through recognition of the lower effective statutory tax rate attributable to milestone payments received and through withholding tax refunds received in the quarter but not previously estimated to be recoverable.
The Companys effective tax rate will vary from the statutory tax rate depending on the mix of net income and the statutory rates in the respective jurisdictions in which the Company operates. The level of tax credits generated from research and development activities in the radiopharmaceutical business also had the impact of lowering effective tax rates by $642,000 for 2005.
The basic weighted-average number of common shares outstanding during 2005 was 41,471,798 and has increased from 39,886,219 in 2004 due mainly to the exercise of stock options.
Comparison of Years Ended December 31, 2004 and 2003
Consolidated revenues from continuing operations of $69.3 million for the year ended December 31, 2004 increased 40.9% compared with the same period in 2003.
Product sales increased 52.2% for the year ended December 31, 2004 compared with the same period in 2003. The increase in product sales throughout 2004 was driven by a significant increase in contract manufacturing revenues, particularly sterile product revenues. Radiopharmaceutical product sales grew 17.9% in 2004 over 2003 driven primarily by sales of sodium iodide I-131 products to the U.S.
Product gross margins for the year ended December 31, 2004 increased as compared with the same period in 2003, primarily related to significant growth in the sterile business, increased capacity utilization in contract manufacturing and changes to the price structure in contract manufacturing. These differences were lessened by the impact of one-time non-recurring items in 2003 and the impact of shutdown activities in the third quarter of 2004.
The contract manufacturing business historically has lower margins than the radiopharmaceutical business. As a result, the shift in business mix towards contract manufacturing is normally dilutive to consolidated gross profit margins. However, as sterile product sales continued to increase in contract manufacturing relative to non-sterile product sales, contract manufacturing results became less dilutive.
Royalty and licensing revenue decreased for the year ended December 31, 2004 compared with the same period of 2003 due to a one-time non-recurring item in 2003. Excluding a one-time non-recurring item, royalty and license revenues did not change significantly from 2003 to 2004.
As a percentage of product sales, selling, general and administrative expenses decreased for 2004 to 21.5% from 24.4% in 2003. The increase in selling, general and administrative expenses in absolute dollar terms for the year was primarily driven by sales and marketing, business development activities and the cost of long-term incentive plans that are indexed to the Companys share price.
Research and development expenditures increased compared to 2003 due to ramping up of clinical trial activities related to FIBRIMAGE® and INFECTON®.
The majority of the costs of the Canadian operations are denominated in Canadian dollars. As the level of revenues denominated in US dollars and other foreign currencies increases relative to the underlying cost structure, the Companys overall gross profit margins are affected. The impact is reflected within the cost of goods sold and selling, general and administration expenses. For 2004, there was an immaterial negative impact on margins related to the strengthening of the Canadian dollar relative to the benefit of increased higher margin business from the U.S.
Depreciation and amortization expense for the year ended December 31, 2004 increased 35.6% over the same period of 2003 following the commencement of depreciation charges on completed capital projects related to contract manufacturing operations.
Foreign exchange loss was $374,000 for 2004 compared to $701,000 in 2003. The decrease in the loss resulted from the strengthening of the Canadian dollar in 2003 which continued, to a lesser extent, in 2004, coupled with a reduction in the Companys net U.S. monetary position.
Interest expense and bank charges decreased for the year compared to 2003 due to lower debt levels. At the end of 2004, all third party debt was repaid.
Minority interest represents Société générale de financement du Québec (SGF) 32.7% share of net income or losses of the Companys contract manufacturing operations. Minority interest was neutral to net income compared with a small income contribution in 2003. As a result of the acquisition by DRAXIS of all minority interest holdings on April 22, 2004, minority interest no longer impacts earnings.
Discontinued operations were neutral to the Companys consolidated revenues for 2004. In the first quarter of 2003, the Company realized an after- tax gain related to the $6.5 million received on the sale of certain product rights to Elan Corporation, plc (Elan). In the third quarter of 2003, substantially all of the remaining residual discontinued operations assets and liabilities were disposed of and the Company recognized a further net after-tax gain of $4.1 million. There are no significant remaining
residual assets and liabilities of the discontinued operations and those remaining are not expected to have a significant impact on future earnings of the Company.
For the year ended December 31, 2004, the Company recorded an income tax expense, expressed as a percentage of pre-tax earnings, of 14%. The income tax expense is below the statutory rates in effect in the jurisdictions in which the Company operates as a result of the recognition of deferred income tax assets not previously recognized related to its Canadian operations. Prior to the acquisition, on April 22, 2004, of all minority interest holdings, the Company was unable to execute tax planning strategies to utilize all of the loss carryforwards available to the Canadian operations. As a result of the acquisition of all minority interest holdings and the significant increase in the profitability of the contract manufacturing operations, the Company was able to recognize into income approximately $0.9 million in previously unrecognized tax loss carryforwards.
The effective tax rate will fluctuate depending on the profitability of individual operations and tax rates in the respective jurisdictions in which the Company operates. The level of tax credits generated from research and development activities in the radiopharmaceutical business also has the impact of lowering effective tax rates.
The basic weighted-average number of common shares outstanding during 2004 was 39,886,219 and increased from 37,114,648 for 2003, primarily as the result of the completion of the equity financing offering of 3,053,436 units (which included 3,053,436 common shares) in April 2004 and the exercise of stock options and employee participation shares.
(in thousands of US dollars) (U.S. GAAP)
(1) Includes $1,436 of revenue related to the termination of agreements for BrachySeed®.
(2) Includes $500 of insurance proceeds.
Radiopharmaceuticals and radiotherapy devices are the focus of the Companys radiopharmaceutical division, DRAXIMAGE, which develops, manufactures and markets diagnostic imaging and therapeutic radiopharmaceutical products for the global marketplace. Products currently marketed by DRAXIMAGE include a line of lyophilized technetium-99m kits used in nuclear medicine imaging procedures and a line of imaging and therapeutic products labelled with a variety of isotopes including sodium iodide I-131. DRAXIMAGE has a number of products in late-stage development including: FIBRIMAGE®, a product that images Deep Vein Thrombosis (DVT) and for which a Phase
III clinical study in Canada has been completed, although the additional analysis of the data from the study is still ongoing and an expert medical advisory panel has been assembled; and INFECTON®, for imaging infection, which is nearing the completion of Phase II clinical trials in Canada and the U.S.
Highlights in this segment for the quarter ended December 31, 2005 included:
Product sales of $19.3 million for the year representing a 12% increase over 2004.
Product gross margin percentage of 60% compared to 58% for 2004.
Operating income of $3.8 million ($4.2 million, excluding the impact of the costs of exiting the brachytherapy market) compared to $3.2 million for 2004.
Effective May 2005, the Company appointed Mr. Jean-Pierre Robert as the new President of the DRAXIMAGE division.
On October 6, 2005, the Company announced its strategies for long-term growth through the addition of new and improved products, further penetration of niche markets in North America where the Company has had success, and plans to expand into new territories and into segments where the Company has not previously participated.
On November 22, 2005, the Company announced that it had begun to implement its strategy to focus its product offerings. Related to this strategy, the Company initiated a process to discontinue the manufacture and sale of implantable brachytherapy seeds. The Company established a customer supply alternative with Oncura, Inc. All costs related to the Companys exit from the brachytherapy market have been fully accrued in 2005.
On January 13, 2006, the Company received approval from the U.S. Food and Drug Administration (FDA) regarding its supplemental new drug application for Sodium Iodide I-131 Capsules USP, Diagnostic-Oral. These diagnostic sodium iodide I-131 capsules are intended to be used by physicians to perform radioactive iodide uptake tests to evaluate thyroid function prior to treatment with stronger therapeutic doses of sodium iodide I-131. The Company plans to introduce the new diagnostic capsules during the first half of 2006 to qualified/approved nuclear physicians and/or radiopharmacists.
Comparison of Years Ended December 31, 2005 and 2004
Revenues for the year ended December 31, 2005 increased 12% compared with the same period of 2004, primarily as a result of higher product sales from radioiodine products and, specifically, sodium iodide I-131 sales to the U.S. The increase is related to higher volumes resulting from greater U.S. market penetration.
During the first quarter of 2005, the Company received approval from the Dutch regulatory authority for its Kit for the Preparation of Technetium Tc 99m Albumin Aggregated Injection (MAA Kit). Approval in the Netherlands allowed DRAXIMAGE to initiate the Mutual Recognition Procedure in pursuit of further regulatory approvals for this diagnostic imaging product in additional European Union countries. This approval was a key milestone in the strategic plan to introduce several additional DRAXIMAGE branded products into a number of European markets. However, the pace of product approvals remains very slow due to the nature of the approval process and regulator backlog.
For the year ended December 31, 2005, product gross margin was stronger compared to 2004, resulting from the increased market penetration of higher margined products like sodium iodide coupled with the positive impact of the Companys decision to exit the brachytherapy market.
Research and development expenditures increased slightly for the year ended December 31, 2005 as compared to 2004 due to the activities related to FIBRIMAGE® and INFECTON®. Specifically, the increased expenditures were mainly for clinical trial activities for INFECTON® coupled with costs associated with the ongoing detailed review of FIBRIMAGE® Canadian Phase III results and activities of the expert medical panel related to the strategy for the further product development and design and assessment of Phase III clinical trial protocols for the U.S.
The planned clinical development program for the commercialization of INFECTON® is nearing the completion of Phase II with three of the four planned clinical trial studies completed. All four clinical trials took place at sites in the U.S. and Canada. Studies to define the target market population and appropriate clinical applications are under way and are expected to be completed in time to guide the design of Phase III studies, which are expected to begin in 2006. An expert panel is being assembled to review the clinical results as they are assessed and analyzed, to review potential target markets, and to advise on the design of Phase III studies and appropriate indications.
An expert medical panel was assembled to assess the results of clinical testing performed to date with FIBRIMAGE® in conjunction with market related information derived from two market studies that have been conducted recently. The report and recommendations of this expert panel will be used to assess the strategy for further development of FIBRIMAGE® and design and assessment of Phase III clinical trial protocols for the U.S.
Selling, general and administrative expenses increased for the year ended December 31, 2005, compared to the same periods of 2004 mainly due to one-time costs relating to the Companys exit from the brachytherapy market and costs of market research studies and activities.
The Company incurred approximately $457,000 of one-time costs associated with the exit of the brachytherapy business during 2005. Over 60% of the costs incurred related to accrual of license termination costs related to the business and is included in selling, general and administration expense. The remainder of the exit costs related to unused inventory components are included in cost of goods sold. The majority of capital equipment used in the BrachySeed® product line, specifically the robotic equipment, is being redeployed in both the radiopharmaceutical and contract manufacturing segments.
Depreciation and amortization expense for this segment increased 10% for the year ended December 31, 2005, compared to 2004 due to the amortization of costs related to the upgrade of warehousing and shipping facilities completed late in 2004.
Effective May 2005, the Company appointed Mr. Jean-Pierre Robert as the new President of the DRAXIMAGE division.
Mr. Robert previously served as Vice President and General Manager of Tyco Healthcare (Canada), overseeing domestic and export operations, following its acquisition of Mallinckrodt (Canada), where he held the same position. Most recently, he was President and CEO of an emerging Canadian biopharmaceutical company. He has extensive health care industry experience, including executive, general management, marketing and sales roles involving diagnostic, pharmaceutical, chemical and laboratory products with Mallinckrodt, Fisher Scientific Canada, Hoechst and Bayer (Canada). He holds a B.Sc. and was a member of the Canadian Society of Nuclear Medicine.
During the third quarter of 2005, the Company hired Dr. Jean De Serres as Vice President, Clinical Research and Regulatory Affairs. Dr. De Serres has twenty years of experience in establishing and managing both small and large teams in medical and regulatory affairs, clinical research and sales and marketing. He is responsible for establishing and maintaining clear lines of communication with regulatory agencies in key jurisdictions worldwide, in order to bring new products to market in a timely manner. He has initiated a process to prioritize projects in order to accelerate development of the products currently in the research and development pipeline to maximize their value.
During the third quarter of 2005, the Company hired Mr. Francois Bergeron as the new Director of Marketing for its radiopharmaceutical business. Mr. Bergeron previously served as a senior executive in the biotechnology sector and has experience in various marketing, sales, business development and training roles in the pharmaceutical and life sciences industries. The initial focus of Mr. Bergeron is to maximize the penetration of the U.S. market through enhanced relationships with existing customers. In addition, efforts are under way to establish new international partnerships and distribution networks to facilitate the future sales of product globally.
Discussions continue between DRAXIMAGE and its major distribution and marketing partners in the U.S. radiopharmaceutical sector and between potential partners in other international markets to identify new products or product improvement opportunities. The in-licensing of new products or technologies continues to be explored.
Comparison of Years Ended December 31, 2004 and 2003
Revenues for the year ended December 31, 2004 increased 6.8% compared with 2003 as the increase in product sales from radioiodine products (substantially sodium iodide I-131 sales to the U.S.) was offset by a decrease in royalty and licensing revenue related to one-time non-recurring items in 2003 and lower cold kit sales in the fourth quarter of 2004. While cold kit sales decreased in October and November due to changes in customer purchasing patterns, December sales returned to traditional levels.
On March 1, 2004, DRAXIMAGE announced that it had received FDA approval to produce and market a new formulation of a diagnostic product for preparing a skeletal imaging agent that is used to demonstrate areas of altered osteogenesis or bone growth. The newly formulated diagnostic product, called MDP-25, provides an increased ability to more effectively image the extremities of the skeleton, particularly the hands and feet.
MDP-25 was launched in the fall of 2004 with the intent of it being an improved alternative to MDP-10, but has not yet succeeded in displacing MDP-10 based on its current formulation. Accordingly, the Company anticipates slower growth in MDP-25 sales and continues to provide MDP-10.
There were no significant changes to shipments of BrachySeed® I-125 to the U.S. and Canada in 2004 compared with 2003.
For the year ended December 31, 2004, EBITDA margin decreased to 24.3% compared with 25.1% (excluding the impact of one-time non-recurring items in 2003) for the same period of 2003. The decreased margin reflects increased sales and marketing activities, increased research and development spending and lower sales of lyophilized kits in the fourth quarter of 2004, which offset the increase in sales of radioactive sodium iodide I-131 products.
The growth in product revenues over 2003 was slower than the Company expected and resulted in the Company issuing reduced revenue expectations in the third quarter of 2004. These reduced expectations were met at year end. EBITDA margin for 2004 was within our original guidance targets.
Research and development expenditures increased $0.4 million for the year ended December 31, 2004 as compared to 2003 due to the ramping up of activities related to FIBRIMAGE® and INFECTON®, specifically clinical trials.
In September 2004, the Company received approval from the FDA to initiate a Phase II clinical trial of INFECTON®. This study will examine patients suffering from bacterial osteomyelitis, a chronic or acute infection of the bone.
An interim analysis of the Phase II images obtained in the AMISCAN trial were very clear in definitive myocardial infarction but insufficiently precise in very early equivocal infarction with the current formulation for this indication. In light of these observances the Company decided in the second quarter of 2004 to cease further development of this product for infarct imaging in order to concentrate on its other pipeline products, notably FIBRIMAGE® and INFECTON®.
Depreciation and amortization expense for this segment increased slightly compared to 2003.
On March 22, 2004, DRAXIMAGE concluded a distribution agreement with Isotope Products Laboratories (IPL), a California-based producer of radioactive sources for nuclear medicine and radiography. DRAXIMAGE will market the full line of IPL medical products in Canada, including calibration references for imaging applications plus calibration sources for positron emission tomography and single photon emission tomography.
(in thousands of US dollars) (U.S. GAAP)
(1) Includes $230 of insurance proceeds.
Manufacturing comprises the Companys manufacturing division, DRAXIS Pharma, which is a pharmaceutical contract manufacturer with capabilities in a broad range of dosage forms, specializing in liquid and lyophilized (freeze-dried) injectables and other sterile products. Operating out of a cGMP-compliant 247,000 square-foot facility located in Montreal, Canada, DRAXIS Pharma manufactures pharmaceutical products for DRAXIMAGE, as well as for over 20 other pharmaceutical clients in many international jurisdictions.
Highlights in this segment for the year ended December 31, 2005 are reflective of the impact of the extended shutdown period which impacted results over the last half of 2005:
Revenues of $54.7 million for 2005 represented an increase of 18% for 2004.
Product gross margin percentage of 27% compared to 25% for 2004.
Operating income of $6.4 million compared to $5.6 million for 2004.
Comparison of Years Ended December 31, 2005 and 2004
The Company had originally planned to shut down its sterile operations in contract manufacturing for a period of two to three weeks for regular maintenance in the third quarter of 2005, as is its normal practice. Near the end of this planned shutdown, it became necessary to upgrade additional pieces of equipment in the sterile area, including in its lyophilized products area. This required further cleaning and validation of the facilitys sterile core, thus extending the planned shutdown period to approximately seven weeks. The Company took these significant measures as a result of its internal quality standards. However, as a result of having to recalibrate sterile production schedules based on discussions with clients, which continued into mid to late November 2005, the quality control process required for sterile products prior to shipment, and a delay in receiving component parts from a third party manufacturer in the fourth quarter of 2005, product sales in the second half of 2005 were negatively impacted relative to 2004. However, production levels in the sterile area returned to pre-shutdown levels by November 2005.
Revenues for the year ended December 31, 2005 increased $8.3 million or 18% over the same period of 2004, even factoring in the negative impact of the extended shutdown. The increase was due to increased demand for the production of Hectorol® Injection for Genzyme Corp. (Genzyme) and products under the Companys GlaxoSmithKline (GSK) contract. GSK production rose throughout 2004 as GSK obtained regulatory approvals for products manufactured by the Company in additional foreign markets. Throughout 2004 and into 2005, the Company increased its output capacity through additional production shifts for its sterile business and intends to continue to do so as a result of increasing demand.
Sterile products have accounted for all of the product sales growth on a year-to-date basis. Sterile products represented 76% of manufacturing revenues on a year to date basis compared to 67% for 2004.
The second lyophilization unit, which was fully installed and validated by early 2005, did not contribute a significant amount of incremental revenues in 2005 since much of the activity on the second lyophilizer was in support of meeting customer demand displaced from the third quarter of 2005 as a result of the extended shutdown period. The extended shutdown did, however, significantly slow the pace at which the Company was able to carry the normal commercial activities on its second lyophilization unit. This results from the focus being placed on ensuring that existing customer demand and requirements were met. Capacity was, accordingly, largely reserved for that purpose in the latter part of 2005.
Product transfer and validation activities are necessary as a precursor to significant commercial volumes and do not create significant revenues, although they consume significant available capacity. Revenues from the second lyophilization unit are expected to increase beginning in 2006 and more significantly into 2007 as the Company refocuses activities back to new product introductions and new contract negotiations in 2006.
Product gross margin percentage for the year ended December 31, 2005 increased to 27% from 25% compared to 2004. The increases are related to volume growth, principally of higher margin sterile products which had taken place prior to the extended shutdown period. The volume growth was made possible by increasing the capacity for manufacturing sterile products through the introduction of additional production labour. Improved capacity utilization has directly resulted in higher margins through substantially improved absorption of overhead costs. The extended shutdown had the impact of
lowering product gross margin percentage for the full year by between 2-4% and at least 5% over the final six months of 2005.
Excluding the impact of foreign currency translation, the increase in selling, general and administrative expenses for the year end 2005 compared to 2004 relates to the investment in process improvement initiatives and severance costs of $250,000 related to steps taken to reduce the overhead cost structure in contract manufacturing. The Company has embarked on process improvement initiatives aimed at enhancing information systems and information technology to improve efficiency and productivity in the key processes of production planning, manufacturing and quality control product release. We believe the process improvement initiatives will, over time, increase throughput of volumes within the existing manufacturing footprint and thereby increase capacity. Furthermore, the Company expects to increase operating margins over time through the application of more efficient processes.
Since virtually all selling, general and administrative costs are denominated in Canadian dollars and translated into US dollars, the strengthening of the Canadian dollar since early 2004 has resulted in inflated selling, general and administrative costs upon translation into US dollars of about $346,000 for the year ended December 31, 2005. These costs are offset by overall growth of absolute margins upon translating Canadian denominated sales into US dollars.
Depreciation and amortization for the fourth quarter of 2005 increased 29% for the year ended December 31, 2005 over 2004, due principally to completed capital projects including additional autoclave capacity, and following the completion of the installation and validation of the Companys second lyophilization unit in the second quarter of 2005.
The Company announced on September 1, 2005, that it renewed its production outsourcing arrangement with Pfizer Canada Inc., Pfizer Consumer Healthcare division. The new three-year manufacturing agreement is effective as of January 1, 2005 and will allow the Company to continue to produce several non-prescription products as one of a select number of approved suppliers to Pfizer Consumer Healthcare Canada.
Comparison of Years Ended December 31, 2004 and 2003
For the year ended December 31, 2004, revenues have increased by $19.5 million or 72.2% over the same period of 2003. The increase was due to the ramp-up in new sterile products business related primarily to the production of Hectorol® Injection for Bone Care International, Inc. (now Genzyme) and products under the Companys GSK contract. Production of Hectorol® Injection has continued to rise throughout 2004. In addition, GSK production rose in 2004 as products obtained regulatory approvals in additional foreign markets. Beginning in late 2003, the Company increased its output capacity through additional production shifts for its sterile business and is continuing to do so as a result of increasing demand. The 2004 revenue growth also reflects the significant impact of the Companys investment in increasing capacity and work performed in prior years to introduce new products to our facilities.
More than 78% of the revenue growth in 2004 over 2003 is related to sterile products. For 2004, sterile products represented approximately 67% of manufacturing revenues compared to 59% for 2003.
EBITDA for this segment increased $7.0 million for 2004 compared with the same period of 2003. The increase is related to the positive impact of the ramping up of sterile products business throughout 2004, the positive financial impact of increased capacity utilization, and changes to the price structure that became effective during 2004. For the year ended December 31, 2004, these positive factors were partially offset by the impact of shutdown activities in the third quarter of 2004. In addition to completing regular maintenance activities, the 2004 shutdown accommodated the completion of the
installation of a second lyophilizer which materially increases the Companys lyophilization capacity. In addition, the Company increased autoclave capacity which is critical to reducing bottlenecks and further increasing sterile capacity.
Improved capacity utilization has directly resulted in better margins through substantially improved absorption of overhead costs.
For the year ended December 31, 2004, EBITDA margin was 17.3% compared to 4.0% over the same period of 2003, reflecting the overall volume growth in sterile products business and the result of price structure changes that became effective during 2004. Since sterile product manufacturing carries significantly higher margins than non-sterile manufacturing, the shift in business mix to sterile production throughout 2004 has driven margins significantly higher. The normal year-end holiday period scale down of production did not have a significant impact on the results of the fourth quarter of 2004 due to the high volume of production in the period immediately preceding it. The Companys improving margins in contract manufacturing also reflect concentrated efforts in early 2004 to ensure changes to the underlying costs of manufacturing are fully reflected in the pricing structure. The impact of these efforts has positively impacted margins as compared to 2003.
Depreciation and amortization for 2004 increased 66.9% over 2003 related to completion of a significant capital improvement program that commenced in 2002 and was completed in 2004.
On February 23, 2004, DRAXIS Pharma announced that a new collective agreement covering its unionized hourly employees, represented by the United Food and Commercial Workers International Union, at its contract manufacturing operations was reached. The new collective agreement, which is retroactive to May 1, 2003, has a five-year term. The agreement includes provisions for additional weekend shifts that will effectively allow DRAXIS Pharma to increase productive capacity and move toward its objective of operating 24 hours a day, 7 days a week in its sterile area.
CORPORATE AND OTHER
(in thousands of US dollars) (U.S. GAAP)
The Corporate and Other segment is comprised of: amortization of deferred revenues, royalties and expenses associated with the Companys business agreements with Pfizer Inc. with respect to ANIPRYL®; deferred revenues and expenses from GSK Consumer Healthcare with respect to the SpectroPharm line of products; revenues related to royalties and milestones from Shire in connection with the divestiture of DRAXIS Pharmaceutica; non-allocated corporate expenses; and inter-segment eliminations. The Company follows a policy of not allocating its central corporate expenses to its operating business segments.
Comparison of Years Ended December 31, 2005 and 2004
Revenues related to the corporate segment were lower compared to the fourth quarter 2004 due to a reduction of deferred revenue amortization offset by lower inter-segment eliminations. In addition, as of January 31, 2005, all deferred revenue related to the SpectroPharm line of products was fully amortized. The amortization of deferred revenue related to the SpectroPharm line had accounted for approximately $500,000 of non-cash revenues per full quarter.
Also during 2005, revenues for this segment included the receipt of contingent milestones of $0.9 million from Shire, which the Company earned in early 2005, partially offset by a reduction of deferred revenue amortization. The contingent milestones are earned based on market driven conditions related directly to product sales.
Depreciation and amortization expense in this segment in 2005 decreased as compared to 2004 since the Company had fully amortized product rights related to the SpectroPharm line in January 2005.
Selling, general and administrative expenses increased $571,000 for the year ended 2005 compared with the same period in 2004 due to incremental spending on corporate business development activities, regulatory compliance costs related to the Sarbanes-Oxley Act of 2002 and the impact of foreign exchange in the translation of Canadian denominated costs to US reporting dollars. Aside from the impact of foreign currency, none of the factors noted has increased selling, general and administrative expenses by more than $200,000 individually. As a result of the strengthening of the Canadian dollar
versus the US dollar since early 2004, approximately $438,000 for 2005 is related solely to foreign currency translation.
Operating income from this segment decreased compared to 2004 due to the factors described above.
Comparison of Years Ended December 31, 2004 and 2003
Revenues related to the corporate segment were slightly lower compared to 2003 as increased royalties primarily in connection with the sale of product rights to Shire were more than offset by increased inter-segment eliminations (transactions between DRAXIMAGE and DRAXIS Pharma) and lower royalties related to ANIPRYL®.
EBITDA was lower by $1,174,000 for the year ended December 31, 2004 compared to 2003 due to increased costs of long-term incentive plans, which are valued based on the appreciation in the Companys stock price and lower royalties related to ANIPRYL®. This was partially offset by Shire royalties and milestone revenues.
Depreciation and amortization expense in this segment in 2004 was largely unchanged as compared to 2003.
Appointment of Chief Operating Officer (COO)
On October 4, 2005, the Company announced that it named Dan Brazier, formerly Senior Vice President, Corporate Development and Strategic Planning, as COO of the Company. Mr. Brazier assumes responsibilities for the day-to-day operations across the Company and reports to Dr. Martin Barkin, President and Chief Executive Officer.
The creation of the COO position is the result of the growth of the Companys operations in scope requiring a senior executive dedicated to overseeing operating efficiency and profitability as well as customer service.
Normal Course Issuer Bid
On December 8, 2005, the Board of Directors of the Company authorized the repurchase for cancellation of up to 3,522,530 of its common shares through a Normal Course Issuer Bid (the Issuer Bid), which represented 10% of the public float on December 6, 2005. In accordance with the rules of The Toronto Stock Exchange (TSX), such purchases may be made beginning on December 15, 2005 and ending no later than December 14, 2006.
As at February 28, 2006, 171,400 shares had been repurchased and cancelled at an average price of CDN$5.15.
On July 22, 2005, we announced that, together with other defendants, we had received a Statement of Claim filed before the Superior Court of Justice of Ontario alleging that Permax®, a drug that we distributed in Canada for a third party manufacturer prior to July 2003, causes compulsive/obsessive behaviour, including pathological gambling. The plaintiff is seeking to have this action certified as a class action. We believe this claim against us is without merit and intend to vigorously defend this proceeding and any motion for certification. Prior to July 2003, Permax® was
distributed in Canada by DRAXIS Pharmaceutica, our Canadian pharmaceutical sales and marketing division. In July 2003, we sold the DRAXIS Pharmaceutica division to Shire. No amounts have been accrued pursuant to the claim.
DRAXIS Added to the NASDAQ Biotechnology Index® and the NASDAQ Health Care Index®
On May 23, 2005, DRAXIS Health was added to the NASDAQ Biotechnology Index® and on July 27, 2005, DRAXIS Health was added to the NASDAQ Health Care Index®.
Disclosure Controls and Procedures
As of December 31, 2005, an evaluation was carried out, under the supervision of and with the participation of management, including the President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Multilateral Instrument 52-109. Based on that evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective, in accordance with the requirements of Multilateral Instrument 52-109.
LIQUIDITY AND CAPITAL RESOURCES
(in thousands of US dollars) (U.S. GAAP)
(1) Excluding cash and cash equivalents, restricted cash, current portion of deferred revenues, current portion of long-term debt and customer deposits.
(2) Each whole warrant entitles the holder to acquire one common share at price of CDN$8.50, subject to certain adjustments, any time prior to April 24, 2006.
Cash and cash equivalents at December 31, 2005 totalled $12.4 million as compared with $5.9 million as at December 31, 2004. The increase is attributable to the increasing cash earnings of the Company and proceeds from the exercise of stock options and is offset by investment in working capital and capital expenditures. Cash and cash equivalents at December 31, 2004 totalled $5.9 million as compared with $10.6 million as at December 31, 2003. The decrease from 2003 to 2004 was related to the repayment of overall debt during 2004, which offset the overall net increase in cash flows from operating activities.
The Company follows a policy of investing its surplus cash resources in high quality, liquid, short-term commercial paper and government treasury bills and money market mutual funds which invest in high quality, short-term securities. All investments as of December 31, 2005 had less than three
months maturity. As at December 31, 2005 there were no restrictions on the flow of these funds nor have any of these funds been committed in any way.
For the year ended December 31, 2005, net cash flows from operations increased to $9.3 million or $4.6 million higher compared to the same period of 2004. This was driven by increased operating earnings and the fact that a smaller portion of those earnings relate to non-cash deferred revenue amortization. For the year ended December 31, 2004, net cash flows from operating activities were $4.8 million compared to net cash outflows of $3.1 million for the same period of 2003.
Non-financial working capital comprising accounts receivable, inventories, prepaid expenses, current deferred income tax assets, accounts payable and accrued liabilities increased slightly to $18.9 million as at December 31, 2005 from $18.4 million as at December 31, 2004. Non-financial working capital increased to $18.4 million as at December 31, 2004 from $12.8 million as at December 31, 2003, driven mainly by a significant increase in raw material and packaging components in contract manufacturing to support the ramp-up in business and increased accounts receivable related to growth in the business.
Capital expenditures for 2005 were mainly attributable to expenditures related to increasing operating efficiency in production areas through automation and to remove bottlenecks in contract manufacturing, coupled with infrastructure upgrades, principally information technology.
Capital expenditures for 2004 were mainly attributable to expenditures under DRAXIS Pharmas previously announced capital plan and, specifically, payments on installation activities that took place during the shutdown period.
Proceeds from the issuance of treasury common shares by the Company attributable to the exercise of options generated $1.6 million for the year ended December 31, 2005 compared with $1.6 million for the same period of 2004.
The Company was in compliance with all lending covenants as at December 31, 2005 and 2004.
The Company did not make any acquisitions in 2005 or during 2004 other than the acquisition of all minority interest holdings in DRAXIS Pharma in April 2004.
All third party debt was repaid over the course of 2004 (see Debt Repayment and Bank Financing). During 2003, the Company reduced its outstanding third party debt through the repayment of its secured revolving credit facility at DRAXIS Pharma and the repayment of its unsecured subordinated obligation.
On April 22, 2004, the Company closed an offering of 3,053,436 units at a price of $4.82 (CDN$6.55) per unit for gross proceeds net of related expenses of $13.4 million (CDN$18.2 million). Each unit consists of one common share of the Company and one-half of one share purchase warrant. Each whole warrant will entitle the holder to acquire one common share of the Company at a price of CDN$8.50 at any time prior to April 24, 2006.
The proceeds of the offering were used to finance the $9.6 million (CDN$13.0 million) cash purchase of the 32.7% interest in the Companys manufacturing subsidiary, DRAXIS Pharma, that was previously owned by SGF and to repay $4.8 million (CDN$6.4 million) of outstanding loans owed by DRAXIS Pharma.
Debt Repayment and Bank Financing
On April 22, 2004, as a result of the equity financing and acquisition of the remaining interest in the contract manufacturing operations, the Company repaid all outstanding debt owed to SGF ($3.1 million) and Investissement Québec ($1.7 million).
During 2004, the Company completed the arrangement of new credit facilities with its bankers, the National Bank of Canada, to replace all existing facilities at the subsidiary level as follows:
CDN$15 million or US$ equivalent operating facility payable within 364 days of drawing upon the facility. The operating facility can be extended by one year upon agreement with the lender. As at December 31, 2005, no amount was drawn under this facility.
CDN$10 million or US$ equivalent term facility, repayable in full in three years. As at December 31, 2005, no amount was drawn under this facility.
Interest under the credit facilities (both term and operating) is based on the banks prime lending rate provided the Company meets certain ratios, which as at December 31, 2005 were met.
Credit facilities, if drawn upon, are to be secured by specific assets of DRAXIS Specialty Pharmaceuticals Inc., and shares and guarantees of certain subsidiaries.
As a result of the debt repayme