BELLUS Health reports results for first half of fiscal 2009



    LAVAL, QC, Aug. 11 /CNW Telbec/ - BELLUS Health Inc. ("BELLUS Health" or
the "Company") (TSX: BLU) reported results for the second quarter and first
half ended June 30, 2009. All currency figures reported, including comparative
figures, are reported in US dollars, unless otherwise specified.
    For the three-month period ended June 30, 2009, the net income amounted
to $12,880,000 ($0.10 per share), compared to a net loss of $12,742,000 ($0.26
per share) for the corresponding period the previous year. For the six-month
period ended June 30, 2009, the net income amounted to $2,973,000 ($0.03 per
share), compared to a net loss of $25,784,000 ($0.52 per share) for the same
period last year. Results for the periods ended June 30, 2009 include a gain
on extinguishment of debt in the amount of $17,020,000 resulting from
amendments to the terms of the $42,085,000 aggregate principal amount of 6%
convertible senior notes issued in November 2006, as well as on the $4,500,000
principal amount of 6% senior convertible notes issued in May 2007. These
amendments took place at the time of a refinancing of the Company in April
2009 and were a condition thereto. Results for the periods ended June 30,
2009, also include a net credit for vacant space in the amount of $2,196,000
in relation to the vacant portion of the Company's premises.
    As at June 30, 2009, the Company had available cash, cash equivalents and
marketable securities of $13,326,000, compared to $10,595,000 at December 31,
2008. The increase is primarily due to the completion of the CDN$20,500,000
convertible notes financing in April 2009, which amount is offset by funds
used in operating activities.
    On July 7, 2009, subsequent to the close of the second quarter of fiscal
2009, BELLUS Health announced that it was filing a preliminary short form
prospectus in each of the provinces of Canada for a CDN$12,080,018 million
rights offering to holders of its common shares. Each of Victoria Square
Ventures Inc. and Vitus Investments III Private Limited, a corporation whose
shares are beneficially owned by Mr. Carlo Bellini, have entered into separate
standby purchase commitments with BELLUS Health whereby they have agreed, on a
separate and individual and not solidary basis, to purchase such of the common
shares that are not otherwise purchased under the rights offering up to a
maximum for a subscription price of CDN$4,000,000 each, for an aggregate
amount of CDN$8,000,000. The record date for this rights offering is August 5,
2009. Please refer to the "Liquidity and capital resources" section below for
further details.

    Consolidated Financial Results Highlights

    This Management's Discussion and Analysis (MD&A) provides a review of the
Company's operations and financial performance for the three and six-month
periods ended June 30, 2009, compared to the three and six-month periods ended
June 30, 2008. It should be read in conjunction with the Company's unaudited
consolidated financial statements for the periods ended June 30, 2009, as well
as the Company's audited consolidated financial statements for the year ended
December 31, 2008, which have been prepared in accordance with Canadian
Generally Accepted Accounting Principles (GAAP). For discussion regarding
related-party transactions, contractual obligations, disclosure controls and
procedures, internal control over financial reporting, critical accounting
policies and estimates, recent accounting pronouncements, and risks and
uncertainties, refer to the Annual Report and the Annual Information Form for
the year ended December 31, 2008, as well as registration statements and other
public filings, which are available on SEDAR at www.sedar.com. This document
contains forward-looking statements, which are qualified by reference to, and
should be read together with the "Forward-Looking Statements" cautionary
notice, which can be found at the end of this MD&A. All currency figures
reported in this document, including comparative figures, are reported in US
dollars, unless otherwise specified. This MD&A was prepared by Management with
information available as at August, 11, 2009.

    Results of operations

    For the three-month period ended June 30, 2009, the net income amounted
to $12,880,000 ($0.10 per share), compared to a net loss of $12,742,000 ($0.26
per share) for the corresponding period the previous year. For the six-month
period ended June 30, 2009, the net income amounted to $2,973,000 ($0.03 per
share), compared to a net loss of $25,784,000 ($0.52 per share) for the same
period last year. Results for the periods ended June 30, 2009, include a gain
on extinguishment of debt in the amount of $17,020,000 resulting from
amendments to the terms of the $42,085,000 aggregate principal amount of 6%
convertible senior notes issued in November 2006 (2006 Notes), as well as on
the $4,500,000 principal amount of 6% senior convertible notes (2007 Notes)
issued in May 2007. These amendments took place at the time of a refinancing
of the Company in April 2009 and were a condition thereto. Results for the
periods ended June 30, 2009, also include a net credit for vacant space in the
amount of $2,196,000 in relation to the vacant portion of the Company's
premises. Refer to the Liquidity and Capital Resources section for details.
    Gross sales amounted to $82,000 for the current quarter ($196,000 for the
six-month period) and net sales amounted to negative $189,000 for the current
quarter (negative $105,000 for the six-month period). These sales represent
the sales of VIVIMIND(TM) (also known as tramiprosate and homotaurine), the
Company's first natural health brand launched on September 2, 2008, in Canada
and also globally on the Internet. VIVIMIND(TM) is commercialized by OVOS
Natural Health Inc., a wholly owned subsidiary of BELLUS Health. VIVIMIND(TM),
to protect memory function, is based on homotaurine, a naturally occurring
ingredient found in certain seaweed. Targeted at healthy baby boomers, this
patented natural health brand is expected to address a largely underserved
self-care market by providing a scientific, evidence-based health solution.
VIVIMIND(TM) is the direct result of over 15 years of significant scientific
research, including clinical testing in over 2,000 individuals. Results
outlining the beneficial effects of homotaurine were published in the June
2009 edition of the Journal of Nutrition, Health and Aging, the peer-reviewed
journal of the European Union Geriatric Medicine Society. They show that
homotaurine slows the loss of volume in the hippocampus, a region of the brain
associated with memory, and suggest that homotaurine has a beneficial effect
on cognition. On the regulatory front, the Company continues to move forward
on its original goal of making VIVIMIND(TM) available on a worldwide basis. On
July 16, 2009, the Company announced that the Italian Ministry of Health has
granted a certificate of free sale for VIVIMIND(TM) as a food supplement,
permitting the commercial sale of the product in that country. This
certificate opens up means by which to pursue marketing and sales
authorization in the other member states of the European Union. With respect
to the United States, the Company has filed a premarket notification of a New
Dietary Ingredient for homotaurine with the US Food and Drug Administration,
and is pursuing mandatory associated regulatory activities to obtain marketing
approval for homotaurine as a dietary supplement. Negative net sales for the
current periods were attributable to a provision recorded during the current
quarter following the Company's decision to reduce VIVIMIND(TM)'s suggested
retail price effective July 7, 2009 via announcement to retail customers. This
decision is supported by changing economic conditions as well as comments of
consumers, healthcare providers and retail customers. This price adjustment
will make VIVIMIND(TM) accessible to a broader clientele and ultimately
promote the growth of the cognitive natural health market.
    Research and development expenses, before research tax credits and
grants, amounted to $2,869,000 for the current quarter ($6,479,000 for the
six-month period), compared to $7,123,000 for the same period the previous
year ($15,903,000 for the six-month period). The decrease is mainly
attributable to a reduction in the research and development activities and
associated workforce. The Company is currently developing NC-503 (eprodisate)
for the treatment of Type II diabetes and certain features of metabolic
syndrome. During the second quarter of 2008, a 26-week, double-blind,
placebo-controlled Phase II clinical trial in diabetic patients was initiated
in Canada and patient recruitment is concluded. The Company has revised the
expected timing of the announcement of results for the Phase II clinical
trial; rather than release interim results in the second half of 2009, the
Company will provide final results upon completion of the study. The release
of such final results is expected in the first quarter of 2010. Results from a
validated rat model of diabetes and metabolic syndrome have demonstrated that
NC-503 decreases glycemic levels in obese diabetic Zucker rats, when compared
to the control group, while preserving 40% more pancreatic islet cells
(insulin secreting cells) as compared to the control group, and have shown
some protective effect on renal function.
    Research tax credits and grants amounted to $154,000 for the current
quarter ($457,000 for the six-month period), compared to $467,000 for the
corresponding period the previous year ($864,000 for the six-month period).
Research tax credits represent refundable tax credits earned under the Quebec
Scientific Research and Experimental Development Program for expenditures
incurred in Quebec. The decrease is attributable to lower research and
development expenses incurred in Quebec during the current periods.
    General and administrative expenses totaled $1,209,000 for the current
quarter ($4,357,000 for the six-month period), compared to $2,373,000 for the
same quarter the previous year ($5,949,000 for the six-month period). Expenses
for the current three-month period are presented net of an amount of
$1,245,000 in relation to amortization of the deferred gain on sale of
property ($1,580,000 for the six-month period) compared to $334,000 for the
corresponding period the previous year ($669,000 for the six-month period).
Refer to Liquidity and Capital Resources section for details.
    Marketing and selling expenses amounted to $560,000 for the current
quarter ($2,438,000 for the six-month period) compared to $2,035,000 for the
same quarter and six-month period of the previous year and represent expenses
incurred in relation to the commercialization of the Company's natural health
brand, VIVIMIND(TM).
    Stock-based compensation amounted to $724,000 for the current quarter
($1,176,000 for the six-month period), compared to $824,000 for the
corresponding quarter the previous year ($1,859,000 for the six-month period).
This expense relates to stock options and stock-based incentives, whereby
compensation cost in relation to stock options is measured at fair value at
the date of grant and is expensed over the award's vesting period. The
decrease in the six-month period is mainly due to adjustments in relation to
forfeitures of stock options, which occurred as a result of reductions in the
workforce.
    Net credit for vacant space amounted to $2,196,000 and is in relation to
the vacancy of a portion of the Company's premises following the reduction in
the Company's research activities and associated workforce. Refer to Liquidity
and Capital resources section for details.
    Interest income amounted to $30,000 for the current quarter ($43,000 for
the six-month period) compared to $213,000 for the same quarter the previous
year ($711,000 for the six-month period). The decrease is mainly attributable
to lower average cash balances and lower interest rates during the current
periods, compared to the same periods the previous year.
    Accretion expense amounted to $1,069,000 for the current quarter
($2,351,000 for the six-month period), compared to $1,225,000 for the same
quarter the previous year ($2,432,000 for the six-month period). Accretion
expense represents the imputed interest under GAAP on the 2006, 2007 and 2009
Convertible notes. The Company accretes the carrying values of the convertible
notes to their face value through a charge to earnings over their expected
lives. As of June 30, 2009, $13,000,000 of the Amended 2006 Notes, $500,000 of
the Amended 2007 Notes and CDN$21,115,000 of the 2009 Notes remained
outstanding.
    Gain on extinguishment of debt amounted to $17,020,000 and resulted from
amendments to the terms of the 2006 and 2007 Notes that took place at the time
of a refinancing of the Company in April 2009. Refer Liquidity and Capital
Resources section for details.
    Change in the fair value of third party Asset-Backed Commercial Paper
(ABCP) increased by $524,000 for the current quarter (increase of $183,000 for
the six-month period) compared to nil for the same quarter the previous year
(decrease of $375,000 for the six-month period). This represents net changes
during the periods on the valuation of ABCP held by the Company. Refer
Liquidity and Capital Resources section for details.
    Foreign exchange loss amounted to $426,000 for the current quarter (loss
of $303,000 for the six-month period), compared to a gain of $106,000 for the
same quarter the previous year (gain of $860,000 for the six-month period).
Foreign exchange gains or losses arise on the movement in foreign exchange
rates in relation to the Company's net monetary assets denominated in
currencies other than US dollars, the Company's functional and reporting
currency, such net monetary assets consisting primarily of assets and
liabilities denominated in Canadian dollars. Foreign exchange gains for the
comparative six-month period include $924,000 of gain recognized on the
reclassification of the refundable amount ($6,000,000) due to Centocor, Inc.,
from deferred revenue (non-monetary liability) to accrued liability (monetary
liability) following the recovery by the Company of ownership rights in and
control of eprodisate (KIACTA(TM)).
    Other income amounted to $231,000 for the current quarter ($760,000 for
the six-month period), compared to $256,000 for the same quarter the previous
year ($534,000 for the six-month period). Other income consists of
non-operating revenue, such as sub-lease revenue and other items. The increase
in the six-month period is attributable to a gain realized during the first
quarter of 2009 on the settlement of a dispute with a supplier.

    Liquidity and capital resources

    As at June 30, 2009, the Company had available cash, cash equivalents and
marketable securities of $13,326,000, compared to $10,595,000 at December 31,
2008. The increase is primarily due the completion of the CDN$20,500,000
convertible notes financing in April 2009, discussed below, which amount was
substantially consumed in operating activities.
    On April 16, 2009, the Company announced the completion of the first
tranche of a CDN$20,500,000 convertible notes (2009 Notes) financing with
Vitus Investments III Private Limited (Vitus), a corporation whose shares are
beneficially owned by Mr. Carlo Bellini, and Victoria Square Ventures Inc.
(VSVI), a subsidiary of Power Corporation of Canada (together with Vitus, the
Investors). On that date, BELLUS Health received gross proceeds of
CDN$10,000,000 for the issuance of 2009 Notes (CDN$5,000,000 from each Vitus
and VSVI). On June 3, 2009, BELLUS Health received a second tranche of
CDN$10,500,000 (CDN$5,000,000 from Vitus and CDN$5,500,000 from VSVI) and
issued additional 2009 Notes in consideration for the second tranche principal
amount received. The aggregate amount of the 2009 Notes issued to the
Investors was increased by CDN$615,000 to cover a set up fee in connection
with the financing.
    In connection with this financing, and as a condition thereto, BELLUS
Health and all of the existing note holders agreed to amend the terms of the
outstanding 2006 Notes and 2007 Notes to either make them convertible into a
new series of preferred shares of BELLUS Health and to have these notes
converted into such preferred shares immediately, or to otherwise amend the
existing notes which remained outstanding. In addition, the landlord of the
premises of BELLUS Health in Laval, Quebec, has agreed, as a condition
precedent to the financing, to defer certain rental payments and to accept
payment of the deferred rent in cash or Common Shares of BELLUS Health (at the
then applicable market price) at the option of BELLUS Health at a later date.
The features of the 2009 Notes issued to the Investors, the terms of the
preferred shares, the amended terms of the 2006 Notes and 2007 Notes, as well
as the amended terms of the lease for the Laval premises are set forth below.
    The 2009 Notes are secured, subject to certain permitted encumbrances, by
a first charge on all of the assets of BELLUS Health and certain of its
subsidiaries. Interest will be capitalized on the 2009 Notes at the rate of
15% per year compounded annually and the notes and capitalized interest will
mature 5 years and one day from the date of issuance. At maturity, capital and
interest are payable in cash or shares of BELLUS Health, at the option of the
holder, at CDN$0.20 per share (the Financing Conversion Price). The 2009 Notes
include customary anti-dilution provisions in respect of issuances of
securities or distributions to shareholders and, in the event BELLUS Health
issues additional equity or equity-linked securities at a price per common
share that is less than the Financing Conversion Price then in effect, "full
ratchet" anti-dilution protection (which will have the effect of lowering the
Financing Conversion Price to the new issue price of equity or equity-linked
securities) will apply, subject to certain exceptions. In addition, the 2009
Notes contain adjustment provisions in the event of a change of control and
negative covenants, as well as a pre-emptive right in respect of future
financings of BELLUS Health. The 2009 Notes issued to VSVI contains certain
piggyback rights in favour of VSVI. The exercise of pre-emptive and piggyback
rights will be subject to regulatory approval. Assuming that each of the 2009
Notes remain outstanding until maturity, is converted in full at the Financing
Conversion Price and that all interest thereon is paid by the issuance of
Common Shares at the Financing Conversion Price, the maximum number of Common
Shares issuable under the 2009 Notes is 212,349,035, representing a potential
dilution factor of 407%, based on the number of Common Shares issued and
outstanding as at June 30, 2009.
    Each of Vitus and VSVI has the right to nominate two (2) members to the
Board of Directors of BELLUS Health.
    In connection with the 2009 Notes financing, BELLUS Health and all of the
existing note holders agreed to amend the terms of the outstanding 2006 Notes
and 2007 Notes (the Original Notes). Holders of $29,085,000 principal amount
of 2006 Notes and $4,000,000 principal amount of 2007 Notes agreed to amend
the terms of their notes to make them convertible into the preferred shares in
the authorized capital of BELLUS Health and received 3,096 preferred shares
per $1,000 aggregate principal amount of existing convertible notes,
representing a conversion price equal to 200% of the Financing Conversion
Price (resulting in a conversion price of CDN$0.40 per share) (the Preferred
Share Conversion Price). A total of 102,431,160 preferred shares were issued
to note holders who elected to receive preferred shares. Such preferred shares
are convertible into Common Shares on a one-to-one basis, subject to
adjustment, entitle the holder to 6% cumulative dividends, payable in cash or
Common Shares at the then market price at the option of the Company, and shall
be automatically converted into Common Shares five years from the date of
issuance. The amendment and immediate conversion of Original Notes into
preferred shares triggered a gain on extinguishment of debt in the amount of
$10,777,000 during the current quarter. Assuming that each of the preferred
shares remain outstanding until maturity, is converted in full at the
Preferred Share Conversion Price and that all dividends payable in respect of
the preferred shares are paid by the issuance of Common Shares at an assumed
market price of CDN$0.24, the maximum number of Common Shares issuable on
conversion of the preferred shares would be 147,778,326, representing a
potential dilution factor of 283%, based on the number of Common Shares issued
and outstanding as at June 30, 2009. The holders of Original Notes that chose
not to convert their amended notes immediately into preferred shares retained
Original Notes, amended as set out below.
    Holders of $13,000,000 principal amount of 2006 Notes and the one
remaining holder of 2007 Notes (aggregate principal amount of $500,000) agreed
to amend the terms of their notes (Amended Notes), without immediate
conversion into preferred shares. The amendments include providing for a 6%
annual interest rate, payable semi-annually in cash or Common Shares at the
option of BELLUS Health at the then market price of the Common Shares,
replacing the existing conversion rate adjustment period of October 2009 -
November 2009 with a period from October 2012 - November 2012 for conversion
of the Amended Notes at the then applicable market price of the Common Shares
based on a twenty (20) day volume weighted average price at that time, and
replacing the right of the holder to have BELLUS Health redeem the Amended
Notes in November 2011 with a right to have BELLUS Health first redeem the
Amended Notes in January 2014 at the then face value of the notes. Amendments
to the notes also include the removal of certain negative covenants. Amendment
of this aggregate $13,500,000 principal amount of Original Notes triggered a
gain on extinguishment of debt in the amount of $6,243,000 during the current
quarter. Assuming that the Amended Notes are converted in full at an assumed
market price of CDN$0.24 in 2012, when the price of such instruments gets
adjusted based on the then market price of the Common Shares, and that all
interest thereon is paid by way of issuance of Common Shares at an assumed
market price of CDN$0.24, the maximum number of Common Shares issuable under
Amended Notes, as amended, would be 75,199,219, representing a potential
dilution factor of 144%, based on the number of Common Shares issued and
outstanding as at June 30, 2009.
    BELLUS Health has agreed that the right to redeem the Amended Notes shall
be exercisable 90 days prior to the maturity date of the 2009 Notes issued to
the Investors. Any additional unsecured debt, other than operating facilities
or debt that is pari passu or junior in ranking to the Amended Notes, shall
not mature or be redeemable for cash prior to the date on which the redemption
right of the Amended Notes comes into effect. In addition, BELLUS Health has
agreed to certain restrictions on its ability to declare or pay dividends in
cash while the 2009 Notes are outstanding.
    The terms of the 2009 Notes and of the Amended Notes require the
continued listing of the Company's shares on the TSX; failure to meet this
requirement may be an event default which may result in the convertible notes
being immediately due and payable.
    The landlord of the Company's premises, in Laval, Quebec, agreed,
effective April 1, 2009, and continuing through and including the period to
April 7, 2011 (on which date BELLUS Health shall have the right to terminate
the lease (the First Termination Option)), to defer BELLUS Health' base rent
by CDN$166,667 per month (the Deferred Rent). In the event BELLUS Health does
not exercise its First Termination Option, the monthly deferral of the
Deferred Rent will continue for an additional twelve-month period until March
31, 2012 (on which date BELLUS Health shall have the right to terminate the
lease (the Second Termination Option)). The Deferred Rent shall bear interest
at the rate of ten percent (10%) annually, calculated from the first date of
the month when any such component of Deferred Rent becomes due and payable.
Deferred Rent and the accrued interest are evidenced by promissory notes
issued by BELLUS Health to its landlord on the first day of each month when
such Deferred Rent becomes due. The notes are payable in cash or, at the
option of BELLUS Health, through the issuance of Common Shares at the market
price on the day that the notes become payable. Deferred Rent and all notes
evidencing Deferred Rent shall be payable on April 7, 2011, in the event that
the First Termination Option is exercised or, alternatively, on March 31,
2012. In the event that the lease is terminated under the First Termination
Option or the Second Termination Option, BELLUS Health will pay the landlord a
consideration of CDN$6,000,000 or CDN$5,450,000, respectively, payable in
Common Shares at the then market price of the Common Shares (the Termination
Option Payment). The precise amount of rent and number of Common Shares
issuable upon conversion of promissory notes to be issued to the landlord will
depend, among other things, on the extent to which portions of the premises
are sublet or assigned to other tenants during the relevant period. Assuming
that the promissory notes issued to the landlord in respect of deferred rent
and interest thereon remain outstanding until April 7, 2011, are paid by way
of issuance of Common Shares at an assumed market price of CDN$0.24, and that
the lease is terminated pursuant to the First Termination Option, the maximum
number of Common Shares issuable under the notes would be 43,365,913,
representing a potential dilution factor of 83%, based on the number of Common
Shares issued and outstanding as at June 30, 2009.
    In May 2009, BELLUS Health issued 1,594,026 Common Shares in payment of
interest on the outstanding Amended Notes and in June 2009, BELLUS Health
issued 600,000 Common Shares upon conversion of Series A Preferred Shares.
    In June 2009, options to purchase an aggregate of 600,000 Common Shares
were granted to directors of the Company, options to purchase 410,851 Common
Shares and 101,300 Common Shares have been cancelled and expired,
respectively.
    On January 8, 2009, the Company's common stock was delisted from the
NASDAQ Capital Market following the Company's formal notice of its intention
to voluntarily delist its common stock provided to the NASDAQ Stock Market,
notice to the public by press release and the formal notice provided to the
SEC, in December 2008. The decision was taken in light of the continuing,
extreme short-term volatility in the financial markets and, accordingly, in
the Company's market value. Originally, the Company received a NASDAQ Staff
Deficiency Letter dated October 10, 2008, stating that, for 10 consecutive
trading days, the market value of the Company's listed securities had been
below the minimum $50,000,000 requirement for continued inclusion on the
NASDAQ Global Market. The Company filed an application to transfer the listing
of its common stock from the NASDAQ Global Market to the NASDAQ Capital Market
and the transfer was effective as of November 14, 2008. The Company then
received a Deficiency Letter dated December 1, 2008, from the NASDAQ Staff
stating that, for 10 consecutive trading days, the market value of the
Company's listed securities had been below the minimum $35,000,000 requirement
for continued inclusion on the NASDAQ Capital Market. The Company then
formally initiated the steps to voluntarily delist by notifying the NASDAQ
Stock Market and issuing a press release regarding its intention to
voluntarily delist its common stock from the NASDAQ Capital Market. The
Company received the consent of the holders of over a majority in value of the
Company's 2006 Notes and amended the trust indenture governing these notes, so
as to permit delisting from NASDAQ. The Company's listing on the Toronto Stock
Exchange was not affected by the delisting from NASDAQ.
    As at December 31, 2008, the Company held approximately $12,250,000 (of
which $6,250,000 was denominated in Canadian dollars) in principal value of
third party ABCP, including $5,719,000 of third party ABCP acquired as part of
the Innodia acquisition. These investments were due to mature as early as
August 2007, but, as a result of a disruption in the credit markets,
particularly in the ABCP market, they did not settle on maturity. On April 25,
2008, the restructuring plan announced by the Pan-Canadian Investors Committee
(the Committee) in December 2007 was approved by the ABCP holders. On January
21, 2009, the Committee announced that the restructuring plan had been
implemented. Pursuant to the terms of the restructuring plan, the Company
received the following new floating rate interest-bearing notes (New ABCP
Notes) in exchange for its ABCP: CDN$2,306,000 of MAV2 Class A-1 Notes,
CDN$2,773,000 of MAV2 Class A-2 Notes, CDN$503,000 of MAV2 Class B Notes,
CDN$173,000 of MAV2 Class C Notes, CDN$850,000 of MAV2 IA Tracking Notes,
$5,000,000 of MAV3 IA Tracking Notes as well as $977,000 and CDN$985,000 of
MAV3 TA Tracking Notes. The legal maturity of the New ABCP Notes is July 15,
2056, but the actual expected repayment date of the Notes, if held to
maturity, is January 22, 2017. The New ABCP Notes issued following the
restructuring plan are designated as held for trading financial assets.
Previously, the ABCP were also classified in that category. During the quarter
ended June 30, 2009, the Company received partial payments for capital,
totaling $1,459,000 ($1,459,000 for the six-month period), and for accrued
interest, totaling $141,000, ($532,000 for the six-month period) for its
investment in ABCP held since the market disruption. The Company has not
recorded any interest income since the initial maturity of the ABCP it held;
however, the expected proceeds from the interest were considered in the
determination of the fair value of the ABCP.
    During the second quarter of 2008, the Company entered into a temporary
credit facility with the chartered bank that sold the ABCP to the Company. On
April 20, 2009, in connection with the restructuring of the ABCP market, the
Company entered into new secured revolving credit facilities with the
chartered bank, with a minimum 2-year term and with options to renew on an
annual basis for up to a maximum total potential term of seven years. These
facilities have combined maximum aggregate amounts of CDN$7,307,000 and
$4,578,000, bear interest at prime rate minus 1% per annum, and are secured by
hypothecs having an aggregate principal amount of CDN$18,400,000 on the New
ABCP Notes issued to the Company, on the securities accounts in which they are
held and on all proceeds of these notes. The amounts of the credit facilities
reduce as capital payments are received on the New ABCP Notes. A portion of
these facilities and all other obligations of the Company towards the bank are
secured by a hypothec on the universality of the Company's assets in the
amount of approximately CDN$2,000,000. The revolving credit facilities also
include a put option feature in 2011 and 2012, which may limit the Company's
losses to between 25% and 55% of the New ABCP Notes, subject to certain
conditions.
    As at June 30, 2009, the Company estimated the fair value of the
outstanding balance of New ABCP Notes at approximately $7,153,000, of which
$296,000 is presented as part of Restricted Cash, as it is pledged to a bank
as collateral for letter of credit issued in connection with a lease
agreement. In connection with its fair value determinations, the Company
recorded an increase in fair value of $524,000 for the three-month period
ended June 30, 2009 (increase of $183,000 for the six-month period), compared
to nil for the same period the previous year (decrease of $375,000 for the
six-month period). The exchange of third party ABCP for New ABCP Notes during
the first quarter of 2009 resulted in a loss on settlement, which is presented
as part of the decrease in fair value recorded during that period. The Company
estimates the fair value of the New ABCP Notes using a probability weighted
discounted cash flow approach, based on its best estimates of the period over
which the assets will generate cash flows, the coupon interest rate, the
discount rate to apply to the net cash flows anticipated to be received
commensurate with the return on comparably rated notes in accordance with the
risk factors of the different investments and other qualitative factors. The
Company estimates that the New ABCP Notes will generate interest returns
ranging from nil to 0.53% (weighted average rate of 0.22%), depending on the
series of New ABCP Notes. These future cash flows were discounted, according
to the series, over a period of up to 8 years and using discount rates ranging
from 5.1% to 8.0% (weighted average rate of 7.2%). The Company also took into
account the put option feature described above in determining the change in
fair value of New ABCP Notes recognized in earnings for the year ended
December 31, 2008, and the six-month period ended June 30, 2009. Estimates of
the fair value of the New ABCP Notes and related put option are not supported
by observable market prices or rates, and therefore are subject to
uncertainty, including, but not limited to, the estimated amounts to be
recovered, the yield of the financial instruments and the timing of future
cash flows, and the market for these types of instruments. The resolution of
these uncertainties could be such that the ultimate fair value of these
investments may vary significantly from the Company's current estimate.
Changes in the near term could require significant changes in the recognized
amount of these assets. As the Company records the New ABCP Notes at current
fair value each period, such adjustments will directly impact earnings.
    As at June 30, 2009, the Company's workforce comprised 52 employees
compared to 104 employees as at December 31, 2008. During the first quarter of
fiscal 2009, the Company reduced further its research activities and
associated workforce to focus on its key projects. Specifically, on March 12,
2009, the Company announced the reduction of its workforce by approximately
45%, effective as of such date. In addition, three members of senior
management stepped down from their positions, but will remain consultants to
BELLUS Health. The current programs related to the Company's existing product
and product candidates are not expected to be affected by the cuts, which were
made primarily in basic research and research-related functions, as well as
support and administrative functions.
    The reduction of the Company's research activities and associated
workforce resulted in vacant space in the Company's premises. During the
current quarter, the Company recorded a net credit for vacant space in the
amount of $2,196,000. As part of the modifications to the lease agreement, the
Company has options to terminate the lease in April 2011 or March 2012, as
discussed before. The Company has determined that these termination options
constitute a material modification to the terms of the original lease. It has
concluded that the lease should continue to be classified as operating and
that the lease term for accounting purposes should now be assumed to end in
April 2011. Accordingly, the Deferred gain on sale of property and the
Deferred rent liability, recorded in 2005 at the time of the sale-leaseback
transaction on the Company's premises, will be amortized on a straight-line
basis to April 2011, for the portion of the premises that the Company
continues to occupy. A portion of the Deferred gain on sale of property and
Deferred rent liability has been attributed to the premises no longer occupied
by the Company and factored into the net credit for vacant space. The net
credit for vacant space also includes a provision for lease consisting of the
present value of future lease costs of the vacant portion of the premises, net
of an estimate of the sublease rentals that could reasonably be obtained, as
well as an amount proportionate to the vacant space of the Lease Termination
Option Payment. The provision is based on various assumptions, including the
Company's estimated borrowing rate and obtainable sublease rates. These
assumptions are influenced by market conditions and the availability of
similar space nearby. If market conditions change for sub-lease rentals in the
future, the Company will adjust the provision accordingly.
    As at August 11, 2009, the Company had 52,237,918 Common Shares
outstanding, 220,000 Common Shares issuable to the Chief Executive Officer
upon the achievement of specified performance targets, 4,830,951 options
granted under the stock option plan, 101,831,160 preferred shares outstanding
which are convertible into Common Shares on a one for one basis, 2,250,645
warrants outstanding as well as notes outstanding in the amount of $13,937,000
and CDN$21,115,000, which are convertible into Common Shares.

    Financial position and going concern

    To date, the Company has financed its operations primarily through public
offerings of Common Shares, private placements, issuance of convertible notes,
as well as a sale-leaseback transaction, research tax credits, collaboration
and research contracts, interest and other income. The future profitability of
the Company is dependent upon such factors as the success of the clinical
trials, the approval by regulatory authorities of products developed by the
Company, the ability of the Company to successfully market, sell and
distribute products, including its natural health products, and the ability of
the Company to obtain the necessary financing to complete its projects. In
January 2009, the Company delisted its shares from NASDAQ. Additionally, in
May 2009, the Company deregistered its securities from the US Securities and
Exchange Commission. The Company's shares trade on the Toronto Stock Exchange.
    The Company has incurred significant operating losses and negative cash
outflows from operations since inception and has an accumulated deficit of
$372,018,000 as at June 30, 2009. As at that date, the Company has cash and
cash equivalents in the amount of $13,326,000. The rights offering announced
in July 2009 (see Subsequent Event section) is expected to generate between
CDN$8 million and CDN$12 million and tax credits of approximately $2.2 million
are expected to be received in the next months. In addition, credit facilities
in the amount of approximately $1.1 million are currently available. As of
June 30, 2009, based on the Company's committed cash obligations and expected
level of expenses, the Company estimates that current liquidities and expected
sources of funds should be sufficient to fund operations for approximately
twelve months.
    As at June 30, 2009, the Company's committed cash obligations and
expected level of expenses for the upcoming twelve months may exceed the
committed sources of funds, including the expected rights financing announced
after June 30, 2009, and the Company's cash and cash equivalents on hand. The
ability of the Company to continue as a going concern is dependent upon
raising additional financing through borrowings, share issuances, receiving
funds through collaborative research contracts, distribution agreements or
product licensing agreements, and ultimately, from obtaining regulatory
approval in various jurisdictions to market and sell its product candidates
and ultimately achieving future profitable operations. The outcome of these
matters is dependent on a number of factors outside of the Company's control.
These factors raise significant doubt about the Company's ability to continue
as a going concern. Management continues to actively pursue additional
financing. The Company is currently involved in ongoing discussions with
several parties to secure partnership agreement, collaboration agreement,
licensing agreement and/or sale with respect to its businesses, product or
product candidates. While the discussions could lead to the signing of binding
agreements in the coming weeks or months, there can be no assurance whatsoever
that any such transaction will be put in place in the near future or at all As
a result, there is material uncertainty as to whether the Company will have
the ability to continue as a going concern and thereby realize its assets and
discharge its liabilities in the normal course of business.
    The consolidated financial statements have been prepared on a going
concern basis, which assumes the Company will continue its operations in the
foreseeable future and will be able to realize its assets and discharge its
liabilities and commitments in the ordinary course of business. These
financial statements do not include any adjustments to the carrying value and
classification of assets and liabilities and reported revenues and expenses
that may be necessary should the Company not be successful in its efforts to
obtain additional financing, to receive significant funds on signing
collaborative research and development contracts, distribution agreements or
by out licensing its products or making significant product sales. Such
adjustments may include but would not be limited to: all debt would be
presented as current debt, accretion on convertible notes would be
accelerated, and all assets, including the investment in ABCP, would be
reduced to liquidation value.

    Subsequent event

    On July 15, 2009, the Company filed a CDN$12,080,018 rights offering
allowing eligible holders of its Common Shares to purchase new Common Shares
at CDN$0.185 (the Subscription Price). The Subscription Price represents a 25%
discount off the volume weighted average price of the Company's Common Shares
on the Toronto Stock Exchange during the five (5) trading days immediately
preceding the filing. Each of VSVI and Vitus have entered into separate
standby purchase commitments with the Company whereby they have committed, on
a separate and individual and not solidary basis, to purchase such of the
Common Shares that are not otherwise purchased under the rights offering up to
a maximum subscription price of CDN$4,000,000 each for an aggregate amount of
CDN$8,000,000. The rights offering will result in the reduction of the
conversion price of the 2006 Notes and render such notes immediately
convertible, result in the reduction of the conversion price of the 2009 Notes
and the reduction of the exercise price of the outstanding warrants.

    Forward-looking statements

    Certain statements included in this Management's Discussion and Analysis
may constitute "forward-looking statements" within the meaning of the US
Private Securities Litigation Reform Act of 1995 and Canadian securities
legislation and regulations, and are subject to important risks, uncertainties
and assumptions. This forward-looking information includes among other things,
information with respect to the Company's objectives and the strategies to
achieve those objectives, as well as information with respect to the Company's
beliefs, plans, expectations, anticipations, estimates and intentions.
Forward-looking statements generally can be identified by the use of
conditional or forward-looking terminology such as "may", "will", "expect",
"intend", "estimate", "anticipate", "plan", "foresee", "believe" or "continue"
or the negatives of these terms or variations of them or similar terminology.
Refer to the Company's filings with the Canadian securities regulatory
authorities for a discussion of the various factors that may affect the
Company's future results. Such risks include, but are not limited to: the
ability to obtain financing in the current markets, the impact of general
economic conditions, general conditions in the pharmaceutical and/or natural
health products industries, changes in the regulatory environment in the
jurisdictions in which the BELLUS Health Group does business, stock market
volatility, fluctuations in costs, and changes to the competitive environment,
and that actual results may vary once the final and quality-controlled
verification of data and analyses has been completed. The results or events
predicted in forward-looking information may differ materially from actual
results or events. The Company believes that expectations represented by
forward-looking statements are reasonable, yet there can be no assurance that
such expectations will prove to be correct. Unless otherwise stated, the
forward-looking statements contained in this report are made as of the date of
this report, and the Company does not undertake any obligation to update
publicly or to revise any of the included forward-looking statements, whether
as a result of new information, future events or otherwise, unless required by
applicable legislation or regulation. The forward-looking statements contained
in this report are expressly qualified by this cautionary statement.

    
    BELLUS Health Inc.
    Consolidated Financial Information(1)
    (in thousands of US dollars, except per share data)

                                   Three-month period       Six-month period
                                      ended June 30           ended June 30
    -------------------------------------------------------------------------
    Consolidated Statements of
     Operations                     2009        2008        2009        2008
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                              (unaudited) (unaudited) (unaudited) (unaudited)
    Revenues:
      Gross sales               $     82    $      -    $    196    $      -
      Discounts, returns
       and cooperative
       promotional incentives       (271)          -        (301)          -
    -------------------------------------------------------------------------
      Net sales                     (189)          -        (105)          -
      Collaboration agreement          -           -           -         205
      Reimbursable costs               -          47           -          69
    -------------------------------------------------------------------------
                                    (189)         47        (105)        274
    -------------------------------------------------------------------------

    Expenses:
      Research and development     2,869       7,123       6,479      15,903
      Research tax credits and
       grants                       (154)       (467)       (457)       (864)
    -------------------------------------------------------------------------
                                   2,715       6,656       6,022      15,039
      General and
       administrative              1,209       2,373       4,357       5,949
      Marketing and selling          560       2,035       2,438       2,035
      Reimbursable costs               -          47           -          69
      Stock-based compensation       724         824       1,176       1,859
      Depreciation of
       equipment                     172         219         341         433
      Net credit for vacant
       space                      (2,196)          -      (2,196)          -
    -------------------------------------------------------------------------
                                   3,184      12,154      12,138      25,384
    -------------------------------------------------------------------------
      Loss before undernoted
       items                      (3,373)    (12,107)    (12,243)    (25,110)

      Interest income                 30         213          43         711
      Interest and bank charges      (73)        (43)       (152)        (72)
      Accretion expense           (1,069)     (1,225)     (2,351)     (2,432)
      Change in fair value of
       embedded derivatives           16          58          16         100
      Gain on extinguishment
       of debt                    17,020           -      17,020           -
      Change in fair value of
       third party asset-
       backed commercial paper       524           -         183        (375)
      Foreign exchange gain         (426)        106        (303)        860
      Other income                   231         256         760         534
    -------------------------------------------------------------------------
      Net Income (Loss)         $ 12,880    $(12,742)   $  2,973    $(25,784)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
      Basic net income
       (loss) per share         $   0.10    $  (0.26)   $   0.03    $  (0.52)
      Diluted net income
       (loss) per share         $  (0.03)   $  (0.26)   $  (0.13)   $  (0.52)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                             At           At
                                                        June 30  December 31
    Consolidated Balance Sheets                            2009         2008
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                     (unaudited)    (audited)

      Cash, cash equivalents and marketable
       securities                                      $ 13,326     $ 10,595
      Other current assets                                3,747        3,667
    -------------------------------------------------------------------------
      Total current assets                               17,073       14,262
      Equipment                                           2,835        3,124
      Other long-term assets                              7,522        9,030
    -------------------------------------------------------------------------
      Total assets                                     $ 27,430     $ 26,416
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

      Current liabilities                                12,284        9,257
      Long-term deferred gain and liabilities            31,592       63,211
      Shareholders' deficiency                          (16,446)     (46,052)
    -------------------------------------------------------------------------

      Total liabilities and shareholders' deficiency   $ 27,430     $ 26,416
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) Condensed from the Company's unaudited consolidated financial
        statements.
    

    About BELLUS Health

    BELLUS Health is a global health company focused on the development and
commercialization of products to provide innovative health solutions to
address critical unmet medical needs.

    To Contact BELLUS Health

    For additional information on BELLUS Health and its drug development
programs, please call the Canada and United States toll-free number
1-877-680-4500 or visit the Web Site at www.bellushealth.com.


    Certain statements contained in this news release, other than statements
of fact that are independently verifiable at the date hereof, may constitute
forward-looking statements. Such statements, based as they are on the current
expectations of management, inherently involve numerous risks and
uncertainties, known and unknown, many of which are beyond BELLUS Health
Inc.'s control. Such risks include but are not limited to: the impact of
general economic conditions, general conditions in the pharmaceutical and/or
nutraceutical industry, changes in the regulatory environment in the
jurisdictions in which the BELLUS Health Group does business, stock market
volatility, fluctuations in costs, and changes to the competitive environment
due to consolidation, that actual results may vary once the final and
quality-controlled verification of data and analyses has been completed, as
well as other risks disclosed in public filings of BELLUS Health Inc.
Consequently, actual future results may differ materially from the anticipated
results expressed in the forward-looking statements. The reader should not
place undue reliance, if any, on any forward-looking statements included in
this news release. These statements speak only as of the date made and BELLUS
Health Inc. is under no obligation and disavows any intention to update or
revise such statements as a result of any event, circumstances or otherwise,
unless required by applicable legislation or regulation. Please see the Annual
Information Form of BELLUS Health Inc. for further risk factors that might
affect the BELLUS Health Group and its business.




For further information:

For further information: Michelle Stein, Specialist, Corporate
Communications, (450) 680-4573, mstein@bellushealth.com


Custom Packages

Browse our custom packages or build your own to meet your unique communications needs.

Start today.

CNW Membership

Fill out a CNW membership form or contact us at 1 (877) 269-7890

Learn about CNW services

Request more information about CNW products and services or call us at 1 (877) 269-7890