NUVO announces third quarter 2008 financial results



    MISSISSAUGA, ON, Oct. 30 /CNW/ - Nuvo Research Inc. (TSX: NRI), a
Canadian drug development company focused on the research and development of
drug products that are delivered to and through the skin using its topical and
transdermal drug delivery technologies, today announced its financial and
operational results for the three and nine months ended September 30, 2008.

    
    Key Corporate Developments:

    -   The Company remains on target to resubmit its Pennsaid application to
        the U.S. FDA in early 2009 and to be eligible to receive final U.S.
        marketing approval six months later. Nuvo has completed the majority
        of the non-clinical studies that it is conducting to respond to
        conditions raised in the FDA's Approvable Letter. No major issues
        have been identified in the completed studies. The remaining studies
        are ongoing and it is anticipated they will be completed by the end
        of 2008.

    -   Revenue for the three months ended September 30, 2008 increased 29%
        to $3.3 million compared with $2.6 million for the three months ended
        September 30, 2007 primarily due to a $1.2 million increase in
        licensing fee revenue. Revenue for the nine months ended
        September 30, 2008 increased 53% to $7.6 million compared with
        $5.0 million for the nine months ended September 30, 2007.

    -   The Company further strengthened its financial position by
        restructuring its Canadian licensing agreement with Squire
        Pharmaceuticals Inc. ("Squire"), a subsidiary of Paladin. On closing,
        Nuvo received a $2.5 million payment related to Pennsaid and an
        additional $2 million through the issuance of a convertible
        debenture.

    -   Nuvo executed an agreement with convertible debenture holders to
        extend the maturity date of certain debentures by one year from
        November 16, 2009 to November 16, 2010. The debentures have a total
        principal amount outstanding of $4.136 million. The resolution
        supports the Company's efforts to conserve its cash resources as it
        moves toward Pennsaid's anticipated approval by the FDA, the
        consummation of a U.S. licensing agreement and the commercialization
        of Pennsaid in the U.S.

    -   Subsequent to quarter end, Nuvo presented Phase 3 Pennsaid data at
        the 2008 American College of Rheumatology Annual Scientific Meeting
        in San Francisco showing that Pennsaid is an effective treatment
        option for the symptoms of osteoarthritis of the knee, with an
        improved safety profile compared to oral diclofenac while providing a
        similar degree of symptom relief.
    

    "The third quarter was productive for Nuvo Research in terms of the
Company's product development and financial management," said Henrich
Guntermann, President and Chief Executive Officer. "We moved closer to the
resubmission of Pennsaid's application to the FDA, partnering discussions
moved forward, and we made significant strides towards solidifying our
financial position, which will help us execute on our milestones in the coming
quarters."

    
    Financial Results

                      Three months  Three months   Nine months   Nine months
                             ended         ended         ended         ended
    (thousands of     September 30, September 30, September 30, September 30,
    Canadian dollars)         2008          2007          2008          2007
    -------------------------------------------------------------------------
    Revenue              $   3,289     $   2,558     $   7,610     $   4,971
    Net loss             $  (3,004)    $  (2,523)    $  (8,139)    $  (9,044)
    -------------------------------------------------------------------------
    

    Revenue for the three months ended September 30, 2008 increased 29% to
$3.3 million compared with $2.6 million for the three months ended
September 30, 2007 primarily as a result of a $1.2 million increase in
licensing fee revenue. This increase was due to the recognition of additional
licensing fee revenue as a result of the agreement reached with Squire to
amend and restate the Pennsaid licensing arrangements in Canada. Under the
terms of the deal that closed on July 7, 2008, Squire paid Nuvo $2.5 million
on account of past obligations and future Canadian sales of Pennsaid a portion
of which were recognized during the third quarter. Partially offsetting this
increase was a $0.4 million decrease in product sales for the three months
ended September 30, 2008 to $1.8 million versus $2.2 million for the three
months ended September 30, 2007. This decrease is primarily attributable to
lower sales to the Company's Greek distributor, Vianex during the
traditionally slower summer months and our agreement to provide a one-time
discount of approximately $0.1 million. Revenue for the nine months ended
September 30, 2008 increased 53% to $7.6 million compared with $5.0 million
for the nine months ended September 30, 2007. The increase is primarily due to
significantly higher sales of Pennsaid to our Greek distributor which launched
Pennsaid in the first half of 2007 and the increase in licensing fee revenue
related to the Squire Deal.
    As a result of the decreased product sales and the one-time discount that
was given to Vianex, gross margin on product sales declined to $0.5 million
for the three months ended September 30, 2008 compared to $0.9 million for the
three months ended September 30, 2007. For the nine months ended September 30,
2008, gross margin increased to $2.2 million compared to $1.0 million for the
nine months ended September 30, 2007. This increase is primarily due to higher
product sales to Vianex.
    Total operating expenses, excluding foreign currency gains and losses,
for three and nine months ended September 30, 2008 were $4.5 million and
$12.1 million, an increase from $4.3 million and $11.5 million for three and
nine months ended September 30, 2007. The increase in the three-month period
is due to higher net interest expense, relating to higher debenture accretion
charges and lower levels of interest income. The increase in the nine-month
period is due to an increase in net interest expense and higher spending on
research and development activities, offset partially by lower selling,
general and administrative expenses. This highlights the impact of the
Company's efforts during the third and fourth quarters of 2007 to focus its
resources on research activities rather than administrative costs.
    Research and development expenses decreased by 7% to $2.6 million for the
three months ended September 30, 2008 compared to $2.7 million for the three
months ended September 30, 2007. For the nine months ended September 30, 2008,
research and development costs increased 9% to $6.8 million compared to
$6.2 million for the nine months ended September 30, 2007. The majority of
spending for the current three and nine month periods related to the on-going
studies to address the conditions raised by the FDA in the Pennsaid Approvable
Letter. During the first three quarters, the Company made excellent progress
towards the completion of several of the Short and Long-Term Studies required
for the Complete Response.
    SG&A expenses increased by 5% to $1.3 million for the three months ended
September 30, 2008 compared to $1.2 million for the three months ended
September 30, 2007. During the quarter, the impact of lower ongoing personnel
costs and the savings associated with closing the Company's international
marketing office in Barbados were more than offset by severance costs incurred
at the corporate office and increased spending on professional and consulting
fees related to the Squire tax reassessment and other matters. For the
nine-month period ended September 30, 2008, SG&A costs decreased 11% to
$3.6 million compared to $4.0 million for the nine-month period ended
September 30, 2007. The decrease is primarily attributable to activities
undertaken during the third and fourth quarters of 2007, including the closure
of the Company's international marketing office in Barbados and staff
reductions at the corporate head office.
    For the three months ended September 30, 2008, the net loss increased to
$3.0 million from $2.5 million for the three months ended September 30, 2007.
Included in the net loss for the third quarter is a non-cash extinguishment
loss of $0.3 million related to the accounting treatment of the amendments to
the November 2004 debentures which extended their maturity by one year.
Included in the net loss for the comparative period is a $0.5 million gain
relating to the sale of assets. Excluding the impact of these items, the net
loss would have declined to $2.7 million in the current quarter compared to
$3.0 million a year ago. For the nine months ended September 30, 2008, the net
loss declined by 10% to $8.1 million from $9.0 million for the nine months
ended September 30, 2007.
    Cash used in operations was $2.2 million for the three months ended
September 30, 2008 compared to $3.0 million for the three months ended
September 30, 2007. Although the net loss for the quarter ended September 30,
2008 was $0.5 million higher than the comparable period it included several
non-cash items including the $0.3 million extinguishment loss on the
convertible debentures, higher accretion charges and a $0.3 million foreign
exchange loss. In addition, the comparable quarter included a non-cash gain of
$0.5 million on the sale of assets and a foreign exchange gain. Overall, cash
provided by operating activities was $0.3 million in the quarter versus cash
used in operating activities of $3.0 million in the third quarter of 2007. The
improvement is due to the $1.4 million recovery of non-cash working capital
and the prepayment of future royalties under the new licensing arrangements
with Squire. For the nine months ended September 30, 2008 funds used in
operating activities decreased to $5.0 million from $9.5 million.
    Net cash used in investing activities totaled $36,000 and $92,000 for the
three and nine months ended September 30, 2008 compared with $31,000 and
$220,000 for the three and nine months ended September 30, 2007. Net cash
provided by financing activities totaled $1.4 million for the three months
ended September 30, 2008, compared to $18.4 million for the three months ended
September 30, 2007. During the quarter, the Company issued a $2 million
debenture to Squire and repaid $0.5 million of long-term debt and debentures.
In the comparable period last year, net cash used in financing activities
related to scheduled debt repayments. Net cash provided by financing
activities totaled $2.3 million for the nine months ended September 30, 2008,
compared to $23.2 million for the nine months ended September 30, 2007.

    Squire Tax Reassessment

    On August 16, 2005, the Company sold 100% of the common shares of its
subsidiary DHCL (renamed Squire) to Paladin. Under the terms of the share
purchase agreement ("SPA") with Paladin, the Company provided representations
and warranties with respect to the status of the Company's tax accounts and
its tax assets, which consisted of non-capital losses, investment tax credits
and undeducted scientific research and experimental development expenditures.
If the amounts represented are incorrect then the Company is required to
indemnify Paladin for a portion of its losses.
    In July and August 2008, Squire received notices of reassessment relating
to its taxation years ending August 16, 2005 and July 31, 2006 and 2007 ("the
Tax Years") from the Canada Revenue Agency ("CRA") containing adjustments
related to certain transactions occurring in the tax year ended August 16,
2005 that impact all of the Tax Years. It is possible that the provincial tax
authorities will propose similar adjustments as a result of the CRA
reassessments. The notices of reassessment, if they stand, could cause the
Company to breach certain representations and warranties in the SPA.
    The Company estimates its potential obligation under the indemnification
provisions of the SPA as a result of the reassessments is in the range of
$6.5 million to $7.5 million, including interest and penalties. In addition,
the Company expects the potential obligation under the indemnity to increase
as additional interest accrues and penalties are assessed on the reassessed
amounts. The SPA also requires the Company to indemnify Paladin for
out-of-pocket costs (including attorneys' and experts' fees) incurred by
Paladin that are caused by the Company's breach of its representations and
warranties contained in the SPA.
    The Company disagrees with the position taken by the CRA and believes it
is without merit. Squire is contesting the reassessments through the CRA
appeals process and has filed a Notice of Objection with the CRA. The Company
is participating in this process. An unfavorable resolution could have a
material adverse impact on the Company's cash flows.
    Squire is a "Large Corporation" under subsection 225.1(8) of the Income
Tax Act and as a result the CRA took action to collect 50% of the reassessed
amount, $3.7 million, in September 2008. Squire may make a claim against the
Company for a portion of the $3.7 million; however, the Company believes that
pursuant to the indemnification provisions of the SPA, the Company is not
obliged to make any such payment to Squire unless and until there is a final
determination after exhausting all avenues of appeal available through the CRA
Appeals process and the courts or by agreement between the parties that the
Company is in breach of a representation and warranty in the SPA related to
its tax accounts or tax assets.
    Detailed financial statements and the MD&A are available at
www.nuvoresearch.com or www.sedar.com.

    About Pennsaid

    Pennsaid(R) is a topical non-steroidal anti-inflammatory drug (NSAID)
used for the treatment of osteoarthritis and is currently approved for sale in
Canada and several European countries. Pennsaid(R) allows the diclofenac
solution to be delivered to a specific site via the surface of the skin and
thus limits complications associated with systemic delivery. According to
published clinical trials, Pennsaid(R) is as effective as the maximum daily
dose of comparable oral medication at relieving pain and stiffness associated
with osteoarthritis of the knee, as well as improving overall well-being.
There are more than 21 million Americans suffering from osteoarthritis, a very
painful and debilitating condition, and the United States market for this
condition is estimated at US$4 billion annually In December 2006, the U.S.
Food and Drug Administration issued an approvable letter that indicated
Pennsaid(R) is approvable subject to Nuvo satisfying certain conditions.

    About Nuvo Research Inc.

    Nuvo is a Canadian drug development company primarily focused on the
research and development of drug products that are delivered to and through
the skin. Nuvo is also involved in research and development activities
involving WF10, a chlorite-based, immunomodulating drug through its 60%
interest in Dimethaid AG.
    Nuvo believes it is uniquely positioned to research and develop new drug
product candidates for delivery to and through the skin using its multiplexed
molecular penetration enhancers ("MMPE(TM)"s), that interact with the skin and
enhance its permeability thereby allowing certain drug molecules to pass into
and through the skin to proximate tissues and its high throughput
experimentation systems that allow its scientists to rapidly screen
combinations of existing molecular penetration enhancers ("MPE(TM)s") with
large numbers of potential drug formulations to measure their ability to
permeabilize and permeate the skin. Nuvo's lead product Pennsaid(R), a topical
non-steroidal anti-inflammatory drug (NSAID) utilizes the Company's technology
to treat the symptoms of osteoarthritis of the knee locally. Nuvo intends to
leverage its technologies to create a portfolio of topical and transdermal
products targeting a variety of indications. Nuvo Research Inc. is a publicly
traded company headquartered in Mississauga, Ontario, with manufacturing
facilities in Varennes, Québec and Wanzleben, Germany and a research and
development facility in San Diego, California. For more information, please
visit www.nuvoresearch.com.

    This release may contain forward-looking statements, subject to risks and
uncertainties beyond management's control. Actual results could differ
materially from those expressed here. Risk factors are discussed in the
Company's annual information form filed with the securities commissions in
each of the provinces of Canada. The Company undertakes no obligation to
revise forward-looking statements in light of future events.

    Summary financial statements attached:

    
                             NUVO RESEARCH INC.
                         CONSOLIDATED BALANCE SHEETS

                                                         As at         As at
                                                  September 30,  December 31,
                                                          2008          2007
                                                     Unaudited       Audited
    (thousands of Canadian dollars)                          $             $
    -------------------------------------------------------------------------
    ASSETS
    CURRENT
    Cash and cash equivalents                           18,902        21,791
    Accounts receivable                                    868         1,802
    Other receivable                                         -           579
    Inventories                                          1,514         1,042
    Prepaid expenses and other                             487           789
    -------------------------------------------------------------------------
    TOTAL CURRENT ASSETS                                21,771        26,003

    Restricted cash                                         82            79
    Property, plant and equipment                        2,137         2,475
    Intangible assets                                      203            90
    -------------------------------------------------------------------------
    TOTAL ASSETS                                        24,193        28,647
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES AND SHAREHOLDERS' EQUITY
    CURRENT
    Accounts payable and accrued liabilities             2,383         2,994
    Short-term loan                                        721           587
    Deferred revenue                                     2,320         1,211
    Current portion of long-term debt and
     capital lease obligations                             156            94
    Current portion of debentures                            -           500
    -------------------------------------------------------------------------
    TOTAL CURRENT LIABILITIES                            5,580         5,386
    Deferred revenue                                     3,882         5,169
    Long-term debt and capital lease obligations           260           222
    Debentures                                           4,789         2,006
    -------------------------------------------------------------------------
    TOTAL LIABILITIES                                   14,511        12,783
    -------------------------------------------------------------------------

    SHAREHOLDERS' EQUITY
    Common shares                                      189,146       187,877
    Warrants                                            10,847        11,243
    Contributed surplus                                  6,754         5,670
    Accumulated other comprehensive income                 114           114
    Deficit                                           (197,179)     (189,040)
    -------------------------------------------------------------------------
    TOTAL SHAREHOLDERS' EQUITY                           9,682        15,864
    -------------------------------------------------------------------------
    TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY          24,193        28,647
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



                             NUVO RESEARCH INC.
       CONSOLIDATED STATEMENTS OF LOSS, COMPREHENSIVE LOSS AND DEFICIT


    Unaudited                 Three-months                Nine-months
    (thousands of                ended                       ended
    Canadian dollars  September 30, September 30, September 30, September 30,
    except per share          2008          2007          2008          2007
    amounts)                     $             $             $             $
    -------------------------------------------------------------------------
    REVENUE
    Product sales            1,808         2,233         5,578         4,002
    Cost of goods sold       1,281         1,374         3,366         3,050
    -------------------------------------------------------------------------
    Gross margin on
     product sales             527           859         2,212           952

    Other revenue
    Licensing fees           1,453           250         1,953           750
    Research and other
     contract revenue           28            75            79           219
    -------------------------------------------------------------------------
                             2,008         1,184         4,244         1,921
    -------------------------------------------------------------------------

    EXPENSES
    Research and
     development             2,556         2,743         6,793         6,205
    Selling, general
     and administrative
     expenses                1,278         1,220         3,564         4,000
    Stock-based
     compensation              131            94           497           468
    Amortization of
     property, plant,
     and equipment
     and intangibles           221           230           633           656
    Foreign currency
     (gain) loss               255           (39)           12          (120)
    Interest expense           418           273         1,046           812
    Interest income           (146)         (306)         (461)         (548)
    -------------------------------------------------------------------------
                             4,713         4,215        12,084        11,473
    -------------------------------------------------------------------------
    Loss from operations    (2,705)       (3,031)       (7,840)       (9,552)
    Loss on extinguishment
     of convertible
     debenture                (299)            -          (299)            -
    Gain on sale of assets       -           508             -           508
    -------------------------------------------------------------------------
    NET LOSS AND TOTAL
     COMPREHENSIVE LOSS     (3,004)       (2,523)       (8,139)       (9,044)

    Deficit, beginning
     of period            (194,175)     (183,185)     (189,040)     (176,664)
    -------------------------------------------------------------------------
    DEFICIT, END
     OF PERIOD            (197,179)     (185,708))    (197,179)     (185,708)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Average number of
     basic and diluted
     common shares
     outstanding for
     the period
     (millions)              310.1         283.1         304.2         224.6
    -------------------------------------------------------------------------
    Net loss per
     common share
     - basic and
     diluted                 (0.01)        (0.01)        (0.03)        (0.04)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



                             NUVO RESEARCH INC.
                    CONSOLIDATED STATEMENTS OF CASH FLOWS

                              Three-months                Nine-months
    Unaudited                    ended                       ended
    (thousands of     September 30, September 30, September 30, September 30,
    Canadian dollars)         2008          2007          2008          2007
                                 $             $             $             $
    -------------------------------------------------------------------------
    OPERATING
     ACTIVITIES
    Net loss                (3,004)       (2,523)       (8,139)       (9,044)
    Items not involving
     current cash flows:
      Amortization             221           230           633           656
      Deferred revenue
       recognized             (560)         (448)       (1,271)       (1,031)
      Stock-based
       compensation
       and payments            131            94           497           600
      Accretion of
       interest on
       debentures              295           173           729           476
      Loss on
       extinguishment
       of convertible
       debenture               299             -           299             -
      Gain on sale of
       assets                    -          (508)            -          (508)
      Other                    408             -           147           (69)
    Net change in
     non-cash working
     capital balances        1,400           (71)        1,058          (598)
    Proceeds from
     licensing
     arrangements and
     advances on
     research contracts      1,093            40         1,093            40
    -------------------------------------------------------------------------
    CASH PROVIDED BY
     (USED IN) OPERATING
     ACTIVITIES                283        (3,013)       (4,954)       (9,478)
    -------------------------------------------------------------------------
    INVESTING ACTIVITIES
    Acquisition of
     property, plant and
     equipment                 (36)          (31)         (120)         (220)
    Proceeds from sale
     of assets                   -             -            28             -
    -------------------------------------------------------------------------
    CASH USED IN
     INVESTING ACTIVITIES      (36)          (31)          (92)         (220)
    -------------------------------------------------------------------------
    FINANCING ACTIVITIES
    Issuance of common
     shares and warrants,
     net of related costs       (1)       18,493           946        23,823
    Issuance of debentures,
     net of related costs    1,932             -         1,932             -
    Repayments of
     debentures, long-term
     debt and capital lease
     obligations              (548)         (113)         (608)         (668)
    -------------------------------------------------------------------------
    CASH PROVIDED BY
     FINANCING ACTIVITIES    1,383        18,380         2,270        23,155
    -------------------------------------------------------------------------
    Effect of exchange
     rate changes on cash
     and cash equivalents      (76)          (49)         (113)         (125)
    -------------------------------------------------------------------------
    Net change in cash and
     cash equivalents
     during the period       1,554        15,287        (2,889)       13,332
    Cash and cash
     equivalents,
     beginning of period    17,348         9,258        21,791        11,213
    -------------------------------------------------------------------------
    CASH AND CASH
     EQUIVALENTS,
     END OF PERIOD          18,902        24,545        18,902        24,545
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Interest paid                6            24           160           188
    -------------------------------------------------------------------------
    





For further information:

For further information: Investor Relations: Adam Peeler, Equicom Group
Inc., (416) 815-0700 x225, apeeler@equicomgroup.com

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