Neurochem reports results for second quarter of fiscal 2007

Neurochem Inc. (NASDAQ: NRMX; TSX: NRM) reported results for the second quarter ended June 30, 2007. The Company reported a net loss of $33,830,000 ($0.83 per share), compared to $20,374,000 ($0.53 per share) for the corresponding period last year. The net loss for the periods ended June 30, 2007, includes a non-cash charge under Canadian GAAP of $11,651,000 relating to the US$40 million 5% senior subordinated convertible notes which were converted into common shares during the current quarter at US$9 per share. For the six-month period ended June 30, 2007, the net loss amounted to $58,448,000 ($1.47 per share), compared to $37,508,000 ($0.97 per share) for the same period last year. Research and development (R&D) expenses amounted to $16,115,000 this quarter compared to $14,342,000 for the same period last year. For the six-month period, R&D expenses were $35,827,000 compared to $28,068,000 for the corresponding period of the previous year. The increase is due to expenses incurred in relation to the development of tramiprosate (ALZHEMED™) primarily in respect of the ongoing Phase III clinical trial in Europe and the North American open-label extension of the Phase III study, as well as the conduct of a QT cardiac status Phase I study. Tramiprosate (ALZHEMED™) is the Company’s investigational product candidate for the treatment of Alzheimer’s disease (AD).

As at June 30, 2007 the Company reported cash, cash equivalents and marketable securities of $90,873,000, compared to $56,821,000 on December 31, 2006. The increase is primarily due to proceeds received from the issue of convertible notes in May 2007 and is partially offset by funds used in operating activities.

Consolidated Financial Results Highlights

The following discussion and analysis should be read in conjunction with the Company’s unaudited consolidated financial statements for the six-month period ended June 30, 2007, as well as the Company’s audited consolidated financial statements for the year ended December 31, 2006, 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, 2006, which are available on SEDAR at www.sedar.com or on EDGAR at www.sec.gov. All dollar figures are Canadian dollars, unless specified otherwise.

Results of operations

For the three-month period ended June 30, 2007, the net loss amounted to $33,830,000 ($0.83 per share), compared to $20,374,000 ($0.53 per share) for the corresponding period in the previous year. For the six-month period ended June 30, 2007, the net loss amounted to $58,448,000 ($1.47 per share), compared to $37,508,000 ($0.97 per share) for the same period last year.

The net loss for the periods ended June 30, 2007, includes a non-cash charge under Canadian GAAP of $11,651,000 relating to the US$40 million 5% senior subordinated convertible notes which were converted into common shares during the current quarter at US$9 per share.

Revenue from collaboration agreement amounted to $340,000 for the current quarter ($777,000 for the six-month period), compared to $608,000 for the same period in the previous year ($1,215,000 for the six-month period). This revenue is earned under the agreement with Centocor, Inc. (Centocor) in respect of eprodisate (KIACTA™), an oral investigational product candidate for the treatment of Amyloid A (AA) amyloidosis. Revenue recognized is in respect of the non-refundable upfront payment received from Centocor, which is being amortized over the estimated period through to the anticipated regulatory approval date of the investigational product candidate. The estimated period is subject to change based on additional information that the Company may receive periodically. The other portion of the upfront payment received from Centocor (US$6,000,000) has been classified as deferred revenue and is not being amortized as earned revenue given that it is potentially refundable. In the event that the Company receives an approval letter issued by the U.S. Food and Drug Administration (FDA), the amount would no longer be refundable and would be amortized as earned revenue. In July 2007, the Company received a second approvable letter from the FDA for eprodisate (KIACTA™) for the treatment of AA amyloidosis. In this action letter, the FDA indicated that an additional efficacy trial will be necessary before the FDA could approve the investigational product candidate. The approvable letter states that additional submissions, filed by Neurochem as part of its complete response to this approvable letter, may address issues raised in this letter. The FDA has indicated that additional submissions could persuade the agency to eliminate the requirement for an additional trial. The FDA also asked for additional information, including further pharmacokinetic studies, and again acknowledged that a QT clinical study should be submitted as part of a Phase IV (post-approval) commitment. The Company expects to file a complete response to this second approvable letter in the near future. Neurochem is also seeking marketing approval for eprodisate (KIACTA™) for the treatment of AA amyloidosis in the European Union, Switzerland and Canada. In September 2006, the European Medicines Agency (EMEA) confirmed that it had commenced a regulatory review of eprodisate (KIACTA™). The Marketing Authorization Application is being reviewed under the EMEA’s centralized procedure. An authorization from the EMEA would apply to all 27 European Union member states, as well as Norway and Iceland.

Reimbursable costs revenue amounted to $144,000 for the current quarter ($294,000 for the six-month period), compared to $205,000 for the same period in the previous year ($435,000 for the six-month period) and consists of costs reimbursable by Centocor in respect of eprodisate (KIACTA™)-related activities. The Company earns no margin on these reimbursable costs.

Research and development expenses, before research tax credits and grants, amounted to $16,115,000 for the current quarter ($35,827,000 for the six-month period), compared to $14,342,000 for the same period in the previous year ($28,068,000 for the six-month period). The increase is due to expenses incurred in relation to the development of tramiprosate (ALZHEMED™) primarily in respect of the ongoing Phase III clinical trial in Europe and the North American open-label extension of the Phase III study, as well as the conduct of a QT cardiac status Phase I study. Tramiprosate (ALZHEMED™) is the Company’s investigational product candidate for the treatment of AD. Tramiprosate (ALZHEMED™) completed its 18-month North American Phase III clinical trial during the first quarter of 2007 and the Company announced in April 2007 that the database had been locked. Neurochem has been advised by its external team of statisticians (the statisticians) that adjustment to the initial statistical model, as set out in the statistical plan, would be necessary to provide accurate results. The procedure to arrive at a reliable model involves a detailed analysis of potential confounding factors such as the effect of concomitant medications, baseline characteristics of the study population or differences in clinical sites. The statisticians have indicated that they have made progress adjusting the statistical model, reaching an acceptable level of validity for the disease modification endpoint, as measured by magnetic resonance imaging (MRI). In July 2007, the FDA designated tramiprosate (ALZHEMED™) as a Fast Track Product for the treatment of AD. Under the FDA Modernization Act of 1997, the Fast Track designation program is intended to facilitate the development and expedite review of drugs developed for the treatment of serious or life-threatening conditions and that demonstrate the potential to address an unmet medical need for such a condition. The Company is meeting the FDA in August to discuss the tramiprosate (ALZHEMED™) Phase III program and present an update on the work accomplished to date on the North American Phase III clinical trial. Neurochem will also seek the FDA’s feedback and validation of the next steps that would be acceptable to the agency, especially with respect to the statistical models. The Company expects the results to be available in 2007. The North American Phase III clinical trial included 1,052 patients at 67 clinical centers across the U.S. and Canada. All patients who completed the North American Phase III clinical trial were eligible to receive tramiprosate (ALZHEMED™) in an open-label extension of the Phase III study. The European Phase III clinical trial on tramiprosate (ALZHEMED™) was launched in September 2005. This study also has a duration of 18 months and the trial is being conducted at approximately 70 clinical centers in ten European countries. As of June 30, 2007, 939 patients were randomized in the European clinical trial. Patient screening activities will stop in August 2007 as Neurochem has exceeded its original patient enrolment objectives. However, in light of the information and experience gained from the North American Phase III clinical trial, Neurochem is presently considering modifications that would need to be made to the design of the European trial. Both Phase III clinical trials are multicentre, randomized, double-blind, placebo-controlled, three-armed, parallel-designed trials. For the six-month period ended June 30, 2007, research and development expenses also included costs incurred to support the North American Phase III clinical trial for tramiprosate (ALZHEMED™), the ongoing open-label extension of the eprodisate (KIACTA™) Phase II/III study, as well as ongoing drug discovery programs.

Research tax credits and grants amounted to $541,000 this quarter ($1,134,000 for the six-month period), compared to $494,000 for the corresponding period in the previous year ($1,029,000 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.

General and administrative expenses totaled $3,464,000 for the current quarter ($7,518,000 for the six-month period), compared to $3,366,000 for the same quarter in the previous year ($6,808,000 for the six-month period). These costs are incurred to support the overall activities of the Company.

Arbitral award amounted to nil for the current quarter and six-month period compared to $2,089,000 for the quarter and six-month period ended June 30, 2006. This expense relates to the dispute with Immtech Pharmaceuticals, Inc. (formerly known as Immtech International, Inc. (Immtech)), which came to a conclusion in January 2007 when Immtech, the University of North Carolina at Chapel Hill (UNC), and Georgia State University Research Foundation, Inc. filed with the Federal District Court for the Southern District of New York, U.S.A. a Notice of Voluntary Dismissal. The plaintiffs voluntarily dismissed their complaint against Neurochem in the Federal District Court without any payment, license, business agreement, concession or compromise by Neurochem. The dispute concerned an agreement entered into between Immtech and Neurochem in April 2002 under which Neurochem had the right to apply its proprietary anti-amyloid technology to test certain compounds to be provided by Immtech.

Reimbursable costs amounted to $144,000 for the current quarter ($294,000 for the six-month period), compared to $205,000 for the same period in the previous year ($435,000 for the six-month period), and consist of costs incurred on behalf of Centocor in respect of eprodisate (KIACTA™)-related activities and reimbursable by Centocor.

Stock-based compensation amounted to $1,025,000 for the current quarter ($2,106,000 for the six-month period), compared to $1,016,000 for the corresponding quarter in the previous year ($1,932,000 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.

Depreciation, amortization and patent cost write-off amounted to $395,000 for the current quarter ($802,000 for the six-month period), compared to $409,000 for the same quarter in the previous year ($902,000 for the six-month period). The decrease in the six-month period is mainly attributable to certain patent costs of $106,000 written off during the first quarter of 2006.

Interest income amounted to $1,057,000 for the current quarter ($1,775,000 for the six-month period), compared to $580,000 for the same quarter in the previous year ($1,223,000 for the six-month period). The increase is mainly attributable to higher average cash balances and higher interest rates during the current periods, compared to the same periods in the previous year.

Accretion expense amounted to $13,712,000 for the current quarter ($14,885,000 for the six-month period), and mainly represents the imputed interest under GAAP on the US$42,085,000 aggregate principal amount of 6% convertible senior notes issued in November 2006, as well as on the US$40,000,000 6% senior convertible notes (Senior Notes) and US$40,000,000 5% senior subordinated convertible notes (Junior Notes) issued in May 2007. The Company accretes the carrying values of the convertible notes to their face value through a charge to earnings over their expected lives of 60 months, 54 months and one month, respectively. Of the total accretion expense recorded in the quarter and six-month period ended June 30, 2007, $11,838,000 relates to accretion expense on the Junior Notes, which were fully converted during the second quarter of 2007.

Change in fair value of derivative-related asset amounted to a loss of $2,122,000 for the current periods and represents the variation in the fair value of the embedded derivatives included in the aggregate US$80,000,000 Senior and Junior Notes issued in May 2007.

Foreign exchange gain amounted to $581,000 for the current quarter (gain of $702,000 for the six-month period), compared to a loss of $524,000 for the same quarter in the previous year (loss of $570,000 for the six-month period). Foreign exchange gains or losses arise on the movement in foreign exchange rates related to the Company’s net monetary assets held in foreign currencies, primarily U.S. dollars.

Other income amounted to $530,000 for the current quarter ($814,000 for the six-month period), compared to $308,000 for the same quarter in the previous year ($593,000 for the six-month period). Other income consists of non-operating revenue, primarily sub-lease revenue.

Share of loss in a company subject to significant influence amounted to nil for the current quarter ($372,000 for the six-month period), compared to $891,000 for the corresponding quarter in the previous year ($1,707,000 for the six-month period). Non-controlling interest amounted to nil for the current quarter ($123,000 for the six-month period), compared to $296,000 for the corresponding quarter in the previous year ($558,000 for the six-month period). These items result from the consolidation of the Company’s interest in a holding company (Innodia Holding) that owns shares of Innodia Inc., for which Neurochem is the primary beneficiary. The share of loss recorded in the current year has reduced the Company’s long-term investment in Innodia Holding to nil. Innodia Inc. is a private, development-stage company engaged in developing novel drugs for the treatment of type 2 diabetes and underlying diseases.

Liquidity and Capital Resources

As at June 30, 2007, the Company had available cash, cash equivalents and marketable securities of $90,873,000, compared to $56,821,000 at December 31, 2006. The increase is primarily due to proceeds received from the issue of convertible notes in May 2007 and is partially offset by funds used in operating activities.

On May 2, 2007, the Company issued US$80,000,000 aggregate principal amount of convertible notes, consisting of US$40,000,000 6% senior convertible notes due in 2027 and US$40,000,000 5% senior subordinated convertible notes due in 2012. The 6% senior convertible notes have an initial conversion price equal to the lesser of US$12.68 or the 5-day weighted average trading price of the common shares preceding any conversion, subject to adjustments in certain circumstances. The Company will pay interest on the 6% senior convertible notes until maturity on May 2, 2027, subject to earlier repurchase, redemption or conversion. The 5% senior subordinated convertible notes were subject to mandatory conversion into common shares under certain circumstances. In connection with this transaction, the Company issued warrants to purchase an aggregate of 2,250,645 common shares until May 2, 2012, at an initial purchase price of US$12.68 per share, subject to adjustments in certain circumstances. During the quarter ended June 30, 2007, US$10,500,000 of the 6% senior convertible notes were converted into 1,653,859 common shares and the totality of the 5% senior subordinated convertible notes were converted into 4,444,449 common shares.

Subsequent to June 30, 2007, an additional US$25,000,000 6% senior convertible notes were converted into common shares at an average price of US$6.3044. The Company issued 3,965,462 common shares in connection with these conversions.

In August 2006, the Company entered into a securities purchase agreement in respect of an equity line of credit facility (ELOC) with Cityplatz Limited (Cityplatz), that provides the Company up to US$60,000,000 of funds in return for the issuance of common shares at a discount of 3.0% to market price at the time of draw downs over term, less a placement fee equal to 2.4% of gross proceeds payable to the placement agent, Rodman & Renshaw, LLC. The ELOC established by the securities purchase agreement will terminate on February 9, 2009. The ELOC shall also terminate if (i) the Company’s common shares are de-listed from NASDAQ unless the common shares are listed at such time on another trading market specified in the agreement and such de-listing is in connection with a subsequent listing on another trading market specified in the agreement, (ii) the Company is subject to a change of control transaction, or (iii) the Company suffers a material adverse effect which cannot be cured prior to the next drawdown notice. The Company may terminate the securities purchase agreement (i) if Cityplatz fails to fund a properly notified drawdown within five trading days of the end of the applicable settlement period or (ii) after it has drawn down at least US$25,000,000 under the ELOC. Either party may also terminate the securities purchase agreement if the volume-weighted average price of the Company’s common shares is below US$5 for more than 30 consecutive trading days, as adjusted. As at June 30, 2007, the Company had not drawn any funds under the ELOC.

As at June 30, 2007, the Company’s workforce comprised 184 employees. During the year ended December 31, 2006 and the first quarter of 2007, the Company increased its workforce in anticipation of commercialization and completion of clinical programs. During the second quarter of 2007, the workforce was reduced due to delays encountered in the product candidate development programs.

As at July 31, 2007, the Company had 44,880,641 common shares outstanding, 220,000 common shares issuable to the Chief Executive Officer upon the achievement of specified performance targets, 2,744,176 options granted under the stock option plan, 7,051,137 shares potentially issuable under the convertible notes and 2,250,645 warrants outstanding, for a total of 57,146,599 common shares, on a fully diluted basis.

The Company believes that its available cash and short-term investments, expected interest income, potential funding from partnerships, research collaborations and licensing agreements, potential proceeds from the equity line of credit facility, research tax credits, grants, and access to capital markets should be sufficient to finance the Company’s operations and capital needs during the ensuing year. However, in light of the uncertainties associated with the regulatory approval process, clinical trial results, and the Company’s ability to secure additional licensing, partnership and/or other agreements, further financing may be required to support the Company’s operations in the future.

Effective July 1, 2007, the Company adopted the U.S. dollar as its functional and reporting currency, as a result of a significant portion of its revenue, expenses, assets, liabilities and financing is now denominated in U.S. dollars.

For further Information, please contact:
Dr. Lise Hébert
Vice President, Corporate Communications
lhebert@neurochem.com