Inflazyme Pharmaceuticals Ltd.
TSX : IZP

Inflazyme Pharmaceuticals Ltd.

August 14, 2006 09:00 ET

Inflazyme Pharmaceuticals Ltd.: Shareholder Letter and Financial Results for the Quarter Ended June 30, 2006

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - Aug. 14, 2006) - Inflazyme Pharmaceuticals Ltd. (TSX:IZP) today announced its first quarter financial results for the period ended June 30, 2006.

Dear Shareholder:

I am pleased to provide you with an update on Inflazyme since our last quarterly and year end financials issued on May 23, 2006. We have made good progress in research and development. I would like to take the opportunity to describe this for you.

IPL512,602 enters a Phase IIb clinical study for Asthma

On May 9, 2006, we announced the initiation of a Phase IIb study with IPL512,602 in patients suffering from moderate to severe asthma. The study known as the Control of Asthma Patients Symptomatic on Inhaled Corticosteroids (CAPSIC) study is an eight week, randomized, double blind, parallel group, multi-center trial comparing the efficacy of IPL512,602 to placebo.

The purpose of the study is to assess the efficacy and safety of a 20mg dose of IPL512,602 given once daily as an oral asthma medication. IPL512,602 represents a new therapeutic approach discovered by Inflazyme that focuses on improving asthma control and reducing asthma symptoms. Approximately 200 subjects, suffering from asthma symptoms and attacks despite taking their regular medications, are expected to be enrolled in the study.

The primary endpoint is an evaluation of Asthma Quality of Life using a well validated, globally accepted and FDA recognized Juniper scoring system that has been widely used in clinical studies for other asthma drugs. The secondary endpoints include other measures of asthma control such as nighttime awakenings, need for rescue medication (short acting beta agonists), and asthma symptoms. The study is being conducted at several major asthma centers across the US, Eastern Europe, Russia and the Ukraine. Initial results are anticipated in Q1 2007.

Last August we reported that we had received written correspondence from the FDA stating that patient reported outcomes, such as asthma quality of life or symptom scores, would be considered among the primary endpoints for suitable Phase II and Phase III registration studies. We believe that this correspondence supports our clinical development strategy for IPL512,602 in asthma.

Research Agreement with BioSeek on LSAIDs™

In June this year, we signed a research agreement with BioSeek, Inc. of Burlingame, California in an effort to characterize the mechanisms of action of our LSAIDs™. BioSeek is a leader in applying integrated human biology systems, using their proprietary BioMap® technology, to develop new therapeutics. Since they have expertise in asthma, COPD, allergy and other inflammatory conditions, which are our areas of therapeutic focus, we believe this collaboration is an excellent match. We are anticipating the work will be completed before the end of this fiscal year. If this collaboration is successful, we will expect to gain a better understanding of the biological pathways affected by our LSAID™ compounds. This will assist us in future research and development activities and help to potentially broaden the application of our LSAIDs™.

IPL455,903 in learning and memory disorders

Earlier this year we communicated that we had been advised by our partner, Helicon Therapeutics Inc., that our compound IPL455,903 (also known as HT-0712) had entered a Phase IIa proof of concept study in Age Associated Memory Impairment. The study, which is being paid for and managed entirely by Helicon, is a four week, randomized, double-blind, parallel group trial comparing the efficacy, safety and tolerability of once daily dosing with IPL455,903 to placebo in subjects aged between 60 and 80 yrs with Age Associated Memory Impairment.

The study is being conducted in Europe using a specifically designed battery of cognitive tests and is expected to enrol up to 75 subjects.

Helicon recently advised us that the results of the Phase IIa study will be delayed because of much slower than expected patient recruitment. The results which were expected in Q3 2006 are now anticipated to be available in Q1 2007.

In studies to date, it has been demonstrated that our PDE4 inhibitor is safe and well tolerated at all doses tested. In addition, no serious adverse events have been observed, and in particular the compound has not given rise to nausea or vomiting (also referred to as emesis). Competitor PDE4 inhibitors in development have frequently been observed to cause nausea and emesis even after a single dose of the drug has been administered. This has contributed to an unacceptable safety profile which has hampered the clinical advancement of competitor drugs of this class.

PDE4 Inhibitor Research

So far, IPL455,903 has not provoked emesis in human studies or given rise to vasculitis in pre-clinical safety assessments. Our research team has been working to identify additional PDE4 inhibitors for respiratory and inflammatory indications based on a unique chemical structure within the IPL42 series. The objective is to identify compounds which demonstrate advantages over other PDE4 inhibitors currently in development by competitor pharmaceutical and biotechnology companies. So far, we have identified several potential compounds from which we expect to select a development candidate(s), before the end of 2006, with the expectation that an Investigational New Drug (IND) application would be filed during the 2H 2007.

Results of operations for quarter ended June 30, 2006

The net loss for the first quarter ended June 30, 2006 was $2,829,000 ($0.02 per common share) versus a net loss of $3,064,000 ($0.03 per common share) in the corresponding quarter in the prior year. The decrease in the loss of $235,000 or 8% was due to lower amortization expenses offset by increases in research and development expenses.

Research and development expenses

Research and development expenses for the quarter ended June 30, 2006 were $1,629,000 compared to $1,202,000 for the quarter ended June 30, 2005 for an increase of $427,000 or 36%. The contracted research and laboratory activity was increased by approximately $542,000. This increase was partially offset by a reduction of $132,000 in personnel related expenses during the first quarter compared to the corresponding quarter last year. For the remainder of the fiscal year, the Company expects fluctuations in its research and development expenses as contract research expenses vary during those quarters.

On May 9, 2006, the Company announced the start of the Phase IIb study with IPL512,602 in patients suffering from moderate to severe asthma. The study known as the Control of Asthma Patients Symptomatic on Inhaled Corticosteroids (CAPSIC) study is an eight week, randomized, double blind, parallel group, multi-center trial comparing the efficacy of IPL512,602 to placebo.

For the quarter ended June 30, 2006, the Company incurred approximately $683,000 in contract research expenses, an increase of 120% over the same quarter in the prior year, on its IPL512,602 in asthma and LSAID™ programmes. As the CAPSIC study progresses during the year, the Company expects fluctuations in recruitment rates to be the primary cause of variations in contract research expenses from one quarter to the next. The Company estimates the remaining contract research expense related to the CAPSIC trial to be $4.7 million, which is expected to be recognized over the next two to three quarters.

General and administration expenses

General and administration expenses for the quarter ended June 30, 2006 were $1,152,000 compared to $1,112,000 for the corresponding quarter of the prior year, an increase of $40,000 or 4%. The increase was due to professional fees offset by reduced facilities costs and lower personnel expenses.

Amortization expenses

The Company recorded $176,000 in amortization expense during the quarter ended June 30, 2006 compared to $853,000 during the corresponding quarter of the prior year. The amortization amount has decreased due to write-downs of the acquired intangible asset balances to nil in the fourth quarter of fiscal 2006, which resulted in a lower depreciable net asset base for the current quarter.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2006 the Company's cash and cash equivalents totalled $10,221,000 compared to $12,809,000 at March 31, 2006. Working capital at June 30, 2006 was $9,826,000 compared to $12,511,000 at March 31, 2006. The decrease in cash and cash equivalents resulted from cash used to fund operating activities of $2,524,000 and cash used in investing activities of $65,000 The decrease in working capital reflects use of capital resources in the on-going operations of the business.

We believe that we can manage our cash resources at June 30, 2006, to fund our operating expenses and capital requirements into the second quarter of calendar 2007.

Conclusion

While we are disappointed that Helicon are experiencing recruitment delays, overall we are pleased with our progress in advancing IPL512,602 into a Phase IIb study in asthma and we are excited about the research collaboration with BioSeek in potentially elucidating the mechanisms of action of our LSAIDs™. We are also very pleased by the progress our research department has made in identifying several potential development PDE4 candidates for respiratory and inflammatory indications. Our goal remains to have a Phase III ready asthma product in late 2007 and consequently we are pursuing a number of strategic options to generate the additional capital required to do this and to fund our operations beyond fiscal 2007.

I look forward to keeping you updated on our continued progress.

Yours sincerely,

Kevin Mullane, Ph.D.

President & Chief Executive Officer

Conference Call

Inflazyme will host a conference call to discuss this announcement on Monday August 14, 2006 at 8:00 am Pacific Daylight Time/11:00 am Eastern Daylight Time. To access the live call, please dial 1-888-789-0089 or 416-695-5261. Audio replay of the conference call will be available until September 14, 2006 by calling 1-888-509-0081 or 416-695-5275 and entering pass code 629311.

About Inflazyme

Inflazyme Pharmaceuticals is a biopharmaceutical company pioneering medical breakthroughs to transform the lives of patients with respiratory and inflammatory diseases worldwide. Further information on the Company may be obtained from its website at www.inflazyme.com.

Statements in this news release other than historical information are forward-looking statements subject to risks and uncertainties. Actual results could differ materially depending on factors such as the availability of resources, the timing and effects of regulatory actions, the strength of competition, the outcome of litigation and the effectiveness of patent protection. Additional information regarding risks and uncertainties is set forth in the current Annual Information Form for Inflazyme on file with the Canadian Securities Commissions.



Inflazyme Pharmaceuticals Ltd.
Consolidated Balance Sheets
(Unaudited)

June 30 March 31
2006 2006
------------ ------------

Assets

Current assets
Cash and cash equivalents $ 10,220,592 $ 12,809,087
Interest receivable 17,666 26,603
Other receivables 182,627 189,935
Prepaid expenses 312,342 455,610
Tax credits recoverable 52,263 52,233
------------ ------------
10,785,490 13,533,468

Property and equipment 1,629,850 1,759,884
Patents and licenses 1,948,655 1,930,043

------------ ------------
$ 14,363,995 $ 17,223,395
------------ ------------
------------ ------------

Liabilities

Current liabilities
Accounts payable and
accrued liabilities $ 959,730 $ 1,022,510

Deferred licensing revenue 258,694 268,275
------------ ------------
1,218,424 1,290,785
------------ ------------

Shareholders' equity

Capital stock
Issued:
Common shares 138,910,033 138,910,033
------------ ------------
138,910,033 138,910,033
Contributed surplus 1,712,170 1,669,796
Deficit (127,476,632) (124,647,219)
------------ ------------
13,145,571 15,932,610

------------ ------------
$ 14,363,995 $ 17,223,395
------------ ------------
------------ ------------

On behalf of the board

Kevin Mullane Louis Drapeau
President and CEO Director
Director


Inflazyme Pharmaceuticals Ltd.
Consolidated Statements of Operations and Deficit
(Unaudited)

For the Three Months Ended
----------------------------------
June 30, 2006 June 30, 2005
------------- -------------
Revenues
Licensing revenue $ 9,619 $ 9,581
------------ ------------

Expenses

Research and development 1,629,101 1,202,493
General and administration 1,151,648 1,111,910
Amortization 176,251 852,513
------------- -------------

Total expenses 2,957,000 3,166,916
------------- -------------

Loss from operations (2,947,381) (3,157,335)
------------- -------------

Interest income 117,968 93,396
------------- -------------

Loss for the period (2,829,413) (3,063,939)

Deficit, beginning of period (124,647,219) (112,963,375)
------------- -------------

Deficit, end of period $(127,476,632) $(116,027,314)
------------- -------------
------------- -------------

Basic and diluted loss per
common share $ (0.02) $ (0.03)
------------- -------------
------------- -------------

Weighted average number of
common shares outstanding 113,534,375 106,676,361
------------- -------------
------------- -------------


Inflazyme Pharmaceuticals Ltd.
Consolidated Statements of Cash Flows
(Unaudited)

For the Three Months Ended
----------------------------------
June 30, 2006 June 30, 2005
------------- -------------

Cash flows from operating
activities
Loss for the period $ (2,829,413) $ (3,063,939)
Items not affecting cash:
Amortization 176,251 852,513
Licensing revenue (9,581) (9,581)
Stock-based compensation 42,374 125,832
------------- -------------
(2,620,369) (2,095,175)

Changes in non-cash working
capital 96,703 (172,351)
------------- -------------
(2,523,666) (2,267,526)

Cash flows from financing
activities
Repayment of long-term debt - (24,894)
------------- -------------

Cash flows from investing
activities
Short-term investments - 1,169
Purchase of property and
equipment (4,235) (5,831)
Patents and licenses (60,594) (46,408)
------------- -------------
(64,829) (51,069)

------------- -------------
Increase (decrease) in cash and
cash equivalents (2,588,495) (2,343,489)

Cash and cash equivalents,
beginning of period 12,809,087 15,650,334
------------- -------------
Cash and cash equivalents,
end of period $ 10,220,592 $ 13,306,845
------------- -------------
------------- -------------

Supplemental disclosure of
cash flow information
Interest paid - 9,159
Interest received 100,302 93,396
Issuance of common shares on
the acquisition of Adprotech
Limited net assets - 21,957,676



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