Theratechnologies inc.
TSX : TH

Theratechnologies inc.

October 12, 2010 15:36 ET

Theratechnologies Announces Results for the Third Quarter 2010: Lower Burn Rate and Solid Financial Position

MONTREAL, CANADA--(Marketwire - Oct. 12, 2010) - Theratechnologies (TSX:TH) today announced its financial results for the third quarter ended August 31, 2010. For reference, the Management's Discussion and Analysis for the third quarter 2010 with the associated Financial Statements can be found at www.theratech.com/en/investor-relations/financial-reports-theratechnologies.php or at www.sedar.com.

Third quarter financial highlights included:

  • Consolidated revenues of $2,152,000
  • Burn rate of $2,629,000 and an adjusted burn rate of $4,340,000
  • Liquidity of $43,933,000 as at August 31, 2010

"Operating and financial results are in line with the objectives of the Company," noted Mr. Luc Tanguay, Senior Executive Vice President & CFO of Theratechnologies. "With close to $44 million in liquidities and an adjusted burn rate 32% lower than the third quarter of 2009, we are in a good position to pursue our business plan," Mr. Tanguay added.

Financial Highlights

For the three- and nine-month periods ending August 31, 2010:

  • Consolidated revenues amounted to $2,152,000 for the quarter and $6,673,000 for the nine-month period, compared to $13,148,000 and $17,474,000 for the corresponding periods in 2009. The higher revenues in 2009 are due to the receipt of a milestone payment of $10,884,000 in the third quarter of 2009 associated with the U.S. Food and Drug Administration ("FDA") agreement to review the New Drug Application ("NDA") for tesamorelin, pursuant to the collaboration and licensing agreement with EMD Serono, Inc. ("EMD Serono").
  • Research and development ("R&D") expenses are significantly lower than those of the previous year, reflecting the completion of the tesamorelin Phase 3 clinical program in 2009. Before tax credits, R&D expenses totalled $2,930,000 for the quarter and $11,298,000 for the nine-month period, compared to $5,681,000 and $17,692,000 for the corresponding periods in 2009, representing decreases of 48% and 36% respectively. The R&D expenses incurred in the third quarter of 2010 are mainly related to the primary objective of the Company, which is to obtain the regulatory approval of tesamorelin for the treatment excess abdominal fat in HIV-infected patients with lipodystrophy in the United States.
  • General and administrative expenses amounted to $2,225,000 for the quarter and $6,083,000 for the nine-month period, compared to $1,337,000 and $5,515,000 for the corresponding periods in 2009. The increase in general and administrative expenses is principally due to professional fees associated with the recruitment of the new President and Chief Executive Officer, a variation in stock-based compensation expense and foreign exchange rate fluctuations. The higher expenses in the nine-month period are principally due to heightened communication activities related to the FDA Advisory Committee meeting as well as an increase in other administrative expenses partially offset by a reduction in the loss on foreign exchange. The increase for the nine-month period is less, in relative terms, than that of the third quarter because of costs associated with revising the Company's business plan incurred in early 2009.
  • Selling and market development expenses amounted to $521,000 for the quarter and $1,901,000 for the nine-month period compared to $495,000 and $1,516,000 for the corresponding periods in 2009. The increase in the selling and market development expenses is principally due to business development and market research studies for territories outside the United States. These expenses also include activities associated with the management of the collaboration and licensing agreement with EMD Serono.
  • Net loss recorded by the Company was $3,277,000, representing $0.05 per share for the quarter and $12,367,000 representing $0.20 per share for the nine-month period compared to net earnings of $5,824,000 representing $0.10 per share and a net loss of $10,360,000 representing $0.17 per share for the corresponding periods in 2009. The profit recorded in the third quarter of 2009 was due to the receipt of a milestone payment of $10,884,000 associated with the FDA's agreement to review the NDA for tesamorelin, pursuant to the collaboration and licensing agreement with EMD Serono.
  • Financial Position
    • At August 31, 2010, liquidities, which include cash and bonds, amounted to $43,419,000, and tax credits receivable amounted to $514,000, for a total of $43,933,000.
    • The burn rate from operating activities, excluding changes in operating assets and liabilities, was $2,629,000 in the quarter and $10,877,000 for the nine-month period compared to a cash flow of $6,186,000 and a burn rate of $9,214,000 for the corresponding periods in 2009. Excluding the revenues and fees associated with the agreement with EMD Serono, the adjusted burn rate from operating activities, excluding changes in operating assets and liabilities, was $4,340,000 in the quarter and $16,011,000 for the nine-month period compared to $6,410,000 and $20,678,000 for the corresponding periods in 2009.
    • In light of a lower expense level and cost control measures, the Company anticipates that the adjusted burn rate for 2010 will be between $22,000,000 and $23,000,000, and thus will be less than the initially forecasted adjusted burn rate of $24,000,000. 

Non-GAAP Measures

The Company uses measures that do not conform to Canadian Generally Accepted Accounting Principles ("GAAP") to assess its operating performance. Securities regulators require that companies caution readers that earnings and other measures adjusted to a basis other than GAAP do not have standardized meanings and are unlikely to be comparable to similar measures used by other companies. Accordingly, these measures should not be considered in isolation. The Company uses non-GAAP measures such as adjusted net loss and the adjusted burn rate from operating activities before changes in operating assets and liabilities, to measure its performance from one period to the next without including changes caused by certain items that could potentially distort the analysis of trends in its operating performance, and because such measures provide meaningful information on the Company's financial condition and operating results. Please refer to the Management's Discussion and Analysis for the three- and nine-month periods ended August 31, 2010 for more details on how these non-GAAP measures are calculated.

About Theratechnologies

Theratechnologies (TSX:TH) is a Canadian biopharmaceutical company that discovers and develops innovative therapeutic products, with an emphasis on peptides, for commercialization. The Company targets unmet medical needs in specialty markets where it can retain all or part of the commercial rights to its products. Its most advanced compound, tesamorelin, is an analogue of the human growth hormone releasing factor. In 2009, Theratechnologies submitted a New Drug Application ("NDA") to the U.S. Food and Drug Administration ("FDA"), seeking approval of tesamorelin for the treatment of excess abdominal fat in HIV-infected patients with lipodystrophy. The Company's growth strategy is centered on the commercialization of tesamorelin in the United States through an agreement with EMD Serono, Inc. for HIV-associated lipodystrophy. Moreover, Theratechnologies' growth strategy will also derive from the commercialization of tesamorelin in other markets for HIV-associated lipodystrophy, as well as from the development of clinical programs for tesamorelin in other medical conditions.

Additional Information about Theratechnologies

Further information about Theratechnologies is available on the Company's website at www.theratech.com. Additional information, including the Annual Information Form and the Annual Report, is also available on SEDAR at www.sedar.com.

Forward-Looking Information 

This press release contains certain statements that are considered "forward-looking information" within the meaning of applicable securities legislation. This forward-looking information includes, but is not limited to, information regarding the potential decrease in the adjusted burn rate for 2010, the growth strategy of the Company by way of the commercialization of tesamorelin in the U.S. market as well as in other markets, and the development of tesamorelin for the treatment of other medical conditions. Furthermore, the words "will", "may", "could", "should", "outlook", "believe", "plan", "envisage", "anticipate", "expect" and "estimate", or variations of them denote forward-looking information.

Forward-looking information is based upon a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond the Company's control that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. These risks and uncertainties include, but are not limited to, the risk that unexpected expenses increase the adjusted burn rate, that the FDA does not approve tesamorelin for the treatment of excess abdominal fat in HIV-infected patients with lipodystrophy, that the Company is unable to commercialize tesamorelin in other markets because, among other reasons, the non-approval of tesamorelin in those markets or the non-acceptance of the product in those markets, and that the results of clinical studies for the development of tesamorelin for the treatment of other medical conditions are inconclusive, resulting in the termination of these studies.

Although the forward-looking information contained herein is based upon what the Company believes are reasonable assumptions, investors are cautioned against placing undue reliance on this information since actual results may vary from the forward-looking information. Certain assumptions made in preparing the forward-looking information and the Company's objectives include the assumption, among others, that the FDA and regulatory agencies in other countries will approve tesamorelin for the treatment of excess abdominal fat in HIV-infected patients with lipodystrophy, sales of tesamorelin in the United States and in other markets will be successful, and that the results of clinical studies for the development of tesamorelin for the treatment of other medical conditions will be conclusive.

Consequently, all of the forward-looking information is qualified by the foregoing cautionary statements and there can be no guarantee that the results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences or effects on the Company, its business, its financial condition or its results of operations. Furthermore, the forward-looking information reflects current expectations regarding future events only as of the date of release of this press release.

Investors are referred to the Company's public filings available at www.sedar.com. In particular, further details on these risks and descriptions of these risks are disclosed in the "Risks and Uncertainties" section of the Company's Annual Information Form, dated February 23, 2010, for the year ended November 30, 2009.

MANAGEMENT'S DISCUSSION AND ANALYSIS

FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED AUGUST 31, 2010

The following Management's Discussion and Analysis ("MD&A") provides Management's point of view on the financial position and the results of operations of Theratechnologies Inc. ("Theratechnologies" or the "Company"), for the three-month and nine-month periods ended August 31, 2010, as compared to the three-month and nine-month periods ended August 31, 2009. This view contains information that the Company believes may affect its prospective financial condition, cash flows and results of operations. The unaudited interim consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). This MD&A should be read in conjunction with the unaudited interim consolidated financial statements of the Company and the notes thereto as at August 31, 2010, as well as the MD&A and audited consolidated financial statements including the related notes thereto as at November 30, 2009. Unless specified otherwise, all amounts are in Canadian dollars.

Financial Overview

Theratechnologies (TSX:TH) is a Canadian biopharmaceutical company that discovers and develops innovative therapeutic products, with an emphasis on peptides, for commercialization. The Company targets unmet medical needs in specialty markets where it can retain all or some of the commercial rights to its products. Its most advanced compound, tesamorelin, is an analogue of the human growth hormone releasing factor.

The Company's growth strategy is centered upon the development of tesamorelin. In late 2008, Theratechnologies entered into a collaboration and licensing agreement with EMD Serono, Inc. ("EMD Serono"), an affiliate of Merck KGaA, Darmstadt, Germany, for the exclusive commercialization rights to tesamorelin for the treatment of excess abdominal fat in HIV-infected patients with lipodystrophy in the United States. The principal strategic objective of Theratechnologies is to obtain regulatory approval for tesamorelin in the United States in this indication and good progress was made by participating in the U.S. Food and Drug Administration ("FDA" or the "Agency") Endocrinologic and Metabolic Drugs Advisory Committee. On May 27, 2010, the Committee recommended by a 16 to 0 unanimous vote that tesamorelin be granted marketing approval by the FDA for this indication. Although advisory committees provide their recommendations, the decision on marketing approval is made by the Agency. Theratechnologies expects a final decision from the Agency on the approval of tesamorelin in the United States during the fourth quarter 2010. Should tesamorelin be approved, the Company expects to receive regulatory milestone payments, royalties and additional milestone payments from sales of tesamorelin by EMD Serono in the United States.

Concurrent with advancing the regulatory process, Theratechnologies has begun building inventory in preparation for the launch of tesamorelin in the United States by EMD Serono, upon its approval by the FDA. In the coming months, the Company will continue building inventory.

In light of a lower expense level and cost control measures, the Company anticipates that the adjusted burn rate for 2010 will be between $22,000,000 and $23,000,000, and thus will be less than the initially forecasted adjusted burn rate of $24,000,000.

Revenues

Consolidated revenues for the three-month period ended August 31, 2010, amounted to $2,152,000, compared to $13,148,000 for 2009. For the nine-month period ended August 31, 2010, consolidated revenues were $6,673,000, compared to $17,474,000 for the same period in 2009. The higher revenues in 2009 are due to the receipt in the third quarter of a milestone payment of $10,884,000 associated with the FDA's agreement to review the New Drug Application ("NDA") for tesamorelin, pursuant to the collaboration and licensing agreement with EMD Serono.

The initial payment received upon the closing of the agreement with EMD Serono of $27,097,000 has been deferred and is being amortized over its estimated service period on a straight-line basis. This period may be modified in the future based on additional information. For the three-month period ended August 31, 2010, an amount of $1,711,000 ($1,712,000 for the same period in 2009) was recognized as revenue related to this transaction, while an amount of $5,134,000 was recognized as revenue related to this transaction for the nine-month period ($ 4,849,000 for the same period in 2009). At August 31, 2010, the deferred revenues related to this transaction recorded on the balance sheet amounted to $15,403,000.

R&D Activities

Research and development ("R&D") expenses, before tax credits, totaled $2,930,000 for the third quarter of 2010, compared to $5,681,000 in 2009. For the nine-month period ended August 31, 2010, R&D expenses were $11,298,000 compared to $17,692,000 for the same period in 2009, a decrease of 36.1%. The R&D expenses incurred in the third quarter of 2010 are mainly related to the pursuit of the regulatory filing for tesamorelin with the FDA. The expenses incurred in the third quarter of 2009, in addition to expenses related to the pursuit of the regulatory filing described above, included a non-recurring charge of $1,395,000 related to a write-down of research supplies produced in order to obtain stability data and to validate the manufacturing process for commercial purposes, as required by the FDA. The expenses incurred in the nine-month period ended August 31, 2009, also included costs associated with completing the Phase 3 clinical trials evaluating tesamorelin in HIV-associated lipodystrophy.

Other Expenses

For the third quarter of 2010, general and administrative expenses amounted to $2,225,000, compared to $1,337,000 for the same period in 2009. For the nine-month period ended August 31, 2010, general and administrative expenses amounted to $6,083,000, compared to $5,515,000 for the same period in 2009. The higher expenses in the third quarter of 2010 are principally due to professional fees associated with the recruitment of the new President and Chief Executive Officer, variations in stock-based compensation expenses, and foreign exchange rate fluctuations. The higher expenses in the nine-month period are principally due to heightened communication activities related to the FDA Advisory Committee meeting as well as an increase in other administrative expenses partially offset by a reduction in the loss on foreign exchange. The expenses for the nine-month period ending August 31, 2009, include the costs associated with revising the Company's business plan.

For the third quarter of 2010, the cost of sales, an amount related to the production of tesamorelin, totaled $120,000. There were no costs related to the production of tesamorelin for the corresponding period in 2009.

Selling and market development expenses amounted to $521,000 for the third quarter of 2010, compared to $495,000 for the same period in 2009. For the nine-month period ended August 31, 2010, selling and market development expenses amounted to $1,901,000, compared to $1,516,000 for the same period in 2009. The increase in the selling and market development expenses is principally due to business development and market research studies for countries other than the United States. These expenses also include activities associated with the management of the agreement with EMD Serono.

Net Results

Taking into account the revenues and expenses described above, the Company recorded a third quarter net loss of $3,277,000, representing $0.05 per share, compared to a net earning of $5,824,000, representing $0.10 per share for the same period in 2009. For the nine-month period ended August 31, 2010, the net loss was $12,367,000, representing $0.20 per share, compared to a net loss of $10,360,000, representing $0.17 per share for the same period in 2009.

The net loss in the third quarter of 2010 includes revenue of $1,711,000 related to the agreement with EMD Serono. Excluding this item, the adjusted net loss amounted to $4,988,000 in 2010, a decrease of 26.3% compared to the same period in 2009. For the nine-month period, the net loss includes revenue and costs related to the agreement with EMD Serono. Excluding those items, the adjusted net loss amounted to $17,501,000, compared to $21,824,000 for the same period in 2009, a decrease of 19.8%.

Financial Position

At August 31, 2010, liquidities, which include cash and bonds, amounted to $43,419,000, and tax credits receivable amounted to $514,000, for a total of $43,933,000.

Taking into account the revenues and expenses described above, for the three-month period ended August 31, 2010, the burn rate from operating activities, excluding changes in operating assets and liabilities, was $2,629,000, compared to a cash flow of $6,186,000 in 2009. Excluding the revenue and costs related to the agreement with EMD Serono, the adjusted burn rate from operating activities, excluding changes in operating assets and liabilities, was $4,340,000 for the quarter ended August 31, 2010, compared to $6,410,000 for the third quarter of 2009, a decrease of 32.3%.

For the nine-month period ending August 31, 2010, the burn rate from operating activities, excluding changes in operating assets and liabilities, was $10,877,000 compared to $9,214,000 for the same period in 2009. Excluding the revenue and costs associated with the agreement with EMD Serono, the adjusted burn rate from operating activities, excluding changes in operating assets and liabilities, was $16,011,000, compared to $20,678,000 for the corresponding period in 2009, representing a decrease of 22.6%.

Quarterly Financial Information

The selected financial information provided below is derived from the Company's unaudited quarterly financial statements for each of the last eight quarters. This information has been restated following the adoption of the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3064, Goodwill and Intangible Assets.

(in thousands of Canadian dollars, except per share amounts)

  2010   2009   2008  
  Q3   Q2   Q1   Q4   Q3 Q2   Q1   Q4  
Revenues $2,152   $2,226   $2,295   $2,246   $13,148 $2,317   $2,009   $616  
Net (loss) earnings $(3,277 ) $(4,823 ) $(4,267 ) $(4,698 ) $5,824 $(5,430 ) $(10,754 ) $(15,145 )
Basic and diluted (loss) earnings per share $(0.05 ) $(0.08 ) $(0.07 ) $(0.08 ) $0.10 $(0.09 ) $(0.18 ) $(0.26 )

As described above, the increased revenues in 2010 and 2009 are related to the amortization of the initial payment received at the closing of the agreement with EMD Serono, as well as the milestone payment of $10,884,000 recorded in August 2009. The increase in the fourth quarter net loss in 2008 is due to impairment charges for intellectual property.

Non-GAAP Measures

The Company uses measures that do not conform to Canadian GAAP to assess its operating performance. Securities regulators require that companies caution readers that earnings and other measures adjusted to a basis other than GAAP do not have standardized meanings and are unlikely to be comparable to similar measures used by other companies. Accordingly, these measures should not be considered in isolation. The Company uses non-GAAP measures such as adjusted net loss and the adjusted burn rate from operating activities before changes in operating assets and liabilities, to measure its performance from one period to the next without including changes caused by certain items that could potentially distort the analysis of trends in its operating performance, and because such measures provide meaningful information on the Company's financial condition and operating results.

Definition and Reconciliation of Non-GAAP Measures

In order to measure performance from one period to another, without accounting for changes related to the impact of revenues and costs associated with the collaboration and licensing agreement with EMD Serono, Management uses adjusted net loss and adjusted burn rate from operating activities before changes in operating assets and liabilities. These items are excluded because they affect the comparability of the financial results and could potentially distort the analysis of trends in the Company's operating performance. The exclusion of these items does not necessarily indicate that they are non-recurring.

(in thousands of Canadian dollars) 

  August 31st
(3 months)
  August 31st
(9 months)
 
Adjusted net loss 2010   2009   2010   2009  
(Net loss) net earnings per the financial statements $(3,277 ) $5,824   $(12,367 ) $(10,360 )
Adjustments:                
Revenue associated with a collaboration and licensing agreement (note 7 to the consolidated financial statements) (1,711 ) (12,596 ) (5,134 ) (15,733 )
Costs associated with collaboration and licensing agreement -   -   -   4,269  
Adjusted net loss $(4,988 ) $(6,772 ) $(17,501 ) $(21,824 )
       
       
       
      August 31st
(3 months)
   August 31st
(9 months)
 
Adjusted burn rate before changes in operating assets and liabilities 2010   2009   2010   2009  
(Burn rate) cash flow before changes in operating assets and liabilities, per the financial statements $(2,629 ) $6,186   $(10,877 ) $(9,214 )
Adjustments:                
Revenue associated with a collaboration and licensing agreement (note 7 to the consolidated financial statements) (1,711 ) (12,596 ) (5,134 ) (15,733 )
Costs associated with collaboration and licensing agreement -   -   -   4,269  
Adjusted burn rate before changes in operating assets and liabilities $(4,340 ) $(6,410 ) $(16,011 ) $(20,678 )

Contingency

On July 26, 2010, the Company received a motion of authorization to institute a class action against the Company and certain of its executive officers (the "Motion"). The Motion was filed in the Superior Court of Quebec, district of Montreal. The applicant is seeking to initiate a class action suit to represent the class of persons who were shareholders at May 21, 2010 and who sold their common shares of the Company on May 25 or 26, 2010. This applicant alleges that the Company did not comply with its continuous disclosure obligations as a reporting issuer by failing to disclose a material change. The Company is of the view that the allegations contained in the motion are entirely without merit and intends to take all appropriate actions to vigorously defend its position. As of October 11, 2010, the motion has not yet been heard by the Superior Court of Quebec.

New Accounting Policies

In February 2008, the Accounting Standards Board of Canada ("AcSB") announced that accounting standards in Canada, as used by public companies, will converge with International Financial Reporting Standards ("IFRS"), for financial periods beginning on and after January 1, 2011 with the option to early adopt IFRS upon receipt of approval from the Canadian Securities regulatory authorities. 

The Company's mandatory changeover from current Canadian GAAP to IFRS applies to the fiscal year beginning December 1, 2011. However, the Company plans to file an exemption with the Canadian securities regulatory authorities to early adopt IFRS beginning December 1, 2009, the change over date. The Company intends to file its November 30, 2010 financial statements under IFRS with December 1, 2008 being the proposed transition date. Should the exemption be granted, the comparative annual period for fiscal 2009 will be restated under IFRS as will all quarterly filings for 2009 and 2010. The following discussion provides further information about the Company's IFRS convergence activities. 

Management of IFRS Convergence Project

Management has evaluated its overall readiness for transition from GAAP to IFRS, including the readiness of its staff, Board of Directors and Audit Committee and has determined that the Company is adequately prepared for the conversion to IFRS.

The Company has established a formal project plan and a detailed timetable to manage the transition. It has also allocated substantial internal resources and is working with its auditors to ensure a timely and accurate conversion. The conversion project is being monitored by senior members of the finance team which report regularly to the Audit Committee and the Board of Directors on the progress of the convergence project through meetings and communication. The Company is currently on schedule with its plan. 

Conversion Plan

The Company's IFRS convergence project includes four steps: diagnostic and planning, detailed analysis, design, and implementation, which in certain cases will occur concurrently as IFRS is applied to specific areas.

Phase One: Diagnostic and Planning This phase involves establishing a transition plan to IFRS and the initial identification of differences between Canadian GAAP and IFRS.

Phase Two: Detailed Analysis This phase involves a comprehensive assessment of the differences between the Company's current accounting policies and the requirements of IFRS in order to evaluate the impact on the Company. In addition, as part of the detailed analysis, the Company identifies training requirements, and determines eventual changes to business processes and information systems.

Phase Three: Design This phase consists of an analysis of the available accounting options under IFRS, notably the exceptions, exemptions and actual accounting policy choices available for the transition and the preparation of draft IFRS financial statements and accompanying notes. In addition, it is during this phase that changes to the business processes and the information systems are designed.

Phase Four: Implementation This phase involves implementing changes to systems, business processes and internal controls, determining the opening IFRS transition balance sheet and the impact on taxation, parallel accounting under Canadian GAAP and IFRS and preparing detailed reconciliations between Canadian GAAP and IFRS financial statements.

Conversion Progress

At the date of preparing this MD&A, the Company has met the key milestones of the project plan, including the completion of the diagnostic and detailed analysis phases, and has made significant progress in the completion of the design phase. 

Though IFRS uses a conceptual framework similar to Canadian GAAP, there are still significant differences in recognition, measurement and the disclosure of information. Based on the comparative analysis of the current IFRS with Canadian GAAP, upon which the Company's accounting practices are now based, the Company has identified a number of differences and impacts which are discussed below. The list should not be interpreted as a comprehensive list of changes, it highlights those areas of accounting differences that the Company currently believes are to be the most significant upon conversion to IFRS.

IFRS 1, First-time Adoption of International Financial Reporting Standards ("IFRS 1")

The adoption of IFRS requires application of IFRS 1, which provides guidance for an entity's initial adoption of IFRS and outlines that, in general, an entity applies the principles under IFRS retrospectively with adjustments arising on conversion from Canadian GAAP to IFRS being directly recognized in retained earnings as of the beginning of the first comparative financial statements presented. In this case, the Company will restate its comparative 2009 financial statements for annual and interim periods to be in accordance with IFRS and will reconcile equity and net earnings from the previously reported fiscal 2009 GAAP amounts to the restated 2009 IFRS amounts.

IFRS also provides certain optional exemptions from retrospective application of certain IFRS requirements as well as mandatory exceptions which prohibit retrospective application of standards.

The Company elected to take the following IFRS 1 optional exemptions:

Fair value or revaluation as deemed cost — IFRS 1 provides a choice between measuring property, plant and equipment at its fair value at the date of transition and using those amounts as deemed cost or using the historical valuation under the prior GAAP. The Company plans to retain the historical basis as cost and forego of the option to use fair value as deemed cost.

Share-based payments — IFRS 1 encourages application of IFRS 2, Share-based payment provisions to equity instruments granted on or before November 7, 2002, but permits the application only to equity instruments granted after November 7, 2002 that were not vested by the transition date. The Company will apply IFRS 2 only to equity instruments granted after November 7, 2002 that were not vested by December 1, 2008.

Changes in existing decommissioning, restoration and similar liabilities included in the cost of property, plant and equipment — IFRS 1 allows for either the retroactive adoption or prospective adoption from the transition date of IFRIC 1, Changes in existing decommissioning, restoration and similar liabilities. The Company plans to prospectively apply this standard, as the case may be.

Further optional exemptions are provided under IFRS 1. However, the Company does not believe these exemptions will impact its adoption of IFRS. Hindsight is not permitted to create or revise estimates. Estimates previously made by the Company under Canadian GAAP cannot be revised for application of IFRS except where necessary to reflect any difference in accounting policies.

IFRS 2, Share-based Payments ("IFRS 2")

Under IFRS, when stock option awards vest gradually, each tranche is to be considered as a separate award, while under Canadian GAAP, companies can make a policy choice to consider gradually vested tranches as a single award. Similarly, the IFRS standard requires that forfeiture estimates be established at the time of the initial fair value assessment of share-based payments rather than to account for the forfeitures as they occur. Therefore, the compensation expense will have to be recognized over the expected term of each tranche and take into account the impact of the differences in accounting for forfeitures. The Company has performed its preliminary calculation and concluded that an adjustment of approximately $200,000 will be recorded at the proposed transition date.

IAS 36, Impairment ("IAS 36")

Under Canadian GAAP standards for impairment of non-financial assets, for assets other than financial assets, a write-down to estimated fair value is recognized if the estimated undiscounted future cash flows from an asset or group of assets are less than their carrying value. IAS 36 requires a write-down to be recognized if the recoverable amount, determined as the higher of the estimated fair value less costs to sell or value in use is less than carrying value. The Company will assess as of the transition date whether there are any indicators of impairment at that date. In the event of a possible early adoption, the Company has performed impairment testing as of December 1, 2008 and November 30, 2009 and has concluded that there is no impairment charge under IFRS as of December 1, 2008. No impairment indicators were identified for the period between the transition date and November 30, 2009. IAS 36 also permits the reversal of certain impairment charges where conditions have changed. The Company reviewed past impairment charges and concluded that there was no justification for reversal of past impairment charges.

IAS 1, Presentation of Financial Statement ("IAS 1")

Financial statement presentation is addressed in conjunction with the related IFRS standards. Certain additional disclosures will be required in the notes to the financial statements and the statement of operations will be modified to reflect either a presentation by nature or by function. The Company is currently working on preliminary IFRS financial statements in accordance with IAS 1, Presentation of Financial Statements which will be completed in the last quarter of 2010.

Other Standards

Based on the results of the comparative analysis of the current IFRS with Canadian GAAP, the Company has also completed its assessment of the following standards and determined that, other than enhanced disclosures, no material adjustments would result regarding:

  • Property plant and equipment
  • Leases
  • Revenue recognition
  • Provisions, contingent assets and contingent liabilities
  • Foreign exchange
  • Intangible assets
  • Inventories
  • Employee benefits

The Company is in the process of completing its analysis of the few remaining potential differences identified, but does not expect material adjustments to be required.

The Company continues to assess the aggregate effect of adopting IFRS, and the relevant changes in accounting policies. Key milestones for the remainder of the year which are in line with the Company's plan include:

  • Completion of the analysis of relevant accounting policies and standards
  • Completion of the opening transition balance sheet
  • Identifying, documenting and embedding changes to systems, business processes and internal controls, as required
  • Parallel accounting under Canadian GAAP and IFRS
  • Preparation of detailed reconciliations of Canadian GAAP to IFRS financial statements
  • Training programs for the Company's finance team and other affected parties, as necessary
  • Audit Committee approval of IFRS financial statements

Impact on the Business

The impact of the conversion to IFRS on the Company has been minimal and will therefore result in a limited number of adjustments. The Company's systems can easily accommodate the required changes. The Company's internal and disclosure control processes, as currently designed, will likely not require significant modification as a result of its conversion to IFRS. The Company is assessing the impacts of adopting IFRS on its contractual arrangements, and has not identified any material compliance issues to date. The Company is considering the impacts that the transition will have on its internal planning process and compensation arrangements and continues to evaluate the impact of transitioning to IFRS on the communication of its financial results.

Impact on Information Systems and Technology

The transition is expected to have minimal impact on information systems used by the Company. The areas where information systems are most impacted to date are minor modifications to certain general ledger accounts, sub-ledgers and end-user reports to accommodate IFRS accounting adjustments, recording, and heightened disclosures.

Impact on Internal Controls and Disclosure Controls and Procedures

The Company's internal controls will not be materially affected by the transition to IFRS. The IFRS differences require presentation and process changes to report more detailed information in the notes to the financial statements, but it is not currently expected to lead to many differences in the accounting treatments used by the Company. Disclosure controls and procedures may change due to the transition to IFRS, but the impact is expected to be minimal as well.

Impact on Financial Reporting Expertise

Training and education has been provided to all members of the finance team who are directly affected by the transition to IFRS. IFRS training to other financial staff will be performed as deemed necessary. This training will focus mainly around the process changes required and an overview of the reasons behind the changes from a standards perspective. Considering the minor impact on the Company's operating results and financial situation, investors and other parties will not be significantly affected by its conversion to IFRS.

Outstanding Share Data 

 On October 8, 2010, the number of shares issued and outstanding was 60 511 598 while outstanding options granted under the stock option plan were 2 853 638.

Contractual Obligations 

There were no material changes in contractual obligations during the quarter, other than in the ordinary course of business.

Economic and Industry Factors

Economic and industry factors were substantially unchanged from those reported in the Company's 2009 Annual Report.

Forward-Looking Information

This MD&A for the third quarter contains certain statements that are considered "forward-looking information" within the meaning of applicable securities legislation. This forward-looking information includes, but is not limited to, information regarding the approval of tesamorelin for the treatment of excess abdominal fat in HIV-infected patients with lipodystrophy by the FDA, the receipt of milestone payments and/or royalties under the agreement entered into with EMD Serono, the potential decrease in the adjusted burn rate, and the completion of a conversion plan to IFRS. Furthermore, the words "will", "may", "could", "should", "outlook", "believe", "plan", "envisage", "anticipate", "expect" and "estimate", or variations of them denote forward-looking information.

Forward-looking information is based upon a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond the Company's control that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. These risks and uncertainties include, but are not limited to, the risk that the FDA does not approve tesamorelin for the treatment of excess abdominal fat in HIV-infected patients with lipodystrophy, the risk that the payment of milestones is delayed or not received or that the royalties from the sale of tesamorelin are not received, the risk that unexpected expenses increase the adjusted burn rate, and the risk that the timeline for preparing a conversion plan to IFRS is not met.

Although the forward-looking information contained herein is based upon what the Company believes are reasonable assumptions, investors are cautioned against placing undue reliance on this information since actual results may vary from the forward-looking information. Certain assumptions made in preparing the forward-looking information and the Company's objectives include the assumption, among others, that the FDA will approve tesamorelin for the treatment of excess abdominal fat in HIV-infected patients with lipodystrophy, sales of tesamorelin in the United States will be successful, unexpected expenses will not result in an adjusted burn rate increase, and the Company will not experience any difficulties in preparing a conversion plan to IFRS.

Consequently, the forward-looking information is qualified by the foregoing cautionary statements, and there can be no guarantee that the results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences or effects on the Company, its business, its financial condition or its results of operations. Furthermore, the forward-looking information reflects current expectations regarding future events only as of the date of release of this MD&A.

Investors are referred to the Company's public filings available at www.sedar.com. In particular, further details on the risks and descriptions of the risks are disclosed in the "Risks and Uncertainties" section of the Company's Annual Information Form, dated February 23, 2010, for the year ended November 30, 2009. This MD&A is dated October 12, 2010, and has been approved by the Audit Committee.

Consolidated Financial Statements of
(Unaudited)
 
THERATECHNOLOGIES INC.
 
Nine-month periods ended August 31, 2010 and 2009
 
 
 
THERATECHNOLOGIES INC.
Consolidated Balance Sheets
(Unaudited)
 
August 31, 2010 and November 30, 2009
(in thousands of dollars)
             
      August 31,   November 30,  
      2010     2009  
             
Assets            
             
Current assets:            
  Cash $ 2,370   $ 1,519  
  Bonds   1,694     10,036  
  Accounts receivable   131     375  
  Tax credits receivable   514     1,666  
  Inventories   4,585     2,225  
  Research supplies   283     287  
  Prepaid expenses   680     302  
      10,257     16,410  
             
Bonds   39,355     51,807  
Property and equipment   1,106     1,229  
Other assets   41     41  
    $ 50,759   $ 69,487  
             
Liabilities and Shareholders' Equity            
             
Current liabilities:            
  Accounts payable and accrued liabilities $ 3,823   $ 5,901  
  Current portion of deferred revenues (note 7)   6,849     6,847  
      10,672     12,748  
Deferred revenues (note 7)   8,557     13,691  
Deferred lease inducements   167      
             
Shareholders' equity:            
  Capital stock (note 3)   279,389     279,169  
  Contributed surplus   7,356     6,484  
               
  Accumulated other comprehensive income   872     1,282  
  Deficit   (256,254 )   (243,887 )
      (255,382 )   (242,605 )
Total shareholders' equity   31,363     43,048  
             
Contingency (note 4)            
    $ 50,759   $ 69,487  
 
See accompanying notes to unaudited consolidated financial statements.
 
 
 
THERATECHNOLOGIES INC.
Consolidated Statement of Operations
(Unaudited)
 
Periods ended August 31, 2010 and 2009
(in thousands of dollars, except per share amounts)
                       
          August 31,         August 31,  
      2010     2009     2010     2009  
          (3 months)         (9 months)  
Revenues:                        
  Royalties, technologies and other (note 7) $ 1,717   $ 12,601   $ 5,151   $ 15,750  
  Interest   435     547     1,522     1,724  
      2,152     13,148     6,673     17,474  
Operating costs and expenses:                        
  Research and development 2,930     5,681     11,298     17,692  
  Tax credits   (448 )   (294 )   (783 )   (1,384 )
      2,482     5,387     10,515     16,308  
                           
  General and administrative   2,225     1,337     6,083     5,515  
  Cost of Sales   120     -     120     -  
  Selling and market development   521     495     1,901     1,516  
  Patents   81     105     421     226  
  Fees associated with collaboration and licensing agreement (note 7)   -         -     4,269  
      5,429     7,324     19,040     27,834  
   
(Net loss) net earnings $ (3,277 ) $ 5,824   $ (12,367 ) $ (10,360 )
   
Basic and diluted (loss) earnings per share (note 3 (d)) $ (0.05 ) $ 0.10   $ (0.20 ) $ (0.17 )
 
See accompanying notes to unaudited consolidated financial statements.
 
 
 
THERATECHNOLOGIES INC.
Consolidated Statements of Comprehensive Loss
(Unaudited)
 
Periods ended August 31, 2010 and 2009
(In thousands of dollars)
                       
          August 31,         August 31,  
    2010     2009     2010     2009  
         (3 months)         (9 months)  
                         
(Net loss) net earnings $ (3,277 ) $ 5,824   $ (12,367 ) $ (10,360 )
                         
Unrealized gains (losses) onavailable-for-sale financial assets   586     342     (151 )   1,327  
                         
Reclassification adjustment for gains and losses on available-for-sale financial assets   (65 )   (48 )   (259 )   (118 )
   
Comprehensive (loss) earnings $ (2,756 ) $ 6,118   $ (12,777 ) $ (9,151 )
 
See accompanying notes to unaudited consolidated financial statements.
 
 
 
THERATECHNOLOGIES INC.
Consolidated Statements of Shareholders' Equity
(Unaudited)
 
Nine-month period ended August 31, 2010
(In thousands of dollars)
                             
  Capital stock                      
  Number   Dollars   Contri-
buted surplus
    Accu-
mulated other compre-hensive
income
    Deficit     Total  
   
Balance, November 30, 2009 60,429,393 $ 279,169 $ 6,484   $ 1,282   $ (243,887 ) $ 43,048  
                               
Issuance of share capital (note 3) 2,880   15   -     -     -     15  
                               
Exercise of stock options:                              
  Cash proceeds 77,493   128   -     -     -     128  
  Ascribed value -   77   (77 )   -     -     -  
                               
Stock-based compensation -   -   949     -     -     949  
                               
Net loss -   -   -     -     (12,367 )   (12,367 )
                               
Unrealized gains on available-for-sale financial assets -   -   -     (410 )   -     (410 )
   
Balance, August 31, 2010 60,509,766 $ 279,389 $ 7,356   $ 872   $ (256,254 ) $ 31,363  
 
See accompanying notes to unaudited consolidated financial statements.
 
 
 
Nine-month period ended August 31, 2009
(In thousands of dollars)
                     
  Capital stock                  
  Number   Dollars   Contri-buted surplus   Accu- mulated other compre-hensive income   Deficit     Total  
   
Balance, November 30, 2008 58,215,090 $ 269,219 $ 5,585 $ 372 $ (228,230 ) $ 46,946  
                           
Issuance of share capital (note 2 (a))         (599 )   (599 )
                           
Share issue costs (notes 3 and 7) 2,182,387   9,861           9,861  
                           
Stock-based compensation     705         705  
                           
Net loss         (10,360 )   (10,360 )
                           
Unrealized gains on available-for-sale financial assets       1,209       1,209  
   
Balance, August 31, 2009 60,397,477 $ 279,080 $ 6,290 $ 1,581 $ (239,189 ) $ 47,762  
 
See accompanying notes to unaudited consolidated financial statements.
 
 
 
THERATECHNOLOGIES INC.
Consolidated Statements of Cash Flows
(Unaudited)
 
Periods ended August 31, 2010 and 2009
(in thousands of dollars)
                           
            August 31,           August 31,  
      2010     2009     2010     2009  
          (3 months)            (9 months)  
Cash flows from operating activities:                        
  Net loss $ (3,277 ) $ 5,824   $ (12,367 ) $ (10,360 )
  Adjustments for:                        
    Amortization of property and equipment   92     157     374     441  
    Lease inducements and amortization   125         167      
    Stock-based compensation   431     205     949     705  
      (2,629 )   6,186     (10,877 )   (9,214 )
  Changes in operating assets and liabilities:                        
    Interest receivable on bonds   317     74     696     (728 )
    Accounts receivable   45     56     244     415  
    Tax credits receivable   1,488     (293 )   1,152     (1,383 )
    Inventories   (89 )       (2,360 )   (1,594 )
    Research supplies   (12 )   1,797     4     2,023  
    Prepaid expenses   (17 )   (200 )   (378 )   (326 )
    Accounts payable and accrued liabilities   (3,216 )   (922 )   (1,950 )   (2,590 )
    Deferred revenues   (1,714 )   (1,715 )   (5,132 )   22,252  
      (3,198 )   (1,203 )   (7,724 )   18,069  
   
      (5,827 )   4,983     (18,601 )   8,855  
Cash flows from financing activities:                        
  Share issuance   37         143     9,861  
  Share issue costs   -         -     (8 )
      37         143     9,853  
Cash flows from investing activities:                        
  Additions to property and equipment   (43 )   (55 )   (379 )   (290 )
  Acquisition of bonds   -         -     (19,631 )
  Disposal of bonds   4,706     3,963     19,688     13,805  
      4,663     3,908     19,309     (6,116 )
   
Net (decrease) increase in cash   (1,127 )   8,891     851     12,592  
Cash, beginning of period   3,497     3,834     1,519     133  
   
Cash, end of period $ 2,370   $ 12,725   $ 2,370   $ 12,725  
 
See note 5 (a) for supplemental cash flow information.
 
See accompanying notes to unaudited consolidated financial statements.
 
 
 
THERATECHNOLOGIES INC.
Notes to Consolidated Financial Statements
(Unaudited)
 
Periods ended August 31, 2010 and 2009
(in thousands of dollars, except per share amounts)

1. Basis of presentation:

The financial statements included in this report are unaudited and reflect normal and recurring adjustments which are, in the opinion of the Company, considered necessary for a fair presentation of its results. These financial statements have been prepared in conformity with Canadian generally accepted accounting principles ("GAAP"). The same accounting policies as described in the Company's latest annual report have been used. However, these financial statements do not include all disclosures required under GAAP and, accordingly, should be read in connection with the financial statements and the notes thereto included in the Company's latest annual report. These interim financial statements have not been reviewed by the auditors.

2. New accounting policies:

(a) Adoption of new accounting standards:

Goodwill and intangible assets

Effective with the commencement of its 2009 fiscal year, the Company adopted the Canadian Institute of Chartered Accountants (''CICA'') Handbook Section 3064, Goodwill and Intangible Assets, which will replace Section 3062, Goodwill and Other Intangible Assets, and Section 3450, Research and Development Costs. The standard provides guidance on the recognition of intangible assets in accordance with the definition of an asset and the criteria for asset recognition, whether these assets are separately acquired or internally developed. The impact of adopting this standard has been to increase the opening deficit and to reduce other assets as at December 1, 2008 by $599, which is the amount of patent costs related to periods prior to these dates.

Lease inducements

Lease inducements arising from leasehold improvements allowance and rent-free inducements received are deferred and amortized over the term of the lease on a straight- line basis.

(b) Future accounting changes:

International Financial Reporting Standards

In February 2008, the Accounting Standards Board of Canada ("AcSB") announced that accounting standards in Canada, as used by public companies, will converge with International Financial Reporting Standards ("IFRS"), for financial periods beginning on and after January 1, 2011 with the option to early adopt IFRS upon receipt of approval from the Canadian Securities regulatory authorities.

The Company's mandatory changeover from current Canadian GAAP to IFRS applies to the fiscal year beginning December 1, 2011. However, the Company plans to file an exemption with the Canadian securities regulatory authorities to early adopt IFRS beginning December 1, 2009, the change over date. The Company intends to file its November 30, 2010 financial statements under IFRS with December 1, 2008 being the proposed transition date. Should the exemption be granted, the comparative annual period for fiscal 2009 will be restated under IFRS as will all quarterly filings for 2009 and 2010.

3. Capital stock:

During the second quarter of 2010, the Company received subscriptions in the amount of $15 ($7 for the same period in 2009) for the issue of 2,880 common shares (2,550 for the same period in 2009) in connection with its share purchase plan.

(a) Shareholder rights plan:

On February 10, 2010, the Board of Directors of the Company adopted a shareholder rights plan (the ''Plan''), effective as of such date. The Plan is designed to provide adequate time for the Board of Directors, and the shareholders, to assess an unsolicited takeover bid for the Company. In addition, the Plan provides the Board of Directors with sufficient time to explore and develop alternatives for maximizing shareholder value if a takeover bid is made, as well as provide shareholders with an equal opportunity to participate in a takeover bid and receive full and fair value for their common shares (the "Common Shares"). The Plan, if approved by the shareholders, will expire at the close of the Company's annual meeting of shareholders in 2013.

The rights issued under the Plan will initially attach to and trade with the Common Shares and no separate certificates will be issued unless an event triggering these rights occurs. The rights will become exercisable only when a person, including any party related to it, acquires or attempts to acquire 20% or more of the outstanding Common Shares without complying with the ''Permitted Bid'' provisions of the Plan or without approval of the Board of Directors. Should such an acquisition occur or be announced, each right would, upon exercise, entitle a rights holder, other than the acquiring person and related persons, to purchase Common Shares at a 50% discount to the market price at the time.

Under the Plan, a Permitted Bid is a bid made to all holders of the Common Shares and which is open for acceptance for no less than 60 days. If, at the end of the 60-day period, at least 50% of the outstanding Common Shares, other than those owned by the offeror and certain related parties, have been tendered, the offeror may take up and pay for the Common Shares but must extend the bid for a further 10 days to allow other shareholders to tender.

(b) Stock option plan:

Changes in outstanding options granted under the Company's stock option plan for the year ended November 30, 2009 and the nine-month period ended August 31, 2010 were as follows:

  Number     Weighted average exercise price per share
 
Options as at November 30, 2008 2,161,800   $ 6.52
         
Granted 680,500     1.83
Cancelled and expired (176,500 )   8.34
 
Options as at November 30, 2009 2,665,800     5.20
         
Granted 335,000     4.03
Cancelled and expired (60,337 )   6.32
Exercised (77,493 )   1.65
 
Options as at August 31, 2010 2,862,970   $ 5.14

(c) Stock-based compensation and other stock-based payments:

The estimated fair value of the options granted was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

  2010   2009  
   
Risk-free interest rate 2.49 % 1.80 %
Volatility 81 % 79 %
Average option life in years 6   6  
Dividend yield Nil   Nil  

The risk-free interest rate is based on the implied yield on a Canadian Treasury zero-coupon issue with a remaining term equal to the expected term of the option. The volatility is based solely on historical volatility equal to the expected term of the option. The average life of the options is estimated considering the vesting period, the term of the option and the length of time that similar grants have remained outstanding in the past. Dividend yield was excluded from the calculation, since it is the present policy of the Company not to retain in cash in order to keep funds available to finance the Company's growth.

The following table summarizes the weighted average fair value of stock options granted during the periods ended August 31, 2010 and 2009:

    Weighted average
  Number of grant-date
Periods ended August 31 (9 months) options fair value
 
2010 335,000 $ 2.83
2009 660,500   1.24
 
 
 
    Weighted average
  Number of grant-date
Periods ended August 31 (3 months) options fair value
 
2010 70,000 $ 3.36
2009 -   -

(d) Diluted (loss) earnings per share:

The following table presents a reconciliation between basic and diluted (loss) earnings per share:

        August 31,         August 31,  
    2010     2009     2010     2009  
        (3 months )       (9 months )
Basic (loss) earnings per share:                        
  Basic weighted average number of common shares outstanding 60,502,515   60,397,477   60,469,621   60,284,591  
   
Basic (loss) earnings per share $ (0.05 ) $ 0.10   $ (0.20 ) $ (0.17 )
   
Diluted (loss) earnings per share:                        
  Basic weighted average number of common shares outstanding 60,502,515   60,397,477   60,469,621   60,284,591  
  Plus impact of stock options   -   237,498          
   
Diluted weighted average number of common shares outstanding 60,502,515   60,634,975   60,469,621   60,284,591  
   
Diluted (loss) earnings per share $ (0.05 ) $ 0.10   $ (0.20 ) $ (0.17 )

4. Contingency:

On July 26, 2010, the Company received a motion of authorization to institute a class action against the Company and certain of its executive officers (the "Motion"). This Motion was filed in the Superior Court of Quebec, district of Montreal. The applicant is seeking to initiate a class action suit to represent the class of persons who were shareholders at May 21, 2010 and who sold their common shares of the Company on May 25 or 26, 2010. This applicant alleges that the Company did not comply with its continuous disclosure obligations as a reporting issuer by failing to disclose a material change. The Company is of the view that the allegations contained in the Motion are frivolous and entirely without merit and intends to take all appropriate actions to vigorously defend its position.

As of October 11, 2010, the Motion has not yet been heard by the Superior Court of Quebec.

The Company subscribed insurances covering the responsibility of its administrators and officers in the exercise of their functions.

5. Supplemental information:

  1. The following transactions were conducted by the Company and did not impact cash flows:
    August 31, November 30,
    2010   2009
 
Additions to property and equipment included in accounts payable and accrued liabilities $ 55 $ 183

(b) For the nine-month period ended August 31, 2010, the Company has reclassified in net loss $259 of realized gains on available-for-sale financial assets previously recorded in accumulated other comprehensive income ($118 in 2009).

On August 31, 2010, the accumulated other comprehensive loss was composed of unrealized gains on available-for-sale financial assets of $872 (gains of $1,282 on November 30, 2009).

(c) For the periods ended August 31, 2010 and 2009, the following items were included in the determination of the Company's net loss:

    2010   2009
 
Amortization of property and equipment $ 374 $ 441
Stock-based compensation   949   705

6. Financial instruments:

(a) Carrying value and fair value:

The Company has determined that the carrying values of its short-term financial assets and liabilities, including cash, accounts receivable, as well as accounts payable and accrued liabilities, approximate their fair value because of the relatively short period to maturity of these instruments.

Bonds and investments in public companies are stated at estimated fair value, determined by inputs that are directly observable.

(b) Interest income and expenses:

Interest income consists of interest earned on cash and bonds.

(c) Loss on exchange:

General and administrative expenses include a loss on foreign exchange of $144 ($580 in 2009) for the nine-month period ended August 31, 2010.

7. Collaboration and licensing agreement:

On October 28, 2008, the Company entered into a collaboration and licensing agreement with EMD Serono, Inc. ("EMD Serono"), an affiliate of Merck KGaA, of Darmstadt, Germany, regarding the exclusive commercialization rights of tesamorelin in the United States for the treatment of excess abdominal fat in HIV-infected patients with lipodystrophy (the "Initial Product"). The Company retains all tesamorelin commercialization rights outside of the United States.

Under the terms of the agreement, the Company is responsible for the development of the Initial Product up to obtaining marketing approval in the United States. The Company is also responsible for product production and for the development of a new formulation of the initial product. EMD Serono is responsible for conducting product commercialization activities.

At the closing of the agreement, on December 15, 2008, the Company received US$30,000 (CAD$36,951), which includes an initial payment of US$22,000 (CAD$27,097) and US$8,000 (CAD$9,854) as a subscription for common shares in the Company by Merck KGaA at a price of US$3.67 (CAD$4.52) per share. The Company may receive up to US$215,000, which amount includes the initial payment of US$22,000, the equity investment of US$8,000, as well as payments based on the achievement of certain development, regulatory and sales milestones. The Company will also be entitled to receive increasing royalties on annual net sales of tesamorelin in the United States, if applicable.

The initial payment of $27,097 has been deferred and is being amortized over its estimated service period on a straight-line basis. This period may be modified in the future based on additional information that may be received by the Company. For the nine-month period ended August 31, 2010, an amount of $5,134 related to this transaction was recognized as revenue. At August 31, 2010, the deferred revenues related to this transaction amounted to $15,403.

On August 12, 2009, the US Food and Drug Administration accepted the New Drug Application ("NDA") made by the Company for tesamorelin. Under the terms of the Company's Collaboration and Licensing Agreement with EMD Serono, the acceptance of the tesamorelin NDA resulted in a milestone payment of US$10,000 (CAD$10,884). This milestone payment has been recorded in the third quarter of 2009.

The Company may conduct research and development for additional indications. Under the Collaboration and Licensing Agreement, EMD Serono will have the option to commercialize additional indications for tesamorelin in the United States. If it exercises this option, EMD Serono will pay half of the development costs related to such additional indications. In such cases, the Company will also have the right, subject to EMD Serono's agreement, to participate in the promotion of the additional indications.

Contact Information

  • Theratechnologies Inc.
    Andrea Gilpin
    Vice President, IR & Communications
    514-336-7800, ext. 205
    communications@theratech.com
    or
    Theratechnologies Inc.
    Luc Tanguay
    Senior Executive Vice President and
    Chief Financial Officer
    514-336-7800, ext. 204
    ltanguay@theratech.com