2016-06-30 bellus health inc. quarterly rpt...

QUARTERLY REPORT

SECOND QUARTERENDED JUNE 30

2016

T 450 680 4500 F 450 680 [email protected]

BELLUS HEALTH INC.275, Armand-Frappier BoulevardLaval (Quebec) Canada H7V 4A7

bellushealth.com

D E V E L O P I N GDRUGS FOR

RAREDISEASES

CORPORATE PROFILE

BELLUS Health is a drug development company focused on rare diseases. Its pipeline of rare disease projects includes KIACTA™ for AA amyloidosis, KIACTA™ for sarcoidosis and clinical-stage Shigamab™ for Hemolytic Uremic Syndrome caused by Shiga toxin-producing E. coli (sHUS). BELLUS Health is partnered with global private equity firm Auven Therapeutics for the development of KIACTA™. BELLUS Health also has financial interests in some biotechnology and pharmaceutical companies. The Company’s shares trade on the Toronto Stock Exchange (TSX) under the symbol BLU.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

This Management’s Discussion and Analysis (MD&A) provides a review of BELLUS Health Inc.’s (and its subsidiaries, including BHI Limited Partnership, together referred to as BELLUS Health or the Company) operations and financial performance for the three and six-month periods ended June 30, 2016. It should be read in conjunction with the Company’s unaudited condensed consolidated financial statements for the three and six-month periods ended June 30, 2016, as well as the Company’s audited consolidated financial statements for the year ended December 31, 2015. These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and International Accounting Standard (IAS) 34, Interim Financial Reporting, as issued by the International Accounting Standards Board (IASB). For discussion regarding related-party transactions, contractual obligations, financial risk management, disclosure controls and procedures, internal control over financial reporting, and risks and uncertainties, refer to the Annual Report and the Annual Information Form for the year ended December 31, 2015, as well as other public filings, which are available on SEDAR at www.sedar.com. This document contains forward-looking statements, which are qualified by reference to, and should be read together with the “Forward-Looking Statements” cautionary notice, which can be found at the end of this MD&A.

The condensed consolidated financial statements and MD&A for the three and six-month periods ended June 30, 2016 have been reviewed by the Company’s Audit Committee and approved by the Board of Directors. This MD&A was prepared by management with information available as at August 8, 2016.

All currency figures reported in the condensed consolidated financial statements and in this document are in Canadian dollars, unless otherwise specified.

CORPORATE PROFILE

BELLUS Health is a drug development company focused on rare diseases. Its pipeline of rare disease projects includes KIACTA™ for AA amyloidosis, KIACTA™ for sarcoidosis and clinical-stage Shigamab™ for Hemolytic Uremic Syndrome caused by Shiga toxin-producing E. coli (sHUS). BELLUS Health is partnered with global private equity firm Auven Therapeutics for the development of KIACTA™. BELLUS Health also has financial interests in some biotechnology and pharmaceutical companies. The Company's shares trade on the Toronto Stock Exchange (TSX) under the symbol BLU.

BUSINESS OVERVIEW – SECOND QUARTER 2016

Highlights

• Announced top-line results from the KIACTA™ Phase 3 Confirmatory Study for the treatment of AA amyloidosis; KIACTA™ did not meet the primary efficacy endpoint in slowing renal function decline and continues to be evaluated in order to determine next steps for the program;

• Subsequent to quarter end, completed an additional Shigamab™ pre-clinical study in a sHUS baboon model; Shigamab™ was shown to rescue the animals against a lethal dose of toxin when administered up to 48 hours post-intoxication;

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• Subsequent to quarter end, highlighted other assets in its pipeline including AMO-01 for Fragile X Syndrome, ALZ-801 for APOE4 homozygous Alzheimer’s disease and an equity stake in an Italian specialty pharma company;

• Completed simplification of the Company’s capital structure by issuing 6.4 million common shares upon scheduled conversion of Pharmascience’s interest in BHI Limited Partnership;

• Has reduced forecasted expenses, effectively decreasing its projected monthly average burn rate from $300,000 to $225,000;

• Concluded the quarter with cash, cash equivalents and short-term investments totaling $8.0 million.

KIACTA™ for AA Amyloidosis

On June 20, 2016, the Company announced top-line results from the Phase 3 study of KIACTA™ for the treatment of AA amyloidosis, an orphan indication resulting in renal dysfunction that often leads to dialysis and death. In the study, KIACTA™ did not meet the primary efficacy endpoint in slowing renal function decline. KIACTA™ was shown to be safe and well tolerated over treatment periods of greater than 4 years.

Auven Therapeutics, BELLUS Health’s partner which acquired the rights to KIACTA™ from the Company in 2010, is currently proceeding to additional analysis in order to determine the next steps for KIACTA™.

The Phase 3 Confirmatory Study of KIACTA™ was a global study across more than 70 sites in more than 25 countries with a total of 261 patients participating in the study. The Phase 3 study was an event driven study that lasted 5 years, meeting its completion target of 120 patient events linked to the deterioration of kidney function in January 2016.

KIACTA™ has been granted Orphan Drug Designation or its equivalent for the treatment of AA amyloidosis in the United States, Europe, Japan and Switzerland, which provide for market exclusivity for a period of seven to ten years once the drug is approved, as well as a reduction in application and review fees.

In accordance with the agreement entered into with Auven Therapeutics in 2010, overall proceeds from potential future revenue of KIACTA™ will be shared between Auven Therapeutics and BELLUS Health based on a pre-agreed formula.

KIACTA™ for Sarcoidosis

BELLUS Health’s partner, Auven Therapeutics, is currently developing a clinical Phase 2/3 study protocol to evaluate the safety and efficacy of KIACTA™ for the treatment of patients suffering from chronic pulmonary sarcoidosis. In vitro study test results in sarcoidosis indicate that KIACTA™ may reduce SAA-induced inflammatory cytokine expression. In conjunction with the review of KIACTA™ for AA amyloidosis, the Sarcoidosis program is also currently under review by Auven Therapeutics.

All costs in relation to the development of KIACTA™ in sarcoidosis will be borne by Auven Therapeutics. Proceeds from potential future revenue of KIACTA™, including the rights to KIACTA™ for sarcoidosis, are subject to the proceeds sharing agreement between Auven Therapeutics and BELLUS Health mentioned above.

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In May 2014, Auven Therapeutics entered into a license agreement with Icahn School of Medicine at Mount Sinai Hospital in New York, under which Auven Therapeutics obtained the exclusive rights to develop KIACTA™ as a treatment for chronic pulmonary sarcoidosis, a rare inflammatory condition that may lead to end-stage fibrotic lung disease and death. Corticosteroids, the mainstay of therapy in sarcoidosis, non-specifically suppress chronic granulomatous inflammation, often causing debilitating adverse effects. Specific therapies for the treatment of chronic granulomatous inflammation are needed. Obtaining the rights to develop KIACTA™ in a second indication further expands its commercial potential.

Shigamab™ for sHUS

A clinical Phase 2 study protocol is currently being designed for the assessment of the efficacy of Shigamab™ in the treatment of sHUS, a rare disease which principally affects the kidneys and often leads to acute dialysis, and in certain cases chronic kidney disease and death, primarily in children. The Company intends to meet with regulatory authorities in 2016 to present its clinical development plan for Shigamab™.

In parallel with the preparation of the clinical Phase 2 study, BELLUS Health has recently completed an additional pre-clinical study in a sHUS baboon model, which recapitulates a pathophysiology similar to that in sHUS patients. The objective of this study was to assess the effect of Shigamab™ on the progression of sHUS. In this study, Shigamab™ was shown to rescue the animals against a lethal dose of toxin when administered up to 48 hours post-intoxication. Shigamab™ was also found to inhibit the kidney injury caused by Shiga toxin 2 and protect the animals against the extra-renal complications associated with the Shiga toxin 2 intoxication. These results are consistent with the protective effects of Shigamab™ previously seen in the mice that received lethal doses of Shiga toxin E. coli or lethal dose of Shiga toxin 2.

During 2014, in vivo studies were performed in collaboration with the Uniformed Services University of the United States Department of Defense. In an in vivo mouse model, Shigamab™ inhibited the kidney injury caused by Shiga toxin 2, as measured by renal biomarkers and renal histopathology.

Shigamab™ has been granted Orphan Drug designation or its equivalent in the United States and Europe, which provide for market exclusivity for a period of seven and ten years, respectively, once the drug is approved, as well as a reduction in application and review fees.

AMO-01 for Fragile X Syndrome

In 2014, BELLUS Health entered into a development and license agreement with AMO Pharma Limited (AMO Pharma) for the worldwide rights to AMO-01 (formerly TLN-4601) for the treatment of neurologic and psychiatric disorders in return for mid-single digit percentage royalty and revenue share. TLN-4601 was acquired by BELLUS Health as part of the Thallion Pharmaceutical Inc. (Thallion) acquisition in August 2013.

AMO Pharma is a private company focused on the treatment of central nervous system and neuromuscular diseases. AMO Pharma is preparing for a Phase 2 study on patients with Fragile X Syndrome, a deadly disease with no current approved therapies. This disease affects approximately 180,000 patients in the United States.

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ALZ-801 for APOE4 Homozygous Alzheimer’s Disease

In 2013, worldwide rights to ALZ-801 (formerly BLU8499) were licensed to Alzheon Inc. (Alzheon) in return for mid-single digit percentage royalty and revenue share. BLU8499 was initially developed by BELLUS Health for the treatment of Alzheimer’s disease (AD). Alzheon is a private company focused on AD and other neurodegenerative disorders.

In July 2016, Alzheon announced that it had completed Phase 1b studies which demonstrated that ALZ-801 had a substantially optimized pharmacokinetic profile and favorable safety/tolerability in elderly subjects compared to oral tramiprosate. ALZ-801 is an orally-available optimized prodrug of tramiprosate, the active agent in ALZ-801, and clinical development of ALZ-801 builds on the established safety and efficacy profile of tramiprosate from two prior Phase 3 trials in more than 2,000 AD patients. Alzheon is in preparation for a pivotal Phase 3 program focusing on treatment of Alzheimer’s patients who are homozygous for apolipoprotein E (APOE4), the most important genetic risk factor for late-onset AD. The Phase 3 study is expected to be initiated in 2017.

Specialty Pharma Equity Stake

The Company has a 5.7% equity interest in FB Health S.p.A (FB Health), an Italy-based specialty pharma focused on neurology and psychiatry. FB Health is a growing and profitable company which distributes over ten nutraceutical and pharmaceutical products in Italy with annual sales in excess of 8 million euros. The investment in FB Health is presented at fair value in BELLUS Health’s financial statements and amounted to $957,000 as of June 30, 2016.

AL Amyloidosis Research Project

During the quarter, the Company took the decision to terminate its research-stage project for AL amyloidosis.

RESULTS OF OPERATIONS

For the three-month period ended June 30, 2016, net loss attributable to shareholders amounted to $327,000 ($0.01 per share), compared to $426,000 ($0.01 per share) for the corresponding period the previous year. For the six-month period ended June 30, 2016, net loss attributable to shareholders amounted to $1,051,000 ($0.02 per share), compared to $472,000 ($0.01 per share) for the corresponding period the previous year. The increase in net loss for the six-month period is primarily attributable to lower revenues recognized for accounting purposes in 2016, higher research and development expenses as well as an increase in the foreign exchange loss.

Revenues amounted to $585,000 for the three-month period ended June 30, 2016, ($1,176,000 for the six-month period) compared to $592,000 for the corresponding period the previous year ($1,378,000 for the six-month period). The decrease in the six-month period is primarily attributable to lower revenues recognized for accounting purposes in 2016 in relation to the VIVIMIND™ license agreement with FB Health. As at December 31, 2015, all amounts to be received until 2017 under this agreement relating to licensing fees, sales-based royalty payments and certain costs reimbursement had been recognized as revenues by the Company.

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Research and development expenses, net of research tax credits, amounted to $543,000 for the three-month period ended June 30, 2016 ($829,000 for the six-month period), compared to $169,000 for the corresponding period the previous year ($492,000 for the six-month period). The increase is primarily attributable to higher expenses incurred in relation to the development of Shigamab™. In addition, higher research tax credits were recognized during the second quarter of 2015 in relation to additional claims for prior years filed during that quarter.

General and administrative expenses amounted to $368,000 for the three-month period ended June 30, 2016 ($1,356,000 for the six-month period), compared to $864,000 for the corresponding period the previous year ($1,583,000 for the six-month period). The decrease is primarily attributable to the income recorded in the second quarter of 2016 in relation to the Company’s deferred share unit plans due to the decrease in the Company’s stock price during that period.

Net finance costs amounted to $51,000 for the three-month period ended June 30, 2016 ($139,000 for the six-month period), compared to net finance income of nil for the corresponding period the previous year ($244,000 for the six-month period). The increase in net finance costs is primarily attributable to the foreign exchange loss that arose from the translation of the Company’s net monetary assets denominated in US dollars, due to the depreciation of the US dollar vs the Canadian dollar during 2016.

Quarterly results (unaudited)(in thousands of dollars, except per share data)

Quarter Revenues Net (loss) income

attributable to shareholders

Basic and diluted (loss) earnings per

share $ $ $

Year ended December 31, 2016 Second 585 (327) (0.01) First 591 (724) (0.01)

Year ended December 31, 2015 Fourth 2,053 865 0.02 Third 593 (191) Nil Second 592 (426) (0.01) First 786 (46) Nil

Year ended December 31, 2014 Fourth 1,061 196 Nil Third 420 (710) (0.01)

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The following explains the variation of the net (loss) income attributable to shareholders of a quarter compared to the corresponding quarter of the previous year. The decrease in net loss for the second quarter ended June 30, 2016 is primarily due to lower general and administrative expenses recognized in 2016 partially offset by higher research and development expenses The increase in net loss for the first quarter ended March 31, 2016 is primarily attributable to lower revenues recognized for accounting purposes in 2016 in relation to the VIVIMIND™ license agreement with FB Health, higher general and administrative expenses as well as an increase in the foreign exchange loss. The increase in net income for the fourth quarter ended December 31, 2015 is primarily attributable to higher revenues recognized for accounting purposes in 2015 in relation to the VIVIMIND™ license agreement with FB Health. The increase is partially offset by higher general and administrative expenses. The decrease in net loss for the third quarter ended September 30, 2015 is primarily due to higher revenues recognized for accounting purposes in 2015 in relation to the service agreement with Auven Therapeutics for KIACTA™, as well as an increase in the foreign exchange gain that arose from the translation of the Company’s net monetary assets denominated in US dollars, due to the appreciation of the US dollar vs the Canadian dollar in 2015.

Related party transactions

Dr. Francesco Bellini is the Chairman of the Board of Directors and provides ongoing advisory services to the Company under the terms of a consulting and services agreement between the Company and Picchio International Inc. (Picchio International), wholly-owned by Dr. Francesco Bellini and his spouse. Picchio International receives a monthly fee of $20,833, plus reimbursement of applicable expenses for services rendered under the agreement. The agreement has a one-year term renewable for successive one year terms. The Company recorded fees and expenses of $95,000 under the consulting and services agreement for the three-month periods ended June 30, 2016 and 2015 ($190,000 for the six-month periods ended June 30, 2016 and 2015).

In October 2013, BELLUS Health entered into an agreement to license the worldwide rights to VIVIMIND™ to FB Health, a company controlled by Dr. Francesco Bellini. BELLUS Health also entered into a worldwide license agreement with FB Health for BLU8499 and a family of analogs, along with an associated platform of chemotypes and clinical datasets, in exchange for a 5.5% equity stake in FB Health. In turn, FB Health sublicensed all its rights to Alzheon, a then related company, as part of an exclusive worldwide license, excluding Italy. In 2014, BELLUS Health invested an additional amount in FB Health, mainly in order to maintain the Company’s pro rata ownership, as well as to acquire its pro rata share of a minority shareholder’s ownership, bringing the Company’s equity stake to 5.72%.

The Company recognized revenues of $13,000 and $27,000 under these license agreements for the three and six-month periods ended June 30, 2016 respectively (nil and $194,000 for the corresponding periods the previous year).

In February 2015, the BLU8499 license agreement with FB Health was amended to expand the field of use of the license. FB Health’s license agreement with Alzheon was amended accordingly. In exchange, BELLUS Health received an equity stake in Alzheon having a minimal value.

On January 1, 2016, as scheduled, the Company issued 7,286,828 common shares from treasury to a significant influence shareholder, Victoria Square Ventures Inc., in settlement of convertible notes previously amended as part of the 2012 Plan of Arrangement (the Amended Note),

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FINANCIAL CONDITION

Liquidity and capital resources

As at June 30, 2016, the Company had available cash, cash equivalents and short-term investments totalling $7,950,000, compared to $9,702,000 as at December 31, 2015. For the six-month period ended June 30, 2016, net decrease in cash, cash equivalents and short-term investments amounted to $1,752,000, compared to $1,625,000 for the corresponding period the previous year.

During the six-month period ended June 30, 2016, the Company sold short-term investments amounting to net $1,426,000 with initial maturities greater than three months. During the six-month period ended June 30, 2015, cash and cash equivalents amounting to net $4,622,000 were invested in short-term investments with initial maturities greater than three months.

During the quarter, the Company has reduced forecasted expenses through the reduction of non-core expenses and the termination of its AL amyloidosis program, effectively decreasing its projected average monthly burn rate from $300,000 to $225,000.

The other significant changes in the Company’s financial position as at June 30, 2016, compared to the financial position as at December 31, 2015, are the decrease in deferred revenue amounting to $1,621,000 due to the recognition of revenue through the amortization of the 2015 year-end balance and the adjustment to the unbilled amount receivable in relation to the service agreement with Auven Therapeutics for KIACTA TM, as well as the decrease in prepaid expenses and other assets amounting to $934,000 due to amounts billed in 2016 and the adjustment to the unbilled amount receivable in relation to the service agreement.

In 2009, Thallion (acquired by BELLUS Health in August 2013) was party to an arrangement pursuant to which it effectively sold its tax attributes to Premium Brands Holding Corporation and Premium Brands Income Fund (collectively Premium Brands). As part of an indemnity agreement signed between the parties, Thallion is entitled to an additional purchase price consideration from Premium Brands amounting to 5.5% of the amount, if any, by which the aggregate balance of the tax pools exceeds $170,000,000. The indemnity agreement provides that the parties shall reach an agreement as to the additional purchase price consideration by the end of September 2016.

As part of the assets acquired through the acquisition of Thallion, BELLUS Health is entitled to receive this additional purchase price consideration from Premium Brands, estimated by management to amount up to $1,450,000. In the event BELLUS Health receives this additional purchase price consideration, it would have to pay 100% of the amount received to the contingent value right (CVR) holders.

During the second quarter of 2015, Premium Brands announced that it had entered into an agreement with the Canada Revenue Agency (CRA) regarding CRA’s objection to the tax consequences associated with Premium Brand conversion from an income trust into a corporation in 2009. CRA is denying the use by Premium Brands of a portion of the tax attributes sold by Thallion in July 2009. Pursuant to the indemnity agreement, the determination of the tax pools sold in 2009 is based on the existence of the tax attributes sold, not the ability of Premium Brands to use them. Accordingly, the value of the additional purchase price consideration to which the Company is entitled to receive in 2016 should not be affected.

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The contingent right is measured at fair value on the same basis as the related contingent consideration (CVRs on the amount receivable from Premium Brands). As at June 30, 2016, the Company estimated the fair value of the contingent right and contingent consideration at $1,430,000 ($1,313,000 as at December 31, 2015). The contingent right is presented in current Prepaid expenses and other assets in the condensed consolidated statement of financial position. Should the estimated amount receivable as additional purchase price consideration from Premium Brands or any of the assumptions used in the valuation change, there will be an equal and offsetting change to the measurement of the asset and the liability as well as to finance income and finance costs, and therefore the Company’s net financial position and net income will not be affected.

There has been no significant change to the Company’s contractual obligations since December 31, 2015.

The Company continues to explore opportunities in order to expand its pipeline, including through acquisitions and/or in-licensing.

On January 1, 2016, BELLUS Health issued 7,286,828 common shares from treasury in settlement of the Amended Note, as discussed above.

On June 2, 2016, BELLUS Health issued 6,350,638 common shares from treasury upon the exercise of Pharmascience Inc. (Pharmascience)'s right to convert into common shares its 10.4% interest (Interest) in BHI Limited Partnership. Pharmascience first acquired the Interest in connection with the strategic partnership entered into with BELLUS Health in May 2012. This conversion is the final step to the completion of the Company’s capital structure's simplification that started in 2012.

As at August 8, 2016, the Company had 61,063,824 common shares outstanding and 65,851,824 common shares on a fully diluted basis, including 4,788,000 stock options granted under the stock option plan.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the condensed consolidated financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. The reported amounts and note disclosures reflect management’s best estimate of the most probable set of economic conditions and planned course of actions. Actual results may differ from these estimates.

In preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the Company’s accounting policies and key sources of estimation uncertainty were the same as those applied to the consolidated financial statements for the year ended December 31, 2015.

Refer to the audited consolidated financial statements for the year ended December 31, 2015 for discussions on accounting policies and estimates that are more important in assessing, understanding and evaluating the Company’s consolidated financial statements. Change in these estimates and assumptions could have a significant impact on the Company’s consolidated financial statements.

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CHANGES IN ACCOUNTING POLICIES

New accounting standards not yet adopted:

Amendments to IFRS 2, Share-based Payment, IFRS 9, Financial Instruments, IFRS 15, Revenue from Contracts with Customers, and IFRS 16, Leases, new accounting standards issued by the IASB, are not yet effective for the three and six-month period ended June 30, 2016, and have not been applied in preparing the condensed consolidated financial statements.

Further information on these new accounting standards can be found in note 4 to the June 30, 2016 condensed consolidated financial statements.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING (ICFR)

In accordance with the Canadian Securities Administrators’ Multilateral Instrument 52-109, the Company has filed certificates signed by the Chief Executive Officer and the Chief Financial Officer that, among other things, report on the design of disclosure controls and procedures and the design of internal control over financial reporting.

There have been no changes in the Company’s ICFR during the three-month period ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect its ICFR.

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FORWARD-LOOKING STATEMENTS

Certain statements contained in this MD&A, other than statements of fact that are independently verifiable at the date of this report, may constitute “forward-looking statements” within the meaning of Canadian securities legislation and regulations. Such statements, based as they are on the current expectations of management, inherently involve numerous important risks, uncertainties and assumptions, known and unknown, many of which are beyond the Company's control. This forward-looking information may include among other things, information with respect to the Company’s objectives and the strategies to achieve these objectives, as well as information with respect to the Company’s beliefs, plans, expectations, anticipations, estimates, and intentions. Forward-looking statements generally can be identified by the use of conditional or forward-looking terminology such as “may”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “plan”, “foresee”, “believe” or “continue” or the negatives of these terms or variations of them or similar terminology. Refer to the Company’s public filings with the Canadian securities regulatory authorities, including the Annual Information Form, for a discussion of the various risk factors that may affect the Company’s future results. Such risks factors include but are not limited to: the ability to obtain financing, the impact of general economic conditions, general conditions in the pharmaceutical industry, changes in the regulatory environment in the jurisdictions in which the Company does business, stock market volatility, fluctuations in costs, changes to the competitive environment due to consolidation, achievement of forecasted burn rate, potential payments/outcomes in relation to indemnity agreements and contingent value rights, achievement of forecasted pre-clinical and clinical trial milestones, dependence on Auven Therapeutics for the development of KIACTA™ and that actual results may vary once the final and quality-controlled verification of data and analyses has been completed. In addition, the length of the KIACTA™ development process and the sharing of proceeds between Auven Therapeutics and the Company from potential future revenue of KIACTA™ are dependent upon a number of factors, including the quantum of proceeds. Consequently, actual future results and events may differ materially from the anticipated results and events expressed in the forward-looking statements. The Company believes that expectations represented by forward-looking statements are reasonable, yet there can be no assurance that such expectations will prove to be correct. The reader should not place undue reliance, if any, on any forward-looking statements included in this report. These forward-looking statements speak only as of the date made, and the Company is under no obligation and disavows any intention to update publicly or revise such statements as a result of any new information, future events, circumstances or otherwise, unless required by applicable legislation or regulation. The forward-looking statements contained in this report are expressly qualified by this cautionary statement.

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BELLUS HEALTH INC. Condensed Consolidated Statements of Financial Position (Unaudited)

June 30, 2016 and December 31, 2015 (in thousands of Canadian dollars)

June 30, December 31, 2016 2015

Assets

Current assets: Cash and cash equivalents (note 5) $ 2,713 $ 3,039 Short-term investments (note 5) 5,237 6,663 Trade and other receivables (note 9 (b)) 1,137 813 Prepaid expenses and other assets (notes 7 et 9 (a)) 1,680 2,614 Total current assets 10,767 13,129

Non-current assets: Trade and other receivables (note 9 (b)) 25 512 Other assets 78 82 In-process research and development asset 542 542 Investment in FB Health (note 6) 957 748 Total non-current assets 1,602 1,884

Total Assets $ 12,369 $ 15,013

Liabilities and Shareholders' Equity

Current liabilities: Trade and other payables $ 611 $ 947 Deferred revenue (note 9 (a)) 690 2,311 Financial liabilities - CVRs (note 7) 1,430 1,313 Total current liabilities 2,731 4,571

Non-current liabilities: Financial liabilities - CVRs (note 7) 70 70 Total non-current liabilities 70 70

Total Liabilities 2,801 4,641

Shareholders' equity: Share capital (note 8 (a)) 445,753 418,592 Other equity (notes 8 (b) (i) and (c)) 25,449 34,058 Accumulated other comprehensive income 609 383 Deficit (462,243) (443,992) Total shareholders’ equity attributable to shareholders 9,568 9,041

Non-controlling interest (note 8 (b) (ii)) – 1,331 Total Shareholder’s equity 9,568 10,372

Total Liabilities and Shareholder’s Equity $ 12,369 $ 15,013

See accompanying notes to unaudited condensed consolidated financial statements.

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BELLUS HEALTH INC. Condensed Consolidated Statements of Loss (Unaudited)

Periods ended June 30, 2016 and 2015 (in thousands of Canadian dollars, except per share data)

Three-month periods ended Six-month periods ended June 30, June 30, 2016 2015 2016 2015

Revenues (note 9) $ 585 $ 592 $ 1,176 $ 1,378

Expenses: Research and development 543 289 865 672 Research tax credits and grants – (120) (36) (180)

543 169 829 492

General and administrative 368 864 1,356 1,583

Total operating expenses 911 1,033 2,185 2,075

Results from operating activities (326) (441) (1,009) (697)

Finance income 86 89 171 347 Finance costs (137) (89) (310) (103) Net finance (costs) income (note 10) (51) – (139) 244

Loss before income taxes (377) (441) (1,148) (453)

Deferred tax recovery (16) (8) (28) (13) Net loss for the period $ (361) $ (433) $ (1,120) $ (440)

Net loss attributable to: Shareholders $ (327) $ (426) $ (1,051) $ (472) Non-controlling interest (34) (7) (69) 32 $ (361) $ (433) $ (1,120) $ (440)

Loss per share (note 11) Basic and diluted $ (0.01) $ (0.01) $ (0.02) $ (0.01)


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BELLUS HEALTH INC. Condensed Consolidated Statements of Other Comprehensive Income (Unaudited)

Periods ended June 30, 2016 and 2015 (in thousands of Canadian dollars)


Net loss for the period $ (361) $ (433) $ (1,120) $ (440)

Other comprehensive income (that may be reclassified subsequently to net loss):

Unrealized gain on available-for-sale investment (note 6) 118 62 209 99

Related income taxes (16) (8) (28) (13)

Other comprehensive income for the period 102 54 181 86

Total comprehensive loss for the period $ (259) $ (379) $ (939) $ (354)

Total comprehensive loss attributable to: Shareholders $ (225) $ (378) $ (878) $ (395) Non-controlling interest (34) (1) (61) 41 $ (259) $ (379) $ (939) $ (354)


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BELLUS HEALTH INC. Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)


Attributable to shareholders Accumulated other Non- Share Other comprehen- controlling capital equity sive income Deficit Total interest Total (note 8 (a))

Balance, December 31, 2015 $ 418,592 $ 34,058 $ 383 $ (443,992) $ 9,041 $ 1,331 $ 10,372

Total comprehensive loss for the period: Net loss – – – (1,051) (1,051) (69) (1,120) Other comprehensive income – – 173 – 173 8 181 Total comprehensive loss

for the period – – 173 (1,051) (878) (61) (939)

Transactions with shareholders, recorded directly in shareholders’ equity:

Issued on settlement of the Amended Note (note 8 (b) (i)) 8,744 (8,744) – – – – –

Issued upon exercise of the Exchange Right (note 8 (b)(ii)) 18,417 – 53 (17,200) 1,270 (1,270) –

Stock-based compensation (note 8 (c)) – 135 – – 135 – 135

Balance, June 30, 2016 $ 445,753 $ 25,449 $ 609 $ (462,243) $ 9,568 $ – $ 9,568

Attributable to shareholders Accumulated other Non- Share Other comprehen- controlling capital equity sive income Deficit Total interest Total (note 8 (a))

Balance, December 31, 2014 $ 418,592 $ 33,770 $ 230 $ (444,194) $ 8,398 $ 1,110 $ 9,508

Total comprehensive loss for the period: Net loss – – – (472) (472) 32 (440) Other comprehensive income – – 77 – 77 9 86 Total comprehensive loss

for the period – – 77 (472) (395) 41 (354)

Transactions with shareholders, recorded directly in shareholders’ equity:

Stock-based compensation (note 8 (c)) – 148 – – 148 – 148

Balance, June 30, 2015 $ 418,592 $ 33,918 $ 307 $ (444,666) $ 8,151 $ 1,151 $ 9,302


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BELLUS HEALTH INC. Condensed Consolidated Statements of Cash Flows (Unaudited)


Six-month periods ended June 30,

2016 2015 Cash flows from operating activities:

Net loss for the period $ (1,120) $ (440) Adjustments for:

Stock-based compensation 135 148 Net finance costs (income) 139 (244) Deferred tax recovery (28) (13) Other items (15) 8

Changes in operating assets and liabilities: Trade and other receivables 163 (38) Prepaid expenses and other assets 916 317 Trade and other payables (336) (290) Deferred revenue (1,621) (1,184)

(1,767) (1,736)

Cash flows from financing activities: Interest and bank charges paid (5) (5)

(5) (5)

Cash flows from investing activities: Sale (purchase) of short-term investments, net 1,426 (4,622) Interest received 54 49

1,480 (4,573)

Net decrease in cash and cash equivalents (292) (6,314)

Cash and cash equivalents, beginning of period 3,039 8,893

Effect of foreign exchange on cash and cash equivalents (34) 36

Cash and cash equivalents, end of period $ 2,713 $ 2,615


16

BELLUS HEALTH INC. Notes to Condensed Consolidated Financial Statements (Unaudited)

Periods ended June 30, 2016 and 2015 (in thousands of Canadian dollars, except per share data, unless otherwise noted)

1. Reporting entity:

BELLUS Health Inc. (BELLUS Health or Company) is a drug development company focused on rare diseases. Its pipeline of rare disease projects includes KIACTA™ for AA amyloidosis, KIACTA™ for sarcoidosis and clinical-stage Shigamab™ for Hemolytic Uremic Syndrome caused by Shiga toxin-producing E. coli (sHUS). BELLUS Health also has financial interests in some biotechnology and pharmaceutical companies. The Company is domiciled in Canada. The address of the Company’s registered office is 275 Armand-Frappier Blvd., Laval, Quebec, H7V 4A7. These condensed consolidated interim financial statements include the accounts of BELLUS Health Inc. and its subsidiaries, including BHI Limited Partnership (BHI LP). The Company's shares trade on the Toronto Stock Exchange (TSX) under the symbol BLU. The annual consolidated financial statements of the Company as at and for the year ended December 31, 2015 are available at www.bellushealth.com or at www.sedar.com.

2. Basis of presentation:

(a) Statement of compliance:

These condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and International Accounting Standard (IAS) 34, Interim Financial Reporting. The condensed consolidated interim financial statements do not include all of the information required for full annual consolidated financial statements and should be read in conjunction with the annual consolidated financial statements as at and for the year ended December 31, 2015. These condensed consolidated interim financial statements have not been reviewed by the Company’s auditors.

These condensed consolidated financial statements for the three and six-months periods ended June 30, 2016 were approved by the Board of Directors on August 8, 2016.

(b) Use of estimates and judgements:

The preparation of the condensed consolidated financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. The reported amounts and note disclosures reflect management’s best estimate of the most probable set of economic conditions and planned course of actions. Actual results may differ from these estimates.

In preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the Company’s accounting policies and key sources of estimation uncertainty were the same as those applied to the consolidated financial statements for the year ended December 31, 2015.

BELLUS HEALTH INC. Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)


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3. Significant accounting policies and basis of measurement:

The accounting policies and basis of measurement applied in these condensed consolidated interim financial statements are the same as those applied by the Company in its consolidated financial statements for the year ended December 31, 2015.

4. New accounting standards not yet adopted:

Share-based Payment:

On June 20, 2016, the IASB issued amendments to IFRS 2, Share-based Payment, clarifying how to account for certain types of share-based payment transactions. The amendments provide requirements on the accounting for the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments, share-based payment transactions with a net settlement feature for withholding tax obligations and a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. The amendments apply for annual periods beginning on or after January 1, 2018. The Company has not yet assessed the impact of adoption of amendments to IFRS 2, and does not intend to early adopt amendments to IFRS 2 in its consolidated financial statements.

Financial Instruments:

In July 2014, the International Accounting Standards Board (IASB) issued the final version of IFRS 9, Financial Instruments, which addresses the classification and measurement of financial assets and liabilities, impairment and hedge accounting, replacing IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The Company has not yet assessed the impact of adoption of IFRS 9, and does not intend to early adopt IFRS 9 in its consolidated financial statements.

Revenue:

In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers. IFRS 15 will replace IAS 18, Revenue, among other standards. The standard contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. The new standard applies to contracts with customers. The new standard is effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The Company has not yet assessed the impact of adoption of IFRS 15, and does not intend to early adopt IFRS 15 in its consolidated financial statements.



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4. New accounting standards not yet adopted (continued):

Leases:

In January 2016, the IASB issued IFRS 16, Leases, which will replace IAS 17, Leases. The standard will require all leases of more than 12 months to be reported on a company’s statement of financial position as assets and liabilities. The new standard is effective for annual periods beginning on or after January 1, 2019, and is available for early adoption for companies that also apply IFRS 15, Revenue from Contracts with Customers. The Company has not yet assessed the impact of adoption of IFRS 16, and does not intend to early adopt IFRS 16 in its consolidated financial statements.

5. Cash, cash equivalents and short-term investments:

Cash, cash equivalents and short-term investments consist of cash balances with banks and short-term investments:

June 30, December 31, 2016 2015

Cash balances with banks $ 846 $ 984 Short-term investments with initial maturities of less than three months (yielding interest at 0.70% to 1.10% as at June 30, 2016) (December 31, 2015 –1.00%) 1,867 2,055 Cash and cash equivalents 2,713 3,039

Short-term investments with initial maturities greater than three months and less than one year (yielding interest at 1.35% to 1.65% as at June 30, 2016) (December 31, 2015 – 1.30% to 1.48%) 5,237 6,663

Cash, cash equivalents and short-term investments $ 7,950 $ 9,702

6. Investment in FB Health:

The 5.72% investment in FB Health S.p.A (FB Health), an Italy-based specialty pharma focused on neurology and psychiatry and related company, acquired by BELLUS Health as part of the licence agreement with FB Health for BLU8499 in October 2013 (refer to note 9 (b)), is measured at fair value in the condensed consolidated financial statements. As at June 30, 2016, the Company estimated the fair value of the investment at $957 ($748 as at December 31, 2015). In connection with its fair value determination, the Company recorded an increase in fair value of $118 and $209 for the three and six-month periods ended June 30, 2016, recognized in other comprehensive income (increase of $62 and $99 for the corresponding periods the previous year).



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6. Investment in FB Health (continued):

FB Health is a private company, therefore this equity instrument does not have a quoted price in an active market for an identical instrument. The Company estimated the fair value of the investment in FB Health by using an enterprise valuation method based on a sales multiple of 1.50 derived from comparable industry participant information with similar size as FB Health. Estimates of the fair value of the investment are not supported by active market prices, and therefore are subject to uncertainty. The estimate of the fair value is sensitive to the sales multiple used. Based on the fair value of the investment as at June 30, 2016, an increase or decrease of 0.20 in the sales multiple used, a reasonable possible change at the reporting date, would increase or decrease other comprehensive income by $133, respectively.

7. Financial liabilities – CVRs

On August 15, 2013, the Company acquired all of the issued and outstanding common shares of Thallion Pharmaceuticals Inc. (Thallion) for a purchase price of $6,266 in cash and the issuance of one contingent value right (CVR) per common share.

The CVRs issued to Thallion’s shareholders entitle the holder thereof to, among other things, its pro rata share of 100% of any additional purchase price consideration to be received from Premium Brands in 2016 and its pro rata share of 5% of the Shigamab™ revenue generated or received by BELLUS Health, capped at $6,500.

In 2009, Thallion was party to an arrangement pursuant to which it effectively sold its tax attributes to Premium Brands Holding Corporation and Premium Brands Income Fund (collectively Premium Brands). As part of an indemnity agreement signed between the parties, Thallion is entitled to an additional purchase price consideration from Premium Brands amounting to 5.5% of the amount, if any, by which the aggregate balance of the tax pools exceeds $170,000. The indemnity agreement provides that the parties shall reach an agreement as to the additional purchase price consideration by the end of September 2016. As part of the assets acquired through the acquisition of Thallion, BELLUS Health is entitled to receive this additional purchase price consideration from Premium Brands, estimated by management to amount up to $1,450. In the event BELLUS Health receives this additional purchase price consideration, it would have to pay 100% of the amount received to the CVR holders.



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7. Financial liabilities – CVRs (continued)

During the second quarter of 2015, Premium Brands announced that it had entered into an agreement with the Canada Revenue Agency (CRA) regarding CRA’s objection to the tax consequences associated with Premium Brands conversion from an income trust into a corporation in 2009. CRA is denying the use by Premium Brands of a portion of the tax attributes sold by Thallion in 2009. Pursuant to the indemnity agreement, the determination of the tax pools sold in 2009 is based on the existence of the tax attributes sold, not the ability of Premium Brands to use them. Accordingly, the value of the additional purchase price consideration to which the Company is entitled to receive in 2016 should not be affected.

The contingent right is measured at fair value on the same basis as the related contingent consideration (CVRs on the amount receivable from Premium Brands). As at June 30, 2016, the Company estimated the fair value of the contingent right and contingent consideration at $1,430 ($1,313 as at December 31, 2015). The contingent right is presented in current Prepaid expenses and other assets in the condensed consolidated statement of financial position. The change in fair value for the three and six-month periods ended June 30, 2016 amounted to $60 and $117 respectively, presented in Finance income for the asset and in Finance costs for the liability in the condensed consolidated statement of loss ($50 and $98 for the corresponding periods the previous year). The Company estimated the fair value of these contingent asset and liability by discounting the probability weighted cash flows estimated by management to be received of up to $1,450, using a pre-tax discount rate of 18.62%. Should the estimated amount receivable as additional purchase price consideration from Premium Brands or any of the assumptions used in the valuation change, there will be an equal and offsetting change to the measurement of the asset and the liability as well as to finance income and finance costs, and therefore the Company’s net financial position and net income will not be affected.

As at June 30, 2016 and December 31, 2015, the Company estimated the fair value of the contingent consideration related to CVRs on Shigamab™ future revenues at $70.



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8. Shareholders’ equity:

(a) Issued and outstanding common shares are as follows:

Number Dollars

Balance, December 31, 2014, June 30, 2015 and December 31, 2015 47,426,358 $ 418,592

Issued on settlement of the Amended Note (note 8 (b) (i)) 7,286,828 8,744

Issued upon exercise of the Exchange Right (note 8 (b) (ii)) 6,350,638 18,417

Balance, June 30, 2016 61,063,824 $ 445,753

(b) Common shares:

(i) On January 1, 2016, as scheduled, the Company issued 7,286,828 common shares from treasury to a significant influence shareholder, Victoria Square Ventures Inc., in settlement of convertible notes previously amended as part of the 2012 Plan of Arrangement (the Amended Note). As a result, the carrying value of the Amended Note of $8,744 allocated to Other equity on issuance was reclassified to Share capital. This is a non-cash transaction, therefore excluded from the condensed consolidated statement of cash flows.

(ii) On June 2, 2016, BELLUS Health issued 6,350,638 common shares from treasury upon the exercise of Pharmascience's right to convert into common shares its 10.4% interest (Interest) in BHI LP (the Exchange Right). Pharmascience first acquired the Interest in connection with the strategic partnership entered into with BELLUS Health in May 2012.

The common shares were issued at a price of $2.90 per share, for a total consideration of $18,417. As a result, an amount of $17,200 was recognized in Deficit, representing the difference between the carrying value of the non-controlling interest and the fair value of the common shares issued. As well, the balance of other comprehensive income allocated to the non-controlling interest up to June 2, 2016 has been reallocated to Accumulated other comprehensive income to reflect the change of interests. This is a non-cash transaction, therefore excluded from the condensed consolidated statement of cash flows.



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8. Shareholders’ equity (continued):

(c) Stock option plan:

Changes in outstanding stock options issued under the stock option plan were as follows:

Weighted average Number exercise price

Options outstanding, December 31, 2015 4,685,000 $ 0.51

Granted (1) 103,000 1.12

Options outstanding, June 30, 2016 4,788,000 $ 0.53

Weighted average Number exercise price

Options outstanding, December 31, 2014 4,595,000 $ 0.50

Granted (1) 150,000 1.05 Forfeited (60,000) 0.50

Options outstanding, June 30, 2015 4,685,000 $ 0.51 (1) All stock options were granted to key management personnel.

The following table summarizes information about stock options outstanding and exercisable as at June 30, 2016:

Options outstanding Options exercisable Weighted Average Years to Exercise price/share Number expiration Number

$0.30 75,000 7.0 30,000 $0.50 4,460,000 6.0 2,712,000 $1.05 150,000 8.7 30,000 $1.12 103,000 9.7 –

4,788,000 6.0 2,772,000



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(c) Stock option plan (continued):

Stock-based compensation:

For the three and six-month periods ended June 30, 2016, the Company recorded a stock-based compensation expense (excluding compensation under the DSU plans) in the amount of $55 and $135, respectively, in the condensed consolidated statement of loss; from these amounts, $5 and $11, respectively, is presented in Research and development expenses and $50 and $124, respectively, is presented in General and administrative expenses ($84 and $148 for the corresponding periods the previous year, $10 and $20 respectively presented in Research and development expenses and $74 and $128 respectively presented in General and administrative expenses).

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes pricing model. Expected volatility is estimated by considering historic average share price volatility for a period commensurate with the expected life. The weighted average assumptions for stock options granted during the six-month periods ended June 30, 2016 and 2015 were as follows:

2016 (1) 2015 (2)

Fair value of stock options at grant date $ 0.85 $ 0.81 Five-day weighted average share price $ 1.12 $ 1.05 Exercise price $ 1.12 $ 1.05 Risk-free interest rate 0.84% 1.04% Expected volatility 87% 102% Expected life in years 7 7 Expected dividend yield Nil Nil

(1) All stock options were granted on February 24, 2016. (2) All stock options were granted on March 17, 2015.

Dividend yield was excluded from the calculation, since it is the present policy of the Company to retain all earnings to finance operations and future growth.



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(d) Deferred share unit (DSU) plans:

The number of units outstanding for the six-month periods ended June 30, 2016 and 2015 was as follows:

June 30, June 30, Number of units 2016 2015

Balance, beginning of period 217,953 170,434

Units granted (1) – 47,519

Balance, end of period 217,953 217,953

Balance of DSU liability, included in Trade and other payables (2) $ 69 $ 238 (1) All DSUs were granted to key management personnel.(2) Balance of DSU liability as at December 31, 2015 amounted to $227.

The net stock-based compensation (income) expense related to DSU plans recorded in the condensed consolidated statement of loss for the three and six-month periods ended June 30, 2016 amounted to $(284) and $(158), respectively; from these amounts, $(2) and $(1), respectively, is presented in Research and development expenses and $(282) and $(157), respectively, is presented in General and administrative expenses ($9 and $(1) for the corresponding periods the previous year, $1 and nil respectively presented in Research and development expenses and $8 and $(1) respectively presented in General and administrative expenses). During the six-month period ended June 30, 2015, the Company granted 47,519 DSUs having a fair value per unit of $1.11.



25

9. Revenues:

Revenues consist of the following:

(a) Development services:

Revenue from the asset sale and license agreement and the service agreement entered into with Auven Therapeutics in 2010 for KIACTA™ amounted to $572 and $1,149 for the three and six-month periods ended June 30, 2016, respectively ($592 and $1,184 for the corresponding periods the previous year). Revenue in connection with these agreements is recognized on a straight-line basis over the period of the KIACTA™ development program conducted by Auven Therapeutics, estimated to be 80 months from 2010 to 2016, as that time period is considered to be management’s best estimate as at June 30, 2016 of the pattern of performance of all its obligations under the agreements. As at June 30, 2016, following the announcement of the negative top-line results from the Phase 3 Confirmatory Study of KIACTA™ on June 20, 2016, the pattern of performance and revenue recognition period have not been adjusted as Auven Therapeutics is currently proceeding to additional analysis in order to determine the next steps for KIACTA™. They will be revised once a decision has been taken by Auven Therapeutics.

On the other hand, the Company’s expected support and assistance to Auven Therapeutics was revised following the announcement and the unbilled amount receivable in relation to the service agreement was decreased accordingly, with a corresponding decrease in deferred revenue. As a result, as at June 30, 2016, the expected amount receivable over the life of the service agreement amounted to $3,732 (US$3,679). The unbilled amount receivable in relation to the service agreement amounted to $0 as at June 30, 2016 ($1,069 as at December 31, 2015, presented in current Prepaid expenses and other assets in the condensed consolidated statement of financial position). The deferred revenue balances in the condensed consolidated statement of financial position consist of unrecognized revenue in relation to these agreements.

(b) Revenue under license agreements:

BELLUS Health entered into an agreement in October 2013 to license the worldwide rights of VIVIMIND™, a natural health product for memory protection, to FB Health, a related company. The agreement provides for a cash consideration of more than $2,000 to be received until 2017, for which all revenue has been recognized as at December 31, 2015, as well as certain costs reimbursements.



26

9. Revenues (continued):

(b) Revenue under license agreements (continued):

BELLUS Health also entered into a worldwide license agreement in October 2013 with FB Health for BLU8499, BELLUS Health's drug candidate for the treatment of central nervous system diseases including Alzheimer's disease, and a family of analogs, along with an associated platform of chemotypes and clinical datasets. In turn, FB Health sublicensed all its rights to Alzheon Inc. (Alzheon), a company focused on Alzheimer’s disease and other neurodegenerative disorders, and then related company, as part of an exclusive worldwide license, excluding Italy. As consideration, BELLUS Health received an equity stake in FB Health, will receive a portion of all future payments received by Alzheon related to BLU8499 and royalties on net sales of BLU8499, which will be recognized as revenue when payments receivable and net sales made by Alzheon are probable, and will be reimbursed for certain costs.

The Company recognized revenues of $13 and $27 under these agreements for the three and six-month periods ended June 30, 2016, respectively, for costs reimbursements (nil and $194 for the corresponding periods the previous year, for a sales-based royalty payment). The amount receivable in relation to the agreements amounted to $909 as at June 30, 2016, of which $884 is presented as current Trade and other receivables and $25 as non-current Trade and other receivables in the condensed consolidated statement of financial position ($1,046 as at December 31, 2015, $534 presented as current Trade and other receivables and $512 as non-current Trade and other receivables).



27

10. Net finance (costs) income:

Finance income and Finance costs for three and six-month periods ended June 30, 2016 and 2015 were attributed as follows:


Interest income $ 26 $ 39 $ 54 $ 80 Change in fair value of contingent right from Premium Brands (note 7) 60 50 117 98 Foreign exchange gain – – – 169 Finance income 86 89 171 347

Interest and bank charges (2) (2) (5) (5) Change in fair value of contingent consideration (CVRs - On receivable from Premium Brands) (note 7) (60) (50) (117) (98) Foreign exchange loss (75) (37) (188) –Finance costs (137) (89) (310) (103)

Net finance (costs) income $ (51) $ – $ (139) $ 244

11. Loss per share:


Basic weighted average number of common shares outstanding 56,667,228 47,426,358 55,690,207 47,426,358

Basic and diluted loss per share $ (0.01) $ (0.01) $ (0.02) $ (0.01)

Excluded from the calculation of the diluted loss per share for the three and six-month periods ended June 30, 2016 is the impact of the stock option plan, as it would be anti-dilutive. Excluded from the calculation of the diluted loss per share for the three and six-month periods ended June 30, 2015 are the impacts of the Amended Note, the Exchange Right and the stock option plan, as they would be anti-dilutive.

The stock option plan could potentially be dilutive in the future.



28

12. Related party transactions:

(a) There is no single ultimate controlling party.

(b) Dr. Francesco Bellini, the Chairman of the Board of Directors, provides ongoing advisory services to the Company under the terms of a consulting and services agreement between the Company and Picchio International Inc., wholly-owned by Dr. Francesco Bellini and his spouse. The Company recorded fees and expenses of $95 and $190 respectively for the three and six-month periods ended June 30, 2016 ($95 and $190 for the corresponding periods the previous year).

In October 2013, BELLUS Health entered into license agreements in relation to VIVIMIND™ and BLU8499 with related party FB Health and then related party Alzheon (refer to notes 6 and 9 (b)). FB Health is controlled by Dr. Francesco Bellini, the Chairman of the Board of Directors of BELLUS Health.

(c) The Amended Note issued to a significant influence shareholder of the Company in May 2012 was settled through the issuance of 7,286,828 common shares from treasury on January 1, 2016, as scheduled (refer to note 8 (b) (i)).

(d) Key management personnel:

The Chief Executive Officer, Vice-Presidents and Directors of BELLUS Health are considered key management personnel of the Company.

The aggregate compensation for the three and six-month periods ended June 30, 2016 and 2015 to key management personnel of the Company is set out below:


Short term benefits $ 313 $ 447 $ 765 $ 867 DSU plans (income) expense (284) 9 (158) (1) Stock option plan expense 52 79 130 138

$ 81 $ 535 $ 737 $ 1,004



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13. Financial instruments:

Carrying values and fair values:

Fair value estimates are made as of a specific point in time, using available information about the financial instrument. These estimates are subjective in nature and may not be determined with precision. A three-tier fair value hierarchy prioritizes the inputs used in measuring fair value. The Level 3 is defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Financial assets and liabilities fair valued on a recurring basis as at June 30, 2016 are the investment in FB Health, as well as the contingent right from Premium Brands and related contingent consideration from the acquisition of Thallion in August 2013; these financial instruments were measured using Level 3 inputs.

For the six-month period ended June 30, 2016, the reconciliation of the beginning and ending balance of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows:

Contingent Contingent right from conside- Investment Premium ration in FB Health Brands (CVRs)

Balance as at December 31, 2015 $ 748 $ 1,313 $ (1,383)

Total gain (loss) included in income (reported as change in fair value) – 117 (117)

Total gain included in other comprehensive income (reported as change in fair value) 209 – –

Balance as at June 30, 2016 $ 957 $ 1,430 $ (1,500)

The amounts presented above as total gain (loss) included in income and other comprehensive income attributable to the change in fair value of the related assets and liabilities still held at reporting date were unrealized.

For its financial assets and liabilities measured at amortized cost as at June 30, 2016, the Company has determined that the carrying value of its short-term financial assets and liabilities and non-current Trade and other receivables approximates their fair value because of the relatively short periods to maturity of these instruments.

Certain statements contained in this document, other than statements of fact that are independently verifiable at the date hereof, may constitute “forward-looking statements” within the meaning of Canadian securities legislation and regulations. Such statements, based as they are on the current expectations of management, inherently involve numerous important risks, uncertainties and assumptions, known and unknown, many of which are beyond BELLUS Health Inc.’s control. Such risks factors include but are not limited to: the ability to obtain financing, the impact of general economic conditions, general conditions in the pharmaceutical industry, changes in the regulatory environment in the jurisdictions in which BELLUS Health Inc. does business, stock market volatility, fluctuations in costs, changes to the competitive environment due to consolidation, achievement of forecasted burn rate, potential payments/outcomes in relation to indemnity agreements and contingent value rights, achievement of forecasted pre-clinical and clinical trial milestones, dependence on Auven Therapeutics for the development of KIACTA™ and that actual results may vary once the final and quality-controlled verification of data and analyses has been completed. In addition, the length of the KIACTA™ development process and the sharing of proceeds between Auven Therapeutics and BELLUS Health Inc. from potential future revenue of KIACTA™ are dependent upon a number of factors, including the quantum of proceeds. Consequently, actual future results and events may differ materially from the anticipated results and events expressed in the forward-looking statements. BELLUS Health Inc. believes that expectations represented by forward-looking statements are reasonable, yet there can be no assurance that such expectations will prove to be correct. The reader should not place undue reliance, if any, on any forward-looking statements included in this document. These forward-looking statements speak only as of the date made, and BELLUS Health Inc. is under no obligation and disavows any intention to update publicly or revise such statements as a result of any new information, future event, circumstances or otherwise, unless required by applicable legislation or regulation. Please see BELLUS Health Inc.’s public filings with the Canadian securities regulatory authorities, including the Annual Information Form, for further risk factors that might affect BELLUS Health Inc. and its business.

QUARTERLY REPORT

SECOND QUARTERENDED JUNE 30

2016

T 450 680 4500 F 450 680 [email protected]

BELLUS HEALTH INC.275, Armand-Frappier BoulevardLaval (Quebec) Canada H7V 4A7

bellushealth.com

D E V E L O P I N GDRUGS FOR

RAREDISEASES

CORPORATE PROFILE

BELLUS Health is a drug development company focused on rare diseases. Its pipeline of rare disease projects includes KIACTA™ for AA amyloidosis, KIACTA™ for sarcoidosis and clinical-stage Shigamab™ for Hemolytic Uremic Syndrome caused by Shiga toxin-producing E. coli (sHUS). BELLUS Health is partnered with global private equity firm Auven Therapeutics for the development of KIACTA™. BELLUS Health also has financial interests in some biotechnology and pharmaceutical companies. The Company’s shares trade on the Toronto Stock Exchange (TSX) under the symbol BLU.

2016-06-30 bellus health inc. quarterly rpt...

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