|This is a summary of the original news release. To read the complete contents of the news release, including financial charts, click here.|
Readers are referred to the cautionary notes regarding Forward-looking Information & non-GAAP and non-IFRS Financial Measures at the end of this release
Listed TSX, Symbol: CNJ
Cangene announces that it has received approval from the Canadian securities regulatory authorities to prepare its financial statements in accordance with International Financial Reporting Standards (“IFRS”) for financial reporting periods beginning on or after January 1, 2010, one year ahead of the mandatory conversion date for Canadian public companies. Accordingly, the Company intends to adopt IFRS retroactive to its interim financial reporting period beginning August 1, 2010 with an August 1, 2009 date of transition (“Transition Date”) and including comparatives for the interim reporting periods starting August 1, 2009.
The conversion to IFRS reduced the assets of the Company at the Transition Date from C$345.8 million to US$261.0 million. This reduction results exclusively from the Company’s retroactive restatement of its financial statements under IFRS and is due primarily to the change of the Company’s functional and reporting currency to the U.S. dollar, as well as the recording of goodwill, and property, plant and equipment impairments. The following information outlines and quantifies the specific areas of the Company’s historical financial reporting that were affected by this conversion.
IFRS Conversion Plan
The Company’s implementation of IFRS consisted of three primary phases as follows:
|[a]||Scoping and diagnostics (Q4, 2009)|
|This phase involved performing a high-level impact assessment to identify key areas potentially impacted by the transition to IFRS. Based on this assessment, potentially affected areas were ranked as high, medium or low priority.|
|[b]||Impact analysis, evaluation and design (2010)|
|This phase involved the identification of all the major components of the IFRS conversion plan and the preparation of a timeline for completion of each of those components. It included the specification of changes to existing accounting policies, information systems and business processes that were required. In addition, policy alternatives allowed under IFRS were analyzed. This analysis included an evaluation of the transitional provisions of IFRS 1 – First-time Adoption of IFRS and the development of draft IFRS financial statement content.|
|[c]||Implementation and review (Q1-Q2, 2011)|
|This phase included execution of changes to information systems and business processes, and selecting and obtaining formal approval of recommended accounting policy changes. Further training for Cangene’s finance and other staff was completed as necessary. The Company monitored exposure drafts issued by the International Accounting Standards Board (“IASB”), the International Financial Reporting Interpretation Committee and other standards setters to ensure adoption of any relevant updates to standards that may have taken place during the period of transition to IFRS. This phase culminated in the collection of the financial information necessary for compiling IFRS-compliant financial statements, approval of these statements by the Audit Committee of our Board of Directors and the absorption of IFRS within all relevant business processes.|
Accounting Policy Decisions
IFRS 1 – First-time Adoption of IFRS:
IFRS 1 provides entities adopting IFRS for the first time with a number of optional exemptions and mandatory exceptions to the general requirement for full retrospective application of IFRS. The Company analyzed the various accounting policy options available and has implemented those that it determined to be the most appropriate for its specific circumstances. The IFRS 1 exemptions most relevant to Cangene are as follows:
An exemption is available within IFRS 1 that allows an entity to carry forward its previous GAAP accounting for business combinations prior to the transition date. The exemption is optional and can be applied to any business combination transaction prior to the transition date. However, should an entity choose to adjust a prior business combination to comply with IFRS, all business combinations subsequent to the date of the adjusted transaction must also be retrospectively adjusted. Cangene elected to retrospectively apply IFRS 3 – Business Combinations to business combinations that occurred subsequent to June 30, 2009.
|Share-based payment transactions
This exemption allows first-time adopters to not apply IFRS 2 – Share-based Payments to equity instruments that were granted prior to November 7, 2002. It also allows the first-time adopter to not apply IFRS 2 to equity instruments granted after November 7, 2002 that vested before transition to IFRS. The Company has applied this exemption to all outstanding equity-settled instruments prior to its transition date of August 1, 2009 to the extent possible. As all the stock option plan awards had vested before the transition to IFRS, an equity adjustment to reclassify contributed surplus to retained earnings was recorded.
|Fair value or revaluation as deemed cost
This exemption allows an entity to revalue property, plant and equipment at fair value at its transition date and use this fair value as the deemed transition cost. This election applies to individual assets. Cangene did not apply this exemption.
|Cumulative translation difference
This exemption allows cumulative translation gains and losses to be deemed zero at transition. Cangene applied this exemption to the extent possible.
This exemption allows an entity to adopt International Accounting Standards (“IAS”) 23 – Borrowing Costs prospectively for property, plant and equipment construction projects for which the capitalization commencement date is after its transition date. Cangene applied this exemption to the extent possible. Cangene has availed itself of the recent IASB annual improvements guidance on IFRS 1 – Borrowing Costs, and will not restate any borrowing costs that were capitalized prior to August 1, 2009.
IFRS 1 stipulates a mandatory exemption from full retrospective application of IFRS as it relates to the use of estimates. It requires that a company’s estimates in accordance with IFRS at the date of transition to IFRS must be consistent with estimates made for the same date in accordance with previous Canadian GAAP (after adjustments to reflect any difference in accounting policies), unless there is objective evidence that those estimates were in error. The Company did not use hindsight in its estimates upon transition to IFRS, nor did it find any evidence that any of its previously made estimates were in error.
IAS 1 – Presentation of Financial Statements:
Canadian GAAP requires certain profit or loss expense categories to be disclosed separately on the statement of income and comprehensive income. Under IFRS, a company has a choice of adopting the nature of expense method or the function of expense method in presenting its analysis of expenses, whichever provides information that is reliable and most relevant.
The Company has elected the function of expense method which classifies expenses according to their function. Accordingly, amortization, foreign-exchange gains (losses), and gains or losses on disposal of property, plant and equipment, which were previously disclosed separately under Canadian GAAP, have now been allocated to cost of sales, independent R&D, and selling, general and administrative expenses. Any foreign-exchange gains (losses) related to finance expenses, such as those used to hedge against interest rate or currency rate risk, remain as a separate line of disclosure on the statement of comprehensive income (loss) under IFRS.
IFRS 2 – Share-based Payments:
Under Canadian GAAP the Company’s cash-settled phantom-stock incentive plan (“PSIP”), restricted share unit plan (“RSU plan”) and deferred share unit plan (“DSU plan”) were accounted for based on their intrinsic values. Under IFRS, share-based payment liabilities are required to be accounted for at fair value using an option pricing model.
IAS 12 – Income Taxes:
Canadian GAAP prohibits the recognition of deferred taxes on the intercompany transfer of assets. Deferred tax is not recognized in the consolidated financial statements for the difference between the tax basis of the buyer and the cost as it is reported in the consolidated financial statements. Any taxes paid or recovered by the transferor as a result of the transfer are recorded as an asset or liability in the consolidated financial statements until the gain or loss is recognized by the consolidated entity.
IAS 12 contains no exception to prohibit the recognition of deferred tax on the intercompany transfer of assets. Therefore, deferred tax is recognized for temporary differences arising on intercompany transactions measured at the tax rate of the buyer, and cash tax paid or recovered on intercompany transactions is recognized in the period incurred. Deferred tax assets have been recorded with respect to these temporary differences.
In addition, certain deferred tax assets and liabilities have been reclassified to conform to IAS 12 standards. Canadian GAAP allows current and deferred income tax liabilities and assets to be offset if they relate to the same taxable entity and the same taxation authority. However, if a company classifies assets and liabilities as current and non-current, the current portion of the balance cannot be offset with the non-current portion. When a group of companies is taxed by the same taxation authority, a deferred tax asset of one of the companies cannot be offset with the liability of one of the other companies, unless tax planning strategies could be implemented such that an offset would be available. IAS 12 does not permit deferred tax assets and liabilities to be classified as current assets or liabilities. In addition, IAS 12 allows for the offset of deferred tax assets and liabilities if, and only if:
- the entity has a legally enforceable right to set off current tax assets against current tax liabilities; and
- the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either:
– the same taxable entity;
– or different taxable entities that intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.
IAS 16 – Property, Plant and Equipment (“PP&E”):
Under IFRS, each component of an item of PP&E with a cost that is significant in relation to the total cost of the item shall be depreciated separately. This is known as the component approach. Compound assets, such as a building or plant, consist of significant parts, and each significant part is depreciated separately. Further, under IAS 16, the residual value and the useful life of an asset shall be reviewed on an annual basis and, if expectations differ from the previous estimate, the change is accounted for as a change in accounting estimate.
The Company has finalized its assessment of the component approach under IFRS and has determined that a building’s foundation, which typically consists of a combination of concrete and steel, is a separate component from the rest of the building. Accordingly, all of the Company’s buildings have been retrospectively assigned a life of 60 years for the structure component and 25 years for the rest of building component. Under Canadian GAAP, the useful lives of our buildings were between 25 and 30 years.
Under IFRS, an entity is required to reassess its PP&E useful-life estimates at the end of each fiscal year. Under Canadian GAAP, the timing of this review is less specific. In accordance with IAS 16, the Company reviewed its capital asset useful lives of its various components as at July 31, 2009 and July 31, 2010. It has determined that equipment has useful lives of five to fifteen years, depending upon equipment type. Under Canadian GAAP, the Company had assigned useful lives to manufacturing and laboratory equipment of five to ten years.
IAS 19 – Employee Benefits:
The Company has a service award program that provides each employee with prescribed cash equivalent awards at defined years of service intervals. Under Canadian GAAP, this type of program is not considered to be obligatory and thus a liability does not exist at the balance sheet date. Under IFRS, this program is considered to represent a liability at the balance sheet date based on the likelihood that this program will continue for the foreseeable future. A liability is recorded and is determined using actuarial estimating, which in this case takes into account age, years of service and projected turnover.
IAS 21 – The Effects of Changes in Foreign-exchange Rates:
In accordance with Canadian GAAP, the Company had determined that Cangene’s functional and reporting currency was the Canadian dollar, and that its U.S. subsidiaries were integrated foreign operations. IFRS requires that the functional currency of each entity in a consolidated group be determined separately based on the currency of the primary economic environment in which the entity operates. A list of primary and secondary indicators is used under IFRS in this determination, and these differ in content and emphasis from those factors used under Canadian GAAP. Accordingly, for IFRS, Cangene has determined that the functional currency of the Corporation, including its U.S. subsidiaries, is the U.S. dollar and in particular, August 1, 2002 is the date at which the U.S. dollar became the functional currency of the Company’s Canadian operations. The net result going forward will be a decrease in earnings volatility that is due to foreign-exchange fluctuations as the Company’s exposure to Canadian-dollar revenues and expenses is significantly less than its exposure to U.S.-dollar revenue and expenses. The Company has retrospectively applied the functional currency determination to prior periods. Accordingly, non-monetary assets and liabilities, including: inventory; prepaid expenses; property, plant and equipment; intangible assets; goodwill; other assets; and deferred income, were required to be restated in U.S. dollars based on historical conversion rates and monetary assets were required to be restated in U.S. dollars at the exchange rates in effect at the period-end balance sheet dates. Revenues and expenses were converted to U.S. dollars at either the exchange rates that were in effect on the dates that they were incurred or at the average exchange rates in the months in which they were incurred.
IAS 34 – Interim Financial Reporting:
Under Canadian GAAP, the Company was allowed to assess its normal manufacturing capacity on an annual basis. At the end of each quarter, it did an assessment of projected manufacturing activity for the remainder of the year and used its latest projection of its current-year manufacturing-capacity utilization to determine how much fixed overhead to capitalize to inventory in the current quarter. Under IFRS, the Company still assesses its normal manufacturing capacity on an annual basis. However, IAS 34 does not allow companies to use projected manufacturing activity as a basis for determining over or under applied fixed overhead at the end of each quarter. Any unallocated overheads incurred in a quarter are treated as an expense in that quarter.
IAS 36 – Impairment of Assets:
Upon adoption of IFRS, the Company is required to test its goodwill for impairment in accordance with IAS 36. Furthermore, IFRS requires that the Company conduct a long-lived asset-impairment test at the date of adoption of IFRS if indicators of impairment exist. There are several differences that exist between current Canadian GAAP and IFRS for impairment of non-financial assets, which include:
- the test for non-financial asset impairment requires the use of a discounted cash flow model, whereas Canadian GAAP uses a two-step impairment test that is first based on undiscounted cash flows and then discounted cash flows;
- testing for impairment occurs at the level of cash generating units (“CGUs”), which is the lowest level of assets that generate largely independent cash inflows, whereas Canadian GAAP requires impairment tests at the asset group level;
- testing for goodwill impairment occurs at the lowest level at which management monitors goodwill (goodwill CGU); however, it cannot be higher than an operating segment, whereas Canadian GAAP requires the impairment test to be assessed at the reporting unit level; and
IFRS allows the reversal of previous impairment losses, with the exception of goodwill, whereas Canadian GAAP prohibits the reversal of non-financial asset impairments.
Upon adoption of IAS 36 at transition, the Company identified both a goodwill impairment loss and a long-lived asset impairment loss at one of its CGUs and a long-lived asset impairment loss at another one of its CGUs.
About Cangene Corporation
Cangene is one of Canada’s largest and earliest biopharmaceutical companies. It was founded in 1984 and is headquartered in Winnipeg, Manitoba. Cangene has approximately 800 employees in six locations across North America and its products are sold worldwide. It operates manufacturing facilities in Winnipeg, Manitoba and Baltimore, Maryland where it produces its own products and undertakes contract manufacturing for a number of companies. Cangene operates three U.S. and one Canadian plasma-collection facilities branded as Cangene Plasma Resources (http://www.cangeneplasma.com/). In addition, it has a regulatory affairs, sales and corporate communications office in Toronto, Ontario.
Cangene is focused on developing therapeutics for infectious diseases, and the Company uses patented manufacturing processes to produce plasma-derived and recombinant therapeutic proteins. Cangene has four FDA and/or Health Canada-approved hyperimmune products. In addition, the Company has several more products in development at various stages. Three of Cangene’s products have been accepted into the U.S. Strategic National Stockpile—botulism antitoxin (investigational product), anthrax immune globulin (investigational product) and a vaccinia immune globulin, a product that may be used to counteract certain complications that may arise from smallpox vaccination. Capitalizing on its drug manufacturing expertise, Cangene also operates a significant contract research and manufacturing business using the resources of Baltimore, Maryland-based Cangene bioPharma, Inc. (a wholly owned subsidiary; formerly Chesapeake Biological Laboratories, Inc.; http://www.cangenebiopharma.com/). Cangene’s website, http://www.cangene.com/, includes product and investor information, including past news releases.
Cautionary Note Regarding Non-GAAP and non-IFRS Financial Measures
This news release may contain non-GAAP and non-IFRS financial measures. Terms by which non-GAAP and non-IFRS financial measures are identified include but are not limited to “net cash”, “total assets”, “sales” and other similar expressions. Non-GAAP and non-IFRS financial measures are used to provide management and investors with additional measures of performance. However, non-GAAP and non-IFRS financial measures do not have standard meanings prescribed by GAAP and/or IFRS and are not directly comparable to similar measures used by other companies. Please refer to the appropriate reconciliations of these non-GAAP and non-IFRS financial measures to measures prescribed by GAAP and/or IFRS.
Forward-looking and risk information
The reader should be aware that Cangene’s businesses are subject to risks and uncertainties that cannot be predicted or quantified; consequently, actual results may differ materially from past results and those expressed or implied by any forward-looking statements. Factors that could cause or contribute to such risks or uncertainties include, but are not limited to: the regulatory environment including the difficulty of predicting regulatory outcomes; changes in the value of the Canadian dollar; the Company’s reliance on a small number of customers including government organizations; the demand for new products and the impact of competitive products, service and pricing; availability and cost of raw materials, especially the cost, availability and antibody concentration in plasma; fluctuations in operating results; government policies or actions; progress and cost of clinical trials; reliance on key strategic relationships; costs and possible development delays resulting from use of legal, regulatory or legislative strategies by the Company’s competitors; uncertainty related to intellectual property protection and potential costs associated with its defence; the Company’s exposure to lawsuits; and other matters beyond control of management. Risks and uncertainties are discussed more extensively in the MD&A section of the Company’s most recent annual report and annual information form, which are available on the Company’s website or on SEDAR at http://www.sedar.com/.
The preceding cautionary statements should be considered in connection with all written or oral statements, especially forward-looking statements, that are made by the Company or by persons acting on its behalf and in conjunction with its periodic filings with Securities Commissions, including those contained in the Company’s news releases and most recently filed annual information form. Forward-looking statements can be identified by the use of words such as “expects”, “plans”, “will”, “believes”, “estimates”, “anticipates”, “intends”, “may”, “bodes” and other words of similar meaning (including negative and grammatical variations). Should known or unknown risks or uncertainties materialize, or should management’s assumptions prove inaccurate, actual results could vary materially from those anticipated. The Company undertakes no obligation to publicly make or update any forward-looking statements, except as required by applicable law.
“Cangene” is a trademark belonging to Cangene Corporation.
For further information:
about Cangene Corporation, please contact Michael Graham at (204) 275-4040 or by email at [email protected]