Toronto Stock Exchange Symbol: DND

MISSISSAUGA, ON, Feb. 22, 2012 /CNW/ - Cipher Pharmaceuticals Inc. (TSX: DND) today announced its financial and operational results for the fourth quarter and fiscal year ended December 31, 2011.

Fiscal 2011 Summary

• Completed CIP-ISOTRETINOIN Phase III safety study in Q2 and submitted New Drug Application (NDA) amendment to the U.S. Food and Drug Administration (FDA) and New Drug Submission (NDS) to Health Canada in Q4. The NDA amendment was accepted as a complete response with a goal date under the U.S. Prescription Drug User Fee Act (PDUFA) of May 29, 2012. Subsequent to year end Health Canada accepted the submission for filing with a response expected by Q1 2013.
  
• Entered into a U.S. distribution and supply agreement for CIP-TRAMADOL ER with Vertical Pharmaceuticals, Inc in Q2. The product was launched by Vertical in the U.S. in Q3 under the trade name ConZip ™.
  
• CIP-TRAMADOL ER was approved by Health Canada in Q3; product will be marketed by the Company's Canadian distributor, Medical Futures, under the trade name Durela™, with an expected launch in Q1 2012.
  
• Royalty revenue from Lipofen® increased 8% over 2010.
  
• Strong balance sheet at year end with no debt and cash of $9.6 million, versus $9.2 million at the end of Q3 2011.

"It was a successful year for Cipher with multiple commercial and regulatory milestones, highlighted by two marketing agreements for our once-daily tramadol, the launch of ConZip™ in the U.S. market, and completion of the comprehensive Phase III study of our high-potential acne product," said Larry Andrews, President and CEO of Cipher. "Moreover, we saw steady growth in royalty revenue from Lipofen® which helped us achieve another sales milestone subsequent to year end. With growing revenues from our two commercial products and an upcoming PDUFA date in May for CIP-ISOTRETINOIN, 2012 is shaping up to be an eventful and exciting year for the Company."

Financial Review

Total net revenue in 2011 was $3.6 million, compared with $5.4 million in 2010.  Fiscal 2010 revenue included a one-time $1.0 million sales milestone for Lipofen® and the recognition of revenue on up-front and milestone payments, neither of which occurred during 2011.  Excluding revenue recognized on these items, net revenue increased by $1.1 million in 2011, driven by an 8% increase in Lipofen® royalties and $0.8 million in revenue from CIP-TRAMADOL ER, the first year that revenue has been recognized for this product.

Research and Development ("R&D") expenditures for 2011 were $2.2 million, compared with $0.7 million in 2010. Reported R&D expense is shown net of the amounts reimbursed for the CIP-ISOTRETINOIN Phase III clinical study and refundable provincial tax credits. The year-over-year increase relates primarily to expenses for the CIP-ISOTRETINOIN Phase III clinical study, which was completed during 2011, as well as a new product development program.

Operating, General and Administrative ("OG&A") expenses for 2011 were $3.1 million, compared with $3.8 million in 2010. Net loss for the 12 months ended December 31, 2011 was $2.3 million ($0.10 per share), compared with net income of $0.2 million ($0.00 per share) in 2010.

In Q4 2011, Cipher recorded licensing revenue of $1.0 million, compared with $1.2 million in Q4 2010.

R&D expenses in Q4 2011 were $0.6 million, compared with nil in Q4 2010.  OG&A expenses for Q4 2011 were $0.7 million versus with $0.9 million in the same period last year. Net loss for the three months ended December 31, 2011 was $0.5 million ($0.02 per share), compared with net income of $0.1 million ($0.00 per share) in the same period last year.

The Company's financial position remained solid at year-end. As at December 31, 2011, Cipher had no debt and cash of $9.6 million, compared with $9.2 million at September 30, 2011 and $10.3 million at December 31, 2010.

Product Update

Lipofen®
During 2011, Cipher saw steady growth in royalty revenue from Lipofen® as Kowa Pharmaceuticals continued its penetration of primary care physicians in its targeted regions. Subsequent to year end, the Company received a US$1.0 million one-time milestone payment, which was based on sales performance over a trailing 12-month period and reflected a steady increase in new prescriptions during Q4 2011 and early Q1 2012. Cipher's 50% share of the milestone will be reflected in its financial results for Q1 2012.

CIP-ISOTRETINOIN
During Q4 2011, Cipher's revised NDA was submitted to the FDA and accepted for review.  Based on the FDA's acceptance as a complete response, Cipher received a US$1.0 million milestone payment from its marketing partner, Ranbaxy Pharmaceuticals Inc. The target action date under PDUFA is May 29, 2012.  Once CIP-ISOTRETINOIN is commercialized in the U.S., Cipher expects that future revenue from this product has the potential to significantly exceed the revenue generated from the Company's other current products. Pre-commercial manufacturing planning is also underway for a possible U.S. launch in Q4 2012.

In addition, Cipher's New Drug Submission for CIP-ISOTRETINOIN was accepted for review by Health Canada subsequent to year end. A response from Health Canada is expected in Q1 2013 and, once the product is approved, Cipher plans to market it in Canada through its own specialty sales team.

CIP-TRAMADOL ER (ConZip™/Durela™)
ConZip™ was launched by Vertical Pharmaceuticals in September 2011. Product sales to date have been encouraging, and the Company expects solid growth in 2012 as U.S. physicians gain more experience with the product and Vertical expands its coverage.

In Canada, Medical Futures plans to launch Durela™ in Q1 2012 with a dedicated sales force comprising approximately 22 representatives, with plans for further expansion.

New Products and Out-Licensing Activities
Cipher is actively pursuing out-licensing agreements for its current products in other territories and is also seeking products in development or approved for the Canadian market to complement its Canadian commercialization plans for CIP-ISOTRETINOIN.

Notice of Conference Call

Cipher will hold a conference call today, February 22, 2012, at 8:30 a.m. (ET) to discuss its financial results and other corporate developments. To access the conference call by telephone, dial 647-427-7450 or 1-888-231-8191.  A live audio webcast of the call will be available at www.cipherpharma.com. The webcast will be archived for 90 days.

About Cipher Pharmaceuticals Inc.

Cipher Pharmaceuticals (TSX: DND; OTC: CPHMF.PK) is a growing specialty pharmaceutical company that commercializes novel formulations of successful, currently marketed molecules. Cipher's strategy is to in-license clearly differentiated products, advance them through the clinical development and regulatory approval stages, and out-license to international marketing partners. The Company's first product is a fenofibrate formulation marketed in the United States as Lipofen®. Cipher's second product, an extended-release tramadol, is marketed in the United States as ConZip™ and will be marketed in Canada as Durela™. Cipher's New Drug Application for its third product, a novel formulation of the acne treatment isotretinoin, is currently being reviewed by the FDA and Health Canada.

For more information, please visit www.cipherpharma.com.

Forward-Looking Statements

Statements made in this news release, other than those concerning historical financial information, may be forward-looking and therefore subject to various risks and uncertainties. The words "may", "will", "could", "should", "would", "suspect", "outlook", "believe", "plan", "anticipate", "estimate", "expect", "intend", "forecast", "objective", "hope" and "continue" (or the negative thereof), and words and expressions of similar import, are intended to identify forward-looking statements. Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements.  Factors that could cause results to vary include those identified in the Company's Annual Information Form and other filings with Canadian securities regulatory authorities. These factors include, but are not limited to losses; the applicability of patents and proprietary technology; possible patent litigation; approval of products in the Company's pipeline; marketing of products; meeting projected drug development timelines and goals; product liability and insurance; dependence on strategic partnerships and licensees; concentration of the Company's revenue; substantial competition and rapid technological change in the pharmaceutical industry; the publication of negative results of clinical trials of the Company's products; the ability to access capital; the ability to attract and retain key personnel; changes in government regulation or regulatory approval processes; dependence on contract research organizations; third party reimbursement; the success of the Company's strategic investments; the achievement of development goals and time frames; the possibility of shareholder dilution; market price volatility of securities; and the existence of significant shareholders. All forward-looking statements presented herein should be considered in conjunction with such filings. Except as required by Canadian securities laws, the Company does not undertake to update any forward-looking statements; such statements speak only as of the date made.

Cipher Pharmaceuticals Inc.

Financial Statements

For the Year Ended December 31, 2011

 The accompanying notes are an integral part of these financial statements

The accompanying notes are an integral part of these financial statements

Cipher Pharmaceuticals Inc.
Notes to Financial Statements
December 31, 2011
(in thousands of Canadian dollars, except per share amounts)

1 NATURE OF OPERATIONS
Cipher Pharmaceuticals Inc. ("Cipher" or "the Company") is a commercial stage drug development company focused on commercializing novel formulations of successful, currently marketed molecules using advanced drug delivery technologies.  The Company's strategy is to in-license products that incorporate proven drug delivery technologies and advance them through the clinical development and regulatory approval stages, after which the products are out-licensed to international partners. Cipher is incorporated under the Business Corporations Act of Ontario and is located at 5650 Tomken Boulevard, Mississauga, Ontario.


2 BASIS OF PREPARATION AND ADOPTION OF IFRS
The Company prepares its financial statements in accordance with Canadian generally accepted accounting principles as defined in the Handbook of the Canadian Institute of Chartered Accountants ("CICA Handbook").  In 2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards ("IFRS"), and to require publicly accountable enterprises to apply these standards effective for years beginning on or after January 1, 2011.  Accordingly, these are the Company's first annual financial statements prepared in accordance with IFRS.  In these financial statements, the term "Canadian GAAP" refers to Canadian GAAP before the adoption of IFRS.

Subject to certain transition elections disclosed in note 5, the Company has consistently applied the same accounting policies in its opening IFRS balance sheet at January 1, 2010 and throughout all periods presented, as if these policies had always been in effect. Note 5 discloses the impact of the transition to IFRS on the Company's reported financial position, financial performance and cash flows,  including the nature and effect of significant changes in accounting policies from those used in the Company's financial statements for the year ended December 31, 2010 prepared under Canadian GAAP.

The policies applied in these financial statements are based on IFRS issued and outstanding as of December 31, 2011.


3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies used in the preparation of these financial statements are described below.

Basis of measurement
The financial statements have been prepared under the historical cost convention.

Translation of foreign currencies
The financial statements are presented in Canadian dollars, which is the Company's functional currency.  Revenues and expenses denominated in foreign currencies are translated into Canadian dollars using the exchange rate in effect at the transaction date.  Monetary assets and liabilities are translated using the rate in effect at the balance sheet date and non-monetary items are translated at historical exchange rates.  Related exchange gains and losses are included in the determination of income (loss) for the year.

Critical accounting estimates and judgments
The Company makes estimates and assumptions concerning the future that will, by definition, seldom equal actual results. The following  are the estimates and judgments applied by management that most significantly affect the Company's financial statements. The estimates  and judgments that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next  financial year are addressed below.

(i) Estimated useful lives and valuation of intangible assets - management estimates the useful lives of intangible assets based on the period during which the assets are expected to be available for use and also estimates the recoverability to assess if there has been an impairment.  The amounts and timing of recorded expenses for amortization and impairments of intangible assets for any period are affected by these estimates. The estimates are reviewed at least annually and are updated if expectations change as a result of technical or commercial obsolescence, generic threats and legal or other limits to use.  It is possible that changes in these factors may cause significant changes in the estimated useful lives of the Company's intangible assets in the future.

(ii) Revenue recognition - management evaluates the multiple elements and units of accounting which are included within certain licensing and distribution agreements.  The recognition of revenue on up-front licensing payments and pre-commercialization amounts are over the estimated period that the Company maintains contractual obligations.  The estimated periods are reviewed at least annually and are updated if expectations change as a result of licensing partner interactions, product commercial obsolescence or other factors.  It is possible that these factors may cause significant changes in the Company's recognition of revenue in the future.

(iii) Income taxes - management uses estimates when determining current and deferred income taxes.  These estimates are used to determine the recoverability of tax loss carry forwards, research and development expenditures and investment tax credits.

Financial instruments
Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument.  Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

At initial recognition, the Company classifies its financial instruments in the following categories depending on the purpose for which the instruments were acquired:

(i) Financial assets and liabilities at fair value through profit or loss: A financial asset or liability is classified in this category if acquired principally for the purpose of selling or repurchasing in the short term.  The Company does not have any instruments classified in this category.  Financial instruments in this category are recognized initially and subsequently at fair value.  Transaction costs are expensed in the statement of operations. Gains and losses arising from changes in fair value are presented in the statement of operations in the period in which they arise. 

(ii) Available-for-sale investments: These investments are non-derivatives that are either designated in this category or not classified in any of the other categories.  The Company does not have any instruments classified in this category.  Available-for-sale investments are recognized initially at fair value plus transaction costs and are subsequently carried at fair value.  Gains or losses arising from changes in fair value are recognized in other comprehensive income.  When an available-for-sale investment is sold or impaired, the accumulated gains or losses are moved from accumulated other comprehensive income to the statement of operations and are included in other gains and losses.

(iii) Loans and receivables:  These are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.  The Company's loans and receivables comprise cash, accounts receivable and loan receivable, and are included in current assets due to their short-term nature.  Loans and receivables are initially recognized at the amount expected to be received, less, when material, a discount to reduce the loans and receivables to fair value.  Subsequently, loans and receivables are measured at amortized cost using the effective interest method less a provision for impairment.

(iv) Financial liabilities at amortized cost: This category includes accounts payable and accrued liabilities.  Accounts payable and accrued liabilities are initially recognized at the amount required to be paid, less, when material, a discount to reduce the payables to fair value.  Subsequently, accounts payable are measured at amortized cost using the effective interest method.  Financial liabilities are classified as current liabilities if payment is due within twelve months. Otherwise, they are presented as non-current liabilities.

Impairment of financial assets
At each reporting date, the Company assesses whether there is objective evidence that a financial asset is impaired.  If such evidence exists, the Company recognizes an impairment loss.  Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized.

Cash
Cash includes deposits held with banks.

Accounts receivable
Accounts receivable consist of amounts due from licensing partners for royalties and product sales in the normal course of business and other amounts such as interest receivable and tax credits receivable.

Prepaid expenses and other assets
Prepaid expenses consist of amounts paid in advance for items that have future value to the Company, such as insurance policy payments, U.S. Food and Drug Administration fees, data base subscription fees and other items paid in advance.  Other assets consist of lease and utility deposits.

Property and equipment
Property and equipment are recorded at historical cost less accumulated depreciation and accumulated impairment losses.  The useful lives of property and equipment are reviewed at least once per year.  Depreciation is computed using the straight-line method, using the following estimated useful lives of the assets or lease terms:

Intangible assets
Intangible assets consist of marketing and other rights relating to products and are recorded at cost less accumulated amortization and accumulated impairment losses.  Intangible assets have a finite life and are amortized using the straight-line method over their estimated period of useful life.  Amortization commences on the earlier of the date of regulatory (generally, U.S. Food and Drug Administration) approval for marketing the related product or upon substantive revenue being generated from the product under a commercial licensing agreement.  The estimated period of useful life has been determined to be 3.5 years from the date of regulatory approval for marketing the related product. Should amortization commence as a result of generating revenue, the amortization period would include the time prior to regulatory approval. The useful lives of the intangible assets are reviewed at least once per year

Impairment of non-financial assets
Non-financial assets, which include property and equipment and intangible assets, are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  An impairment loss is recognized when the carrying amount of a non-financial asset exceeds the sum of the estimated present value of the expected future cash flows from the non-financial asset.  The Company evaluates impairment losses for potential reversals when events or circumstances warrant such consideration. 

Accounts payable and accrued liabilities
Accounts payable are obligations to pay for goods and services that have been acquired in the ordinary course of business from suppliers and are classified as current liabilities if payment is due within one year or less.  If not, they are presented as non-current liabilities.

Deferred revenue
Deferred revenue consists of amounts received from licence partners in advance of revenue recognition.  Amounts expected to be recognized within one year or less are classified as current liabilities with the balance being classified as non-current liabilities.

Share capital
Common shares are classified as equity.  Incremental costs directly attributable to the issuance of shares are recognized as a deduction from equity.

Revenue recognition
The Company recognizes revenue licensing and distribution agreements, which may include multiple elements.  The individual elements of each agreement are divided into separate units of accounting if certain criteria are met.  The applicable revenue recognition approach is then applied to each unit.  Otherwise, the applicable revenue recognition criteria are applied to combined elements as a single unit of accounting.

Licensing revenues - for up-front licensing payments and pre-commercialization milestones, revenue is deferred and recognized on a straight-line basis over the estimated term that the Company provides services and when the costs of fulfilling the Company's contractual obligations can be measured reliably.  Post-commercialization milestone payments are recognized as revenue when the underlying condition is met, the milestone is not a condition of future deliverables and collectability is reasonably assured.  Otherwise, these milestone payments are recognized as revenue over the remaining term of the underlying agreement or the estimated service term which the Company maintains contractual obligations.  Royalty revenue is recognized in the period in which the Company earns the royalty.  The gross margin on sales of finished products to license partners is recognized when the product is shipped, at which time ownership is transferred.  Amounts received in advance of recognition as revenue are included in deferred revenue.

Research and development
The Company conducts research and development programs and incurs costs related to these activities, including employee compensation, materials, professional services and services provided by contract research organizations.  Research and development costs, net of related tax credits and contractual reimbursements from development partners, are expensed in the periods in which they are incurred.

Income taxes
Income tax comprises current and deferred tax. Current tax is the expected tax payable on the taxable income for the year using tax rates enacted or substantively enacted at the end of the reporting period and any adjustment to tax payable in respect of previous years. Deferred tax is recognized in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined on a non-discounted basis using tax rates and laws that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the deferred tax asset or liability is settled. Deferred tax assets are recognized to the extent that it is probable that the assets can be recovered.  Tax on income for interim periods is accrued using the tax rate that would be applicable to expected total annual earnings.

Investment tax credits
The Company is entitled to provincial investment tax credits, which are earned as a percentage of eligible research and development expenditures incurred in each taxation year.  Investment tax credits are accounted for as a reduction of the related expenditure items of a current nature and a reduction of the related asset cost for items of a long-term nature, provided that the Company has reasonable assurance that the tax credits will be realized.

Share-based compensation
The fair value of options granted to employees and directors is estimated on the date of the grants using the Black-Scholes option pricing model.  Stock options vest over four years (25% per year), expire after ten years and can only be settled for shares.  Each tranche in an award is considered as a separate award with its own vesting period and grant date fair value.  Share-based compensation expense is recognized over the tranche's vesting period based on the number of awards expected to vest, by increasing contributed surplus.  The number of awards expected to vest is reviewed annually, with any impact being recognized immediately.  Share-based compensation expense is included in operating, general and administrative expense in the statements of operations and contributed surplus in the balance sheets.  The consideration received on the exercise of stock options is credited to share capital at the time of exercise.

Earnings per share
Basic earnings per share ("EPS") is calculated using the treasury stock method,  by dividing the net income (loss) for the period by the weighted number of common shares outstanding during the period.  Diluted EPS is calculated by adjusting the weighted average number of common shares outstanding for dilutive instruments.

Accounting standards issued but not yet applied
IFRS 9, "Financial Instruments", addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November 2009 and October 2010.  It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments.  IFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortized cost.  The determination is made at initial recognition.  The classification depends on the entity's business model for managing its financial instruments and the contractual cash flow characteristics of the instrument.  For financial liabilities, the standard retains most of the IAS 39 requirements.  The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity's own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch.  The Company is yet to assess IFRS 9's full impact and intends to adopt IFRS 9 no later than the accounting period beginning on or after January 1, 2013.

IFRS 12, "Disclosures of interests in other entities" includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles.  The Company is yet to assess IFRS 12's full impact and intends to adopt IFRS 12 no later than the accounting period beginning on or after January 1, 2013.

There are no other IFRS or International Financial Reporting Interpretations Committee interpretations that are not yet effective that would be expected to have a material impact on the Company.

4 RISK MANAGEMENT

Financial risk management
In the normal course of business, the Company is exposed to a number of financial risks that can affect its operating performance.  These risks are: credit risk, liquidity risk and market risk.  The Company's overall risk management program and prudent business practices seek to minimize any potential adverse affects on the Company's financial performance.

(i) Credit risk
Cash - the Company's cash balance is on deposit with a Canadian chartered bank that has a DBRS rating of "AA" for deposits and senior debt. Accounts receivable - the Company licenses its products to distribution partners in major markets.  The credit risk associated with the accounts receivable pursuant to these agreements is evaluated during initial negotiations and on an ongoing basis.  The accounts receivable balance at December 31, 2011 is concentrated between two distribution partners.  One has been a partner of the Company for over four years, with no defaults in the past and one is a new partner in the current year.  As of December 31, 2011, no accounts receivable were impaired or past due.  The Company's three largest customers comprise 63%, 20% and 15% of licensing revenue (92% for the largest customer in 2010).

(ii) Liquidity risk
The Company has no long term debt.  Accounts payable and accrued liabilities are settled in the regular course of business, based on negotiated terms with trade suppliers.  All components of the balance of $1,912 as at December 31, 2011 are expected to be settled in less than one year.  The carrying value of the balances approximate their fair value as the impact of discounting is not significant.  Management forecasts cash flows in order to monitor liquidity requirements and ensure that the Company has sufficient cash to meet operational needs.

(iii) Market risk
Currency risk - the majority of the Company's revenue and a portion of its expenses are denominated in US currency.  The accounts receivable balance at December 31, 2011 includes a total of US$1,602 and accounts payable and accrued liabilities includes a total of US$1,039.  A 10% change in the US/CDN exchange rate on December 31, 2011 balance would have had a $56 impact on net income.

Capital risk management
Shareholders' equity is managed as the capital of the Company.  The Company's objective when managing capital is to safeguard its ability to continue as a going concern in order to provide returns for shareholders and to maintain an optimal capital structure to minimize the cost of capital.  In order to maintain or adjust the capital structure, the Company may issue new common shares from time to time.

5 TRANSITION TO IFRS
The effect of the Company's transition to IFRS, described in note 2, is summarized in this note as follows:
(i)  Transition elections
(ii) Reconciliation of deficit, contributed surplus and comprehensive income as previously reported under Canadian GAAP to IFRS

(i) Transition elections:
IFRS 1 - First-time Adoption of International Financial Reporting Standards - sets forth guidance for the initial adoption of IFRS.  Under IFRS 1, the standards are applied retrospectively at the transitional balance sheet date with all adjustments to assets and liabilities taken to retained earnings unless certain exemptions are applied.  The Company has applied the following exemption to its opening balance sheet dated January 1, 2010:

Share-based payment transactions - the Company has elected not to apply IFRS 2 to awards that vested prior to January 1, 2010.

With regard to the designation of financial assets and liabilities, the Company has elected to re-designate cash from the held-for-trading category to the loans and receivables category.  In addition, as required by IFRS 1, estimates made under IFRS at the date of transition must be consistent with estimates made for the same date under previous GAAP, unless there is evidence that those estimates were in error.

(ii) Reconciliation of deficit, contributed surplus and comprehensive income as previously reported under Canadian GAAP to IFRS:
In preparing its financial statements in accordance with IFRS, the Company has adjusted amounts reported previously in financial statements prepared in accordance with Canadian GAAP.  An explanation of how the transition from previous Canadian GAAP to IFRS has affected the Company's financial position, financial performance and cash flow is set out below.

Statements of cash flows - the transition to IFRS had no significant impact on cash flows generated by the Company.

Under IFRS, the Company accrues the cost of employee stock options over the vesting period using the graded method of amortization rather than the straight-line method, which was the Company's policy under Canadian GAAP.  As a result of this change, contributed surplus increased by $317 and deficit increased by $317 as at January 1, 2010.  General and administrative expenses decreased by $116 for the year ended December 31, 2010.



6 PROPERTY AND EQUIPMENT
The following is a summary of property and equipment as at December 31, 2011:

7 INTANGIBLE ASSETS
The Company has entered into agreements with Galephar Pharmaceutical Research Inc. ("Galephar") for the rights to package, test, obtain regulatory approvals and market certain products in various countries around the world.  In accordance with the terms of the agreements, the Company has acquired certain intangible rights.  The Company may be required to pay additional amounts to Galephar for the CIP-ISOTRETINOIN intangible rights of up to $661 (US$650) if certain future milestones are achieved as defined in the agreement.  The recoverability of these intangible rights is dependant upon sufficient revenues being generated from the related products.  The Company is currently amortizing the intangible rights related to CIP-ISOTRETINOIN and CIP-TRAMADOL ER.

In accordance with the above-noted agreements, after certain prescribed thresholds are achieved, the Company pays Galephar a 50% share of all amounts received, after deducting product-related expenses under licensing and distribution agreements.

The following is a summary of intangible assets as at December 31, 2011:

The Company has considered indicators of impairment as of January 1, 2010, December 31, 2010 and December 31, 2011 and no indicators were identified.



8 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The following is a summary of accounts payable and accrued liabilities as at December 31, 2011 and December 31, 2010:

9 SHARE CAPITAL

Authorized share capital
The authorized share capital consists of an unlimited number of preference shares, issuable in series, and an unlimited number of voting common shares.

Issued share capital
The following is a summary of the changes in share capital from January 1, 2010 to December 31, 2011:

Share purchase plan - in 2011, the Company implemented an Employee and Director Share Purchase Plan ("ESPP") to allow employees and directors to share in the growth of the Company through share ownership.  Through the ESPP, employees and directors may contribute amounts from payroll to be used to purchase shares of the Company at a 15% discount from the prevailing trading price. Plan members must hold their shares for a period of at least six months before they can be sold.  The plan was approved by the board of directors on March 8, 2011.  The shareholders of the Company approved the ESPP at the annual and special meeting of shareholders held on May 12, 2011.  The shares issued under the ESPP are new shares issued from treasury and the maximum number of shares that can be issued under the ESPP is one million.  During the year, 131,417 shares were issued under the ESPP.  Included in share-based compensation expense is $16 which is the discount on the shares issued under the ESPP during the year.

Stock option plan
The following is a summary of the changes in the stock options outstanding from January 1, 2010 to December 31, 2011:

At December 31, 2011, 1,247,420 options were fully vested and exercisable (1,114,560 at December 31, 2010).

During 2011, the Company issued 196,000 stock options under the employee and director stock option plan, with an exercise price of $1.16, 25% of which vest on March 11 of each year, commencing in 2012, and expire in 2021.  Total  compensation cost for these stock options is estimated to be $198, which will be recognized on a graded basis over the vesting period of the stock options.

The stock options issued during 2011 were valued using the Black-Scholes option pricing model, at $1.01 per option, with the following assumptions.  Expected volatility is based on the Company's historical volatility, while estimated forfeitures are not considered significant.

During 2011, 104,445 stock options were exercised for a total cash consideration of $47.  Capital stock increased by $90 representing  the cash consideration of $47 and a $43 transfer from contributed surplus.  The share price at the time of exercise was $1.11.

The following is a summary of the outstanding options as at December 31, 2011:

10 RESEARCH AND DEVELOPMENT
A total of $4,022 of research and development costs were incurred in 2011 ($12,835 in 2010).  The research and development expense reflected in the Statement of Operations is presented net of refundable provincial tax credits of $100 ($328 in 2010) for qualifying research and development expenditures and reimbursed R&D expenditures of $1,717 ($11,764 in 2010).  Under the terms of the CIP-ISOTRETINOIN distribution and supply agreement, certain research and development costs incurred for clinical studies required by the FDA to secure approval for the product are reimbursed to the Company and as a result, these reimbursed costs are not reflected in reported research and development expense.

11 EXPENSES BY NATURE

12 COMPENSATION OF KEY MANAGEMENT
Key management includes directors and executives of the Company.  The compensation paid or payable to key management for services is shown below:

13 INCOME TAXES
The provision for income taxes differs from the amount computed by applying the statutory income tax rate to the loss for the year.  The sources and tax effects of the differences are as follows:

The significant components of unrecognized deferred tax assets are summarized as follows:

Deferred tax assets are recognized for tax loss carry-forwards to the extent that the realization of the related tax benefit through future taxable profits is probable.  The Company did not recognize deferred tax assets of $23,163 (2010 - $22,527) that can be carried forward against future taxable income.

The Company has non-capital loss carry forwards of $49,100 as at December 31, 2011 that expire in varying amounts from 2014 to 2031.

The Company has Scientific Research and Experimental Development ("SR&ED") expenditures of $17,500 which can be carried forward indefinitely to reduce future years' taxable income.

The Company has approximately $3,700 of investment tax credits on SR&ED expenditures that are available to be applied against federal taxes otherwise payable in future years and expire in varying amounts from 2022 to 2031.

14 EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is calculated using the weighted average number of shares outstanding.  The weighted average number of shares outstanding for the year ended December 31, 2011 was 24,175,720 (for the year ended December 31, 2010 - 24,071,522).

As the Company had a loss for the year ended December 31, 2011, basic and diluted loss per share are the same because the exercise of all stock options would have an anti-dilutive effect.  For the prior year, the dilutive impact on earnings per share is not significant.

15 COMMITMENTS
The Company has entered into an operating lease for its office facilities with the following minimum annual payments:

16 SEGMENTED INFORMATION
The Company's operations are categorized into one industry segment, being specialty pharmaceuticals.  All of the Company's assets, including capital and intangible assets, are in Canada, while all licensing revenue is derived from the United States.