Labopharm first quarter total revenue increases to $5.3 million

Labopharm Inc. (TSX: DDS)(NASDAQ: DDSS) today reported its progress and financial results for the first quarter ended March 31, 2011. All figures are in Canadian dollars unless otherwise stated.

As previously announced, Labopharm is continuing its strategic review of the business, including Labopharm's technologies, products and product candidates, to determine the appropriate path forward, including consideration of opportunities to monetize the Company's approved products and strategies to capitalize on opportunities inherent to the INTELLITAB(TM) and POLYMERIC NANO-DELIVERY SYSTEMS(TM) (PNDS(TM)) technology platforms. Labopharm is also exploring potential business combinations that could create value for shareholders, however, there can be no assurance that these actions will result in any specific transaction.

"The strategic review is our top priority. However, it will take some time to complete," said Mark D'Souza, President and Chief Executive Officer, Labopharm Inc. "Preservation of capital remains an important focus as we move through the process."

Recent Developments

Management Changes and Cost Reductions - In March 2011, Mark D'Souza, previously Chief Financial Officer with the Company, was appointed President and Chief Executive Officer and Sylvain Guenette, previously Vice President and Corporate Controller, was appointed Chief Financial Officer. Consistent with its intention to preserve capital, Labopharm reduced its workforce in March, which is expected to result in cost savings of approximately $3.8 million annually.

OLEPTRO(TM) Update - Product sales of OLEPTRO(TM) by Angelini Labopharm to end users in the first quarter of 2011 were $908,000, of which Labopharm recognized $454,000 as revenue in accordance with its 50% ownership of Angelini Labopharm, the Company's joint venture with Gruppo Angelini (Angelini) for the U.S. commercialization of OLEPTRO(TM). Following a review of the OLEPTRO(TM) commercialization effort in the U.S., Labopharm entered into discussions with Angelini with the objective of restructuring its agreement with Angelini to further preserve capital. Pending the outcome of the strategic review, as well as the outcome of the aforementioned discussions with Angelini, Labopharm is not pursuing discussions to commercialize OLEPTRO(TM) in Canada.

Twice-Daily Tramadol/Acetaminophen - Grünenthal GmbH, to whom Labopharm granted the exclusive right to market and sell its twice-daily tramadol/acetaminophen product in certain countries in Europe, has determined that the product is no longer consistent with its global corporate strategy. Labopharm has entered into discussions with Grünenthal to terminate its agreement. As a result, Labopharm does not expect its twice-daily tramadol/acetaminophen product to be launched in Europe in 2011 as previously anticipated. Subject to satisfactory resolution of the discussions with Grünenthal, the Company will work towards establishing a new distribution and supply agreement for this product in certain European markets.

Sales of Once-Daily Tramadol Continue to Grow - Worldwide sales (in standard units) of Labopharm's once-daily tramadol product by its marketing partners to end users in 2010 (the latest period for which data is available) grew 8% compared to the previous year.

Financial Results

Beginning with the three-month period ended March 31, 2011, Labopharm is reporting its financial results in accordance with International Financial Reporting Standards (IFRS), as required for public companies in Canada. Previously, the Company reported its financial results under Canadian Generally Accepted Accounting Standards (GAAP). Financial results for the corresponding period in 2010 have been restated to reflect the adoption of IFRS.

Under Canadian GAAP, the gain resulting from the transfer of the U.S rights for OLEPTRO(TM) to Angelini Labopharm in May 2010 was being deferred and recognized over a five-year period such that the Company was recording licensing revenue of $1.4 million per quarter. As result of the adoption of IFRS, that gain cannot be deferred and must be recorded in its totality at the transaction date. Other changes resulting from the adoption of IFRS can be found in the notes to the Company's first quarter 2011 consolidated financial statements, which will be filed with SEDAR and EDGAR in due course.

Three-Month Period Ended March 31, 2011

Total revenue for the first quarter of 2011 was $5.3 million compared with $4.7 million for the first quarter of 2010. The increase was primarily the result of higher product sales as a result of the U.S. commercialization of OLEPTRO(TM) and higher revenue from the provision of services related to the commercialization of OLEPTRO(TM) to Angelini Labopharm under support services agreements entered into under the terms of the joint venture with Gruppo Angelini, which were partially offset by lower royalties.

Revenue from product sales for the first quarter of 2011 was $4.0 million compared with $3.2 million for the first quarter of 2010. Product sales for the first quarter of 2011 included $0.5 million (Labopharm's 50% proportionate share) of sales of OLEPTRO(TM) by Angelini Labopharm to end users. Labopharm's proportionate share of revenue from sales of OLEPTRO(TM) by Angelini Labopharm are recognized using the "sell-through" method under which revenue is recognized upon sale of the product to the end user customer.

Sales of once-daily tramadol for the first quarter of 2011 were $3.5 million compared with $3.2 million for the first quarter of 2010. Higher unit sales volumes were partially offset by lower average selling prices per tablet, as well as the impact of an unfavourable year-over-year variance in the exchange rate of the Euro relative to the Canadian dollar.

Gross margin as a percentage of revenue from product sales of once-daily tramadol for all territories for the first quarter of 2011 was 54% compared with 55% for the first quarter of 2010.

There were no royalties on sales of RYZOLT(TM) by Purdue Pharma for the first quarter of 2011 as a result of the second amendment to the license agreement with Purdue in December 2010 that provides for the restructuring of the royalty payment terms for RYZOLT(TM) under which Labopharm monetized the expected future royalty payment stream from that product. Royalties on sales of RYZOLT(TM) for the first quarter of 2010 were $0.6 million.

Licensing revenue for the first quarter of 2011 was $0.8 million compared with $0.6 million for the first quarter of 2010. The increase is primarily the result of the partial recognition of the $4.8 million special royalty payment received from Purdue in December 2010 per the aforementioned second amendment to the license agreement with that company.

Revenue from services and research and development collaborations for the first quarter of 2011 was $0.5 million and primarily relates to the various support services provided by the Company to Angelini Labopharm. Revenue from services and research and development collaborations for the first quarter of 2010 was $0.3 million.

Research and development expenses, before government assistance, for the first quarter of 2011 were $2.5 million compared with $2.7 million for the first quarter of 2010. The decrease was primarily the result of lower non-cash stock-based compensation expense in the first quarter of 2011, as well as our cost reduction efforts and the timing on the Company's development programs. Estimated research and development tax credits were $0.2 million compared with $0.3 million for the first quarter of 2010.

Selling, general and administrative expenses for the first quarter of 2011 were $9.7 million compared with $7.5 million for the first quarter of 2010. The increase is primarily due to the Company's 50% proportionate share of Angelini Labopharm's sales and marketing expenses for the commercialization of OLEPTRO(TM) in the U.S., which totalled $5.6 million. This increase was partially offset by the absence in the first quarter of 2011 of expenses for pre-commercialization and related costs for the U.S. launch of OLEPTRO(TM) prior to the formation of the joint venture that were incurred in the first quarter of 2010, which totalled $2.3 million, the absence in the first quarter of 2011 of any accruals for the Company's share of litigation costs incurred by Purdue to enforce certain of its U.S. patents related to Labopharm's once-daily tramadol product that were incurred in the first quarter of 2010, lower stock-based compensation expense and cost reductions resulting from the Company's cash preservation initiative.

Net loss for the first quarter of 2011 was $12.4 million, or $0.17 per share, compared with $8.2 million, or $0.13 per share, for the first quarter of 2010. Net loss for the first quarter of 2011 was negatively impacted by restructuring costs of $1.9 million related to the Company's workforce reduction in March 2011, which is expected to result in cost savings of approximately $3.8 million.

Cash, cash equivalents and marketable securities as at March 31, 2011 were $36.3 million (including $1.7 million representing Labopharm's proportionate share of the cash and cash equivalents held by Angelini Labopharm) compared with $49.6 million as at December 31, 2010. The decrease of $13.3 million is primarily the result of cash used in operations, including $5.4 million to fund the joint venture and payment of $1.1 million in restructuring costs, as well as the $2.2 million scheduled repayment of principal on the Company's term loan with Hercules Technology Growth Capital. This was partially offset by the sale for $3.8 million of the long-term notes the Company had received in exchange for its asset-backed commercial paper (ABCP). The Company used a portion of the proceeds to repay in full the $2.5 million credit facility that was established in the context of the restructuring of the Canadian ABCP.