Dr. Tony Cruz reports

TRANSITION THERAPEUTICS ANNOUNCES SECOND QUARTER FISCAL 2012 FINANCIAL RESULTS

Transition Therapeutics Inc. has released its financial results for the quarter ended Dec. 31, 2011.

Selected highlights

During fiscal 2012 and up to the date of this press release, the company achieved the following significant milestones:

• On July 15, 2011, Transition announced that ELND005 (AZD-103) phase 2 clinical trial data would be presented at the international conference of Alzheimer's disease meeting on July 18, 2011.
• On Sept. 27, 2011, Transition announced that phase 2 clinical study data of ELND005 (AZD-103) in mild to moderate Alzheimer's disease have been published in the peer-reviewed journal, Neurology. The Neurology article is entitled, "A phase 2 randomized trial of ELND005, scyllo-inositol, in mild-moderate Alzheimer's disease."
• On Nov. 22, 2011, Transition Therapeutics announced a $5-million (U.S.) private placement. Under the non-brokered private placement, Transition issued 3,703,703 common shares at a price of $1.35 (U.S.) for gross proceeds of approximately $5-million (U.S.).
• On Dec. 12, 2011, Transition announced that the first patient has been dosed in a phase 1 clinical study of Type 2 diabetes drug candidate, TT-401. TT-401 is a once-weekly administered peptide being studied for its potential to lower blood glucose levels in patients with Type 2 diabetes and accompanying obesity.

Pipeline review

ELND005 (AZD-103) for Alzheimer's disease

Transition's lead Alzheimer's disease compound ELND005 (AZD-103) is a disease-modifying agent with the potential to both prevent and reduce disease progression and improve symptoms, such as cognitive function.

The recently completed phase 2 study was a randomized, double-blind, placebo-controlled safety and efficacy study of ELND005 (AZD-103) in approximately 340 patients with mild to moderate Alzheimer's disease. The study evaluated both cognitive and functional end points, and each patient's participation lasted approximately 18 months. Elan and Transition announced top-line summary results of the phase 2 study, as well as plans for phase 3 for ELND005 (AZD-103). The AD201 study did not achieve significance on co-primary outcome measures (NTB and ADCS-ACL) in mild to moderate patients. The study identified a dose with acceptable safety and tolerability. The dose demonstrated a biological effect on amyloid-beta protein in the cerebrospinal fluid and effects on clinical end points in an exploratory analysis. Based on the preponderance of evidence and input from the experts in this field, the companies intend to advance ELND005 (AZD-103) into phase 3 studies.

On Sept. 27, 2011, Transition announced that phase 2 clinical study data of ELND005 (AZD-103) in mild to moderate Alzheimer's disease had been published in the peer-reviewed journal, Neurology. The Neurology article was entitled, "A phase 2 randomized trial of ELND005, scyllo-inositol, in mild-moderate Alzheimer's disease." In addition, the embargo on the ELND005 phase 2 data previously presented at the international conference on Alzheimer's disease in July, 2011, was lifted.

In the overall population (mild and moderate AD), the treatment effects on the primary end points NTB and ADCS-ADL were not significant. In the prespecified analyses of the mild AD group (MMSE 23-26), there were encouraging trends on cognition (NTB: p equals 0.007 in compliant patients who completed the study). The positive NTB trends were observed on both memory and function. In the mild AD group, both the ADCS-ADL and CDR-SB effects of ELND005, though not significant, showed a consistent and favourable separation over the 18 months, where the active group showed at least 30 per cent less decline than placebo. These trends were consistent throughout both the modified intent to treat and the compliant completer patient (or per protocol) populations. The ADAS-Cog treatment difference was not significant but directionally opposite to the other cognitive (NTB) and functional/global (ADCS-ADL and CDR-SB) end points in the study and was largely driven by a minimal decline in the placebo group over the 18 months. The moderate AD group (MMSE 16-22, inclusive) and ApoE4 carriers and non-carriers showed no consistent positive or negative trends.

The safety and tolerability profile of 250-milligram bid dose was deemed acceptable, and the independent safety committee concurred with this assessment. The two high-dose groups were electively discontinued due to imbalance of infections and deaths due to various causes. The overall incidence of adverse events in the 250-milligram bid and placebo groups was 87.5 per cent versus 91.6 per cent; and the incidence of withdrawals due to adverse events was 10.2 per cent versus 9.6 per cent, respectively. The most common adverse events in the 250-milligram bid group that were more than 5 per cent in incidence and double the placebo rate were: falls (12.5 per cent versus placebo 6 per cent), depression (11.4 per cent versus placebo 4.8 per cent) and confusional state (8 per cent versus placebo 3.6 per cent).

In the cerebrospinal fluid subset at 78 weeks, ELND005 treatment resulted in a significant reduction of CSF AA 42 (negative 27 per cent) and a numerical reduction of tau, which are potential evidence of target engagement. In the overall population, the increase in ventricular volume as measured by MRI was greater in the 250-milligram group compared with placebo. This difference though statistically significant was small (approximately three cubic centimetres). Whole brain volume treatment differences were not significant.

On Nov. 29, 2011, Elan Corp. PLC provided an update on the development of Alzheimer's disease drug candidate, ELND005. Elan reported that Lonza Group AG has been contracted to supply future active pharmaceutical ingredient. In addition, four oral presentations were presented at the fourth annual conference on clinical trials on Alzhimer's disease focusing on ELND005 treatment effects at earlier stages of AD and the use of validated composite cognitive end points. Elan also noted that ELND005's role in reducing neuropsychiatric symptoms in AD was highlighted at the CTAD meeting and that ELND005 may have applications in additional psychiatric indications, such as bipolar disorder. Elan's goal is to initiate a proof-of-concept phase 2 study in bipolar disorder following the completion of discussions with therapeutic experts and regulators. Elan indicated that it will continue to seek advice as it advances the ELND005 program in Alzheimer's disease.

TT-401/TT-402

On March 3, 2010, Transition announced that it had acquired the rights to a series of preclinical compounds from Lilly in the area of diabetes. Under this licensing and collaboration agreement with Lilly, Transition will receive exclusive worldwide rights to develop and potentially commercialize a class of compounds that, in preclinical diabetes models, showed potential to provide glycemic control and other beneficial effects, including weight loss.

The unique properties of these compounds have the potential to provide important therapeutic benefits to Type 2 diabetes patients and could represent the next generation of diabetes therapies to be advanced to clinical development. On Dec. 12, 2011, the company announced that the first patient was dosed in a phase 1 clinical study. TT-401 is a once-weekly administered peptide being studied for its potential to lower blood glucose levels in patients with Type 2 diabetes and accompanying obesity.

TT-301/TT-302

Transition's lead drug candidates in development are TT-301 and TT-302. These novel drug candidates are derived from a diligent drug design program engineered to produce compounds optimized to target inhibiting pro-inflammatory cytokines in the brain and the periphery. Each compound is designed to cross the blood brain barrier, and each has the flexibility to be administered by injection or orally. In preclinical studies, both TT-301/302 have shown a favourable safety profile and therapeutic window for efficacy.

Transition has completed a phase 1 clinical study of intravenously administered TT-301. The study was a double-blind, randomized, placebo-controlled study in which healthy volunteers received placebo or escalating doses of TT-301.

The company is also preparing to perform phase 1 studies evaluating the safety, tolerability, and pharmacokinetics of TT-301 or TT-302 when dosed orally. The company plans to advance oral formulations of lead drug candidate TT-301 or TT-302 for inflammatory diseases, such as rheumatoid arthritis. Both TT-301 and TT-302 have been shown to suppress inflammatory cytokine production, reduce inflammation and improve outcomes in preclinical models of collagen-induced arthritis. Transition may seek a partnership to access specialized expertise and resources to maximize the potential of these therapies.

Financial liquidity

The company's cash, cash equivalents and short-term investments were $22,565,837 at Dec. 31, 2011. On Nov. 22, 2011, the company issued 3,703,703 common shares at a price of $1.35 (U.S.) per share for gross proceeds of approximately $5-million (U.S.). The company's current cash projection indicates that the current cash resources should enable the company to execute its core business plan and meet its projected cash requirements beyond the next 12 months.

Financial review

For the three-month period ended Dec. 31, 2011, the company recorded a net loss of $3,790,421 (15-cent loss per common share) compared with net income of $5,195,827 (22-cent income per common share) for the three-month period ended Dec. 31, 2010.

Revenue is nil in the three-month period ended Dec. 31, 2011, compared with $9,400,485 in the three-month period ended Dec. 31, 2010.

At Dec. 31, 2011, in light of the amendments to the Elan agreement, the balance in deferred revenue is nil as all amounts received from Elan have been fully recognized as revenue. Under the terms of the modification to the Elan agreement, the company will be eligible to receive a $11-million (U.S.) payment upon the commencement of the next ELND005 (AZD-103) clinical trial. Management is not in a position to estimate when or if that payment will be received.

Research and development expenses increased $32,575 or 2 per cent from $1,930,781 for the three-month period ended Dec. 31, 2010, to $1,963,356 for the three-month period ended Dec. 31, 2011. The increases are primarily due to an increase in preclinical and clinical development costs associated with advancing the TT-401/402 compounds. The increase is largely offset by decreased clinical development costs related to ELND005 (AZD-103) and TT-301/302, decreased amortization due to the fact that the technology and patents acquired from Protana were fully amortized during the second quarter of fiscal 2011, and decreased salaries and related costs associated with head count reductions.

General and administrative expenses decreased by $25,602 or 2 per cent from $1,655,780 for the three-month period ended Dec. 31, 2010, to $1,630,178 for the three-month period ended Dec. 31, 2011. The decreases in general and administrative expenses for the three-month period ended Dec. 31, 2011, are due to decreases in consulting fees, insurance expense and facility lease costs. These decreases are partially offset by one-time increases in severance and option expenses, as well as increased investor relations and business development expenses.

                                                                                                                                                                                                            
                    CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
                                             (in Canadian dollars)

                                                 Six-month          Six-month         Three-month      Three-month
                                              period ended       period ended        period ended     period ended
                                             Dec. 31, 2011      Dec. 31, 2010       Dec. 31, 2011    Dec. 31, 2010
Revenues                                                                                                     
Licensing fees                                          --        $10,251,394                  --       $9,400,485
Cost of sales                                           --         (1,299,994)                 --         (449,085)
Gross profit                                            --          8,951,400                  --        8,951,400
Expenses                                                                                                             
Research and development                        $4,112,634          3,994,279          $1,963,356        1,930,781
Selling, general and administrative expenses     2,824,670          2,912,667           1,630,178        1,655,780
Loss on disposal of property and equipment         118,623                 --              38,709               --
Operating income (loss)                         (7,055,927)         2,044,454          (3,632,243)       5,364,839
Interest income                                     80,339             92,200              40,412           51,096
Interest expense                                      (851)              (441)               (241)            (247)
Foreign exchange gain (loss)                       315,261            (86,134)           (198,349)         (19,704)
Change in fair value of contingent 
consideration payable                                   --           (388,769)                 --         (200,157)
Net income (loss) and comprehensive 
income (loss) for the period                    (6,661,178)         1,661,310          (3,790,421)       5,195,827
Basic and diluted net income (loss) 
per common share                                     (0.28)              0.07               (0.15)            0.22

We seek Safe Harbor.