YM
BioSciences Inc.
 Letter to
Shareholders
 Fiscal
2010 Fourth Quarter and Year End, ended June 30th, 2010
 
 Dear
Shareholders,
 
 This has
been a transformative year for YM. In addition to the ongoing advancement of
nimotuzumab by YM and our four licensees our most notable development was the
merger of the Australia Stock Exchange-listed company, Cytopia (now YM
BioSciences Australia), into YM, completed in January. Through YM Australia the
portfolio was expanded by two significant clinical stage drug candidates, CYT387
and CYT997, as well as a library of more than 4,000 novel compounds. During the
fiscal year we raised an additional US$20 million and we also recently announced
the appointment of Dr. Nick Glover as President and COO of YM. By strengthening
both our balance sheet and leadership team at this time we have positioned YM to
capitalize on the important opportunities that our pipeline now
presents.
  Our most
advanced product from YM Australia, CYT387, a potent, orally-administered JAK1/2
inhibitor, has shown excellent progress in the last several months. Subsequent
to quarter end, Mayo Clinic concluded dose-escalation in the Phase I portion of
the Phase I/II clinical trial of CYT387 in patients with myelofibrosis, a
chronic, debilitating condition where the patient's bone marrow is replaced by
scar tissue. In total, 21 patients were treated in Phase I, with no voluntary
withdrawals reported.  The lack of patient withdrawal from the study
is testament to the tolerability and patient acceptability of this drug. Dr.
Ayalew Tefferi, Professor of Hematology at Mayo Graduate School and Chair of the
study reported that CYT387 continued to present very favorable biological
activity with disease-modifying effects comparable to other JAK2 inhibitors
evident in myelofibrosis patients, including significant spleen size reduction,
improvement in constitutional symptoms and favorable hematological changes.
Given this favorable biological activity and safety data, we have expanded our
current Phase I/II program from the original 60 patients to up to 120 and to
include up to six centers in the United States, Canada and Australia, subject to
regulatory approval. To date, 27 patients have been enrolled into the Phase II
tranche bringing the total number in the study to 48.
  Earlier
in the year, pivotal preclinical efficacy data for CYT387 in myeloproliferative
neoplasms were published in Blood, the Journal of the American Society of
Hematology (Blood, 24 June 2010, Vol. 115, No. 25, pp. 5232-5240). These
compelling results add to the growing body of data that is driving great
interest by the pharmaceutical industry for the JAK class of drugs and their
therapeutic promise in a number of conditions for which current pharmaceutical
options are limited or not available. Indeed, to our knowledge, CYT387 is the
only JAK1/2 product in clinical development that is available for partnering and
we expect attention to be focused on the American Society of Hematology (ASH)
Annual Meeting in Orlando, Florida in early December 2010, at which we plan to
present preliminary efficacy data in addition to the safety data. Also
significant, subsequent to quarter end CYT387 was granted Orphan Drug
Designation by the US FDA.
  Work on
other applications of the JAK molecule is ongoing in anticipation of it defining
a broader clinical development program. This family of drugs has shown its
prospect for activity in numerous indications including solid and liquid tumors
as well as the large indications such as inflammatory diseases. This broad range
of prospective applications are reportedly the reason that so many impressive
licensing transactions have recently concluded highlighted by the licenses to
Novartis and Eli Lilly in late 2009 and the acquisition of one of the companies
developing a JAK by Sanofi-Aventis.
  1
  Nimotuzumab,
our humanized monoclonal antibody, continues to make progress in the US and
worldwide. Early in this fiscal year our wholly-owned subsidiary, YM BioSciences
USA Inc. (YM-USA), received a license from the US Department of the Treasury’s
Office of Foreign Assets Control (OFAC) permitting the unlimited development of
nimotuzumab in the United States in solid tumors. This important milestone was
followed in January by clearance from the US FDA to enroll patients at US
clinical sites for two ongoing randomized, double-blind Phase II trials of
nimotuzumab. Although these trials are not part of the drug’s regulatory path to
first approvals in major markets they provide the opportunity for US patients to
receive nimotuzumab and a broader group of US oncologists to gain experience
with the drug. However, recruitment into both trials lags expectations and the
targeted recruitment period is under review as a consequence. The main focus of
our path to market remains the more advanced trials being conducted by our
licensees. Should the data from the two trials being conducted by our licensee,
Daiichi-Sankyo Co., Ltd. in Japan, in gastric cancer and first line NSCLC, and
the late-stage trials being completed by our licensee for Europe, Oncoscience
AG, in glioma and pancreatic cancer, be compelling we would expect those
indications to be advanced into registration trials.
 
 We will
continue to support the scale-up and process enhancement for manufacturing of
nimotuzumab which are required for increased late-stage clinical activity and in
anticipation of requirements for commercial volumes of product. Successful
implementation of improvements and capacity is an important element of our
business plan.
 
 The
second clinical-stage product in YM Australia, CYT997, a potent, vascular
disrupting agent, is currently in a Phase II trial for glioblastoma multiforme,
a brain cancer with very poor prognosis despite multimodal
treatment.  Data from this study are expected in Q2 2011. In a poster
presented at the 2009 AACR-NCI-EORTC Molecular Targets and Cancer Therapeutics
conference in Boston, Massachusetts, CYT997 was demonstrated to have potent
vascular disrupting effects and enhanced antitumor effects in combination with
cisplatin in preclinical models.  In August 2010, Phase I clinical
trial results of CYT997 were published in the premier cancer journal, the
British Journal of Cancer, demonstrating that CYT997 was well tolerated at doses
that were associated with changes in plasma and
imaging biomarkers consistent with vascular disruption in
tumors.
 
 On the
corporate side, we welcomed Dr. Nick Glover to YM as President and Chief
Operating Officer in June. Nick was formerly the President and Chief Executive
Officer at Viventia Biotech Inc., a biopharmaceutical company involved in the
discovery and development of monoclonal antibody-based technologies for the
treatment of cancer. He has broad experience running a biotech development
company and has conducted international clinical trials in cancer indications
similar to those for nimotuzumab. Furthermore, his background in small molecule
drug design and his doctoral degree in chemistry are an excellent match for our
JAK inhibitor and VDA programs. Nick is an important addition to YM and has
already had a positive impact on our Company through his leadership. Ms. Wendy
Chapman and Dr. Ernest Wong have been appointed as Vice President, Clinical
Operations and Vice President, Business Development respectively.
  As we
begin fiscal 2011, I would like to take this opportunity to thank the Board of
Directors, the management team and staff at YM for their diligent work
throughout the year and to note the contribution of Mr. Robert Watson who has
resigned as a  director of the Company. I would particularly like to
thank our long-time as well as new shareholders for their ongoing support of YM
BioSciences.
  Sincerely,
 
 
 
 David
G.P. Allan
 Chairman
and CEO
 YM
BioSciences Inc.
 Date:
September 24, 2010




2




MANAGEMENT’S
DISCUSSION AND ANALYSIS


For
the year and three months ended June 30, 2010





The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) should be read in conjunction with the
accompanying audited consolidated financial statements for the years ended June
30, 2010, 2009 and 2008 and notes thereto.





The
consolidated financial statements have been prepared by management in accordance
with accounting principles generally accepted in Canada (Canadian GAAP). These
accounting principles differ in certain respects from United States GAAP. The
differences, as they affect our consolidated financial statements, are set out
in Note 18 to the audited consolidated financial statements for the fiscal year
ended June 30, 2010. All amounts presented are in Canadian dollars unless
otherwise stated. In this report, “the Company”, “YM”, “we”, “us”, and “our”
refer to YM BioSciences Inc. and its consolidated subsidiaries. This document is
current in all material respects as of September 23, 2010.




FORWARD-LOOKING
STATEMENTS





Statements
contained in this MD&A that are not based on historical fact, including
without limitation statements containing the words "believes," "may," “likely,”
"plans," "will," "estimate," "continue," "anticipates," "intends," "expects" and
similar expressions, constitute "forward-looking statements" within the meaning
of the United States Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, events or developments to be
materially different from any future results, events or developments expressed
or implied by such forward-looking statements. Such factors include, without
limitation, changing market conditions, our ability to obtain patent protection
and protect our intellectual property rights, commercialization limitations
imposed by intellectual property rights owned or controlled by third parties,
intellectual property liability rights and liability claims asserted against us,
the successful and timely completion of clinical studies, the impact of
competitive products and pricing, new product development, uncertainties related
to the regulatory approval process, product development delays, our ability to
attract and retain business partners and key personnel, future levels of
government funding, our ability to obtain the capital required for product
development, operations and marketing and other risks detailed elsewhere
herein.  These forward-looking statements are based on our beliefs and
expectations on the date the statements are made, and subject to the
requirements of applicable securities laws, we undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
management’s discussion and analysis might not occur and you should not place
undue reliance on forward-looking statements.  Forward-looking statements
are subject to known and unknown risks, uncertainties and other factors that may
cause our actual results, level of activity, performance or achievements to be
materially different from those expressed or implied by such forward-looking
statements, including:


·
            our
      ability to obtain, on satisfactory terms or at all, the capital required
      for product development, operations and
  marketing;


·
            general
      economic, business and market
conditions;


·
            our
      ability to successfully and to complete clinical studies in a timely
      manner;


·
            product
      development delays and other uncertainties related to new product
      development;


·
            our
      ability to attract and retain business partners and key
      personnel;


·
            the
      risk of our inability to profitably commercialize our
      products;


·
            the
      extent of any future losses;


·
            the
      risk of our inability to establish or manage manufacturing, development or
      marketing collaborations;


·
            the
      risk of delay of, or failure to obtain, necessary regulatory approvals
      and, ultimately, product launches;


·
            dependence
      on third parties for successful commercialization of our
      products;


·
            inability
      to obtain quantities of development product in sufficient quantity or at
      standards acceptable to health regulatory authorities to complete clinical
      trials or to meet commercial
demand;


·
            the
      risk of the termination of or conversion to non-exclusive licenses or our
      inability to enforce our rights under, our
  licenses;


·
            our
      ability to obtain patent protection and protect our intellectual property
      rights;


·
            commercialization
      limitations imposed by intellectual property rights owned or controlled by
      third parties;




3




·
            uncertainty
      related to intellectual property liability rights and liability claims
      asserted against us;


·
            the
      uncertainty of recovery of advances to
  subsidiaries;


·
            the
      impact of competitive products and
pricing;


·
            future
      levels of government funding; and


·
            other
      factors discussed under “Risk
Factors”.




OVERVIEW
OF BUSINESS





YM
BioSciences Inc. (the “Company”) is engaged in the acquisition or in-licensing
and subsequent clinical development toward commercialization of drug products
and technologies from basic research of others. The Company evaluates drug
projects, technologies, and products and the prospective markets for them and
acquires products or obtains, as appropriate, a license for their further
development and marketing.





The
Company expends money on the evaluation, in-licensing and further development of
certain drug products and on providing out-licensing, marketing, clinical
development and regulatory affairs skills, intellectual property management and
funding to facilitate the introduction of the licensed products into the
principal pharmaceutical markets. This involves acquiring products researched
and developed by others and taking them through the clinical and regulatory
processes in Canada and elsewhere in order to achieve regulatory approval for
their sale in the markets to which the Company has rights.





The
Company will incur expenditures either directly or pursuant to agreements with
certain licensees or partners. These expenditures will include: costs associated
with the conduct of clinical trials; the collection and collation of data; the
organizing of data and market information; the development and production of
non-confidential and confidential dossiers on each licensed product and the
marketing of the information contained in the dossiers to prospective
commercialization partners. The Company plans to generate its revenues from
out-licensing the licensed products or from the direct commercialization of the
products.





The
Company does not have its own manufacturing facilities but it may participate in
ownership of manufacturing facilities and the marketing of the products if
appropriate opportunities are available.





SELECTED
ANNUAL FINANCIAL INFORMATION




Year ended June 30,2010
                                    
                                    
                                    2009
                                    
                                    
                                    2008Out-licensing
      revenue
                                    
                                    $
                                    2,610,560
                                    
                                    
                                    $
                                    4,543,280
                                    
                                    
                                    $
                                    4,859,085Interest
      income
                                    
                                    $
                                    84,391
                                    
                                    
                                    $
                                    1,070,264
                                    
                                    
                                    $
                                    2,584,080Expenses:Licensing
      and product development
                                    
                                    $
                                    16,974,790
                                    
                                    
                                    $
                                    14,172,845
                                    
                                    
                                    $
                                    15,631,550General
      and administrative
                                    
                                    $
                                    6,898,209
                                    
                                    
                                    $
                                    4,839,870
                                    
                                    
                                    $
                                    6,831,955Loss
      for the year
                                    
                                    $
                                    (20,993,364
                                    )
                                    
                                    $
                                    (13,069,466
                                    )
                                    
                                    $
                                    (14,885,744
                                    )Deficit,
      beginning of year
                                    
                                    $
                                    (146,251,951
                                    )
                                    
                                    $
                                    (133,182,485
                                    )
                                    
                                    $
                                    (118,296,741
                                    )Deficit,
      end of year
                                    
                                    $
                                    (167,245,315
                                    )
                                    
                                    $
                                    (146,251,951
                                    )
                                    
                                    $
                                    (133,182,485
                                    )Basic
      and diluted loss per common share
                                    
                                    $
                                    (0.33
                                    )
                                    
                                    $
                                    (0.23
                                    )
                                    
                                    $
                                    (0.27
                                    )Total
      Assets
                                    
                                    $
                                    57,774,767
                                    
                                    
                                    $
                                    46,069,936
                                    
                                    
                                    $
                                    63,073,239




4





RESULTS
OF OPERATIONS





Year
ended June 30, 2010 compared to year ended June 30, 2009





Out-licensing
Revenue


Revenue
from out-licensing decreased by $1.933 million for the year ended June 30, 2010
compared to the year ended June 30, 2009.  The decrease was mainly
attributable to the full recognition of all contracts related to the development
of Tesmilifene, because all of YM’s obligations under the licensing agreement
have been met.





Interest
Income


Interest
income decreased by $986 thousand in the year ended June 30, 2010 compared to
the year ended June 30, 2009. Interest income decreased as the Company drew on
its cash and short-term investment balances to fund its operations, and due to
the dramatic decline in interest rates.





Licensing
and Product Development Expenses


Licensing
and product development expenses for the year ended June 30, 2010 increased by
$2.802 million to $16.975 million compared to the year ended June 30,
2009.  In addition to the changes described below, core expenses for
licensing and product development increased by $3.525 million for the year ended
June 30, 2010. This was mainly caused by the write-off of the AeroLEF intangible
asset which resulted in an increase of $1.944 million, and the amortization of
the Cytopia intangible asset in the amount of $1.878 million.





Nimotuzumab


Costs
associated with development activities for nimotuzumab decreased by $445
thousand to $5.603 million for the year ended June 30, 2010, compared to the
year ended June 30, 2009.  Fiscal 2010 costs are mainly attributable to two
clinical trials, one for brain metastases from non-small cell lung cancer
(NSCLC) and the other for NSCLC patients ineligible for radical
chemotherapy.  These expenses were offset by the decrease in expenditures
for the Phase II pediatric pontine glioma and colorectal trials.





AeroLEF


Costs
associated with development activities for AeroLEF decreased by $1.178 million
to $563 thousand for the year ended June 30, 2010 as compared to the year ended
June 30, 2009.  The decrease was primarily due to the shift from the
creation of a product development plan, regulatory matters, and preparation for
a Phase III clinical trial in fiscal 2009, to out-licensing and partnering
initiatives, as well as IP management in fiscal 2010.  In June 2010, the
Company decided to no longer pursue the AeroLEF program, and to terminate the
development program associated with the product.  Accordingly, the net
asset remaining on the balance sheet has been written down to zero in Q4 of
fiscal 2010.





Tesmilifene


Costs
related to development activities for tesmilifene, have decreased by $413
thousand to $19 thousand for the year ended June 30, 2010 compared to the year
ended June 30, 2009.  The costs in fiscal 2009 were associated with
finalizing the taxotere study.  Fiscal 2010 costs were primarily associated
with IP management.





CYT387
and CYT997


Costs
associated with development activities for the CYT products were $1.321 million
for the year ended June 30, 2010.  These costs are primarily attributable
to clinical trial and IP costs since the date of acquisition.





General
and Administrative Expenses


General
and administrative expenses have increased by $2.058 million to $6.898 million
for the year ended June 30, 2010, compared to the year ended June 30,
2009.  This was due mainly to the cost of acquiring Cytopia and the
additional administrative expenses related to maintaining an Australian
office.





5





Year
ended June 30, 2009 compared to year ended June 30, 2008





Out-licensing
Revenue


Revenue
from out-licensing decreased by $316 thousand for the year ended June 30, 2009
compared to the year ended June 30, 2008.  The decrease  was mainly
attributable to the 12 month extension of the revenue recognition period for the
initial payment from Daiichi Pharmaceutical Co., Ltd (“Daiichi”), as a result of
a revision to the estimated period of the collaboration.  The majority of
YM’s out-licensing revenue comes from five out-licensing agreements with third
party licensees. The licensing agreements include a non-refundable up-front
payment from the licensees. The initial license fees were recorded as deferred
revenue and are being recognized over the estimated period of collaboration
until the milestone associated with commercial approval of the first indication
in the licensee’s territory has been satisfied and the relevant payment
received. The largest of these contracts was entered into in July 2006 with
Daiichi, a subsidiary of Daiichi Sankyo Co., Ltd. The agreement licensed the
commercial rights for nimotuzumab for the Japanese market and included a
non-refundable up-front payment from Daiichi to the Company of $16.227 million.
This initial license fee was recorded as deferred revenue and is being
recognized over the revised estimated period of collaboration of five years. The
Company also began receiving royalty payments from a limited sales program in
Europe in the fourth quarter of fiscal 2008.





Interest
Income


Interest
income decreased by $1.514 million in the year ended June 30, 2009 compared to
the year ended June 30, 2008. Interest income decreased as the Company drew on
its cash and short-term investment balances to fund its operations, and due to
the dramatic decline in interest rates.





Licensing
and Product Development Expenses


Licensing
and product development expenses for the year ended June 30, 2009 decreased by
$1.459 million compared to the year ended June 30, 2008.  In addition to
the changes described below, core expenses for licensing and product development
decreased by $1.205 million for the year ended June 30, 2009. This was mainly
caused by decreases in salaries and travel expenses as a result of a reduction
of staff in the U.S. office.





Nimotuzumab


Costs
associated with development activities for nimotuzumab increased by $889
thousand to $6.048 million for the year ended June 30, 2009, compared to the
year ended June 30, 2008. The increase was due mainly to two new clinical
trials, one for brain metastases from non-small cell lung cancer (NSCLC) and the
other for NSCLC patients ineligible for radical chemotherapy, which were
initiated during fiscal 2009.  These expenses were partially offset by the
decrease in expenditures for the Phase II pediatric pontine glioma trial and
monkey toxology studies.





AeroLEF


Costs
associated with development activities for AeroLEF decreased by $260 thousand to
$1.741 million for the year ended June 30, 2009 as compared to the year ended
June 30, 2008.  The decrease was primarily due to the shift from clinical
activity in fiscal 2008, to new marketing, and out-licensing initiatives, as
well as clarifying our regulatory position in Europe, in fiscal
2009.





Tesmilifene


Costs
related to development activities for tesmilifene decreased by $883 thousand to
$432 thousand for the year ended June 30, 2009 compared to the year ended June
30, 2008.  The decrease in spending for the current fiscal year resulted
mainly from the curtailment of development subsequent to the termination of the
DEC study in January 2007 and from lower intellectual property costs. 
 Fiscal 2008 costs were associated with closing out the DEC study and
completing the PK studies.  Fiscal 2009 costs were related to the closing
of the PK studies.





General
and Administrative Expenses


General
and administrative expenses decreased by $1.992 million to $4.840 million for
the year ended June 30, 2009, compared to the year ended June 30, 2008. 
This was due mainly to lower stock based-compensation expense of $761 thousand
in fiscal 2009 compared to $2.064 million in fiscal 2008, and lower audit fees
by $140 thousand since we did not require a SOX audit this fiscal year
end.  In addition, expenditures for consulting, legal fees, salaries, and
investor relations were also lower for the year ended June 30,
2009.





Fourth
Quarter – Three Months Ended June 30, 2010 Compared to Three Months Ended June
30, 2009





Out-licensing
Revenue


Out-licensing
revenue for the quarter ended June 30, 2010 of $495 thousand decreased by $225
thousand compared to $720 thousand in the same quarter of the prior year. 
The decrease was mainly attributable to the full recognition of all contracts
related to the development of tesmilifene in Q3, because all of YM’s obligations
under the licensing agreement have been met.





6


Interest
Income


Interest
income decreased by $28 thousand to $33 thousand for the three months ended June
30, 2010 compared to $61 thousand in the same period in the prior year. Interest
income decreased as the Company drew on its cash and short-term investment
balances to fund its operations, and due to lower interest rates in fiscal
2010.





Licensing
and Product Development Expenses


Licensing
and product development expenses increased by $4.992 million to $7.640 million
for the fourth quarter ended June 30, 2010 compared to the same period last
year.  In addition to the changes described below, core expenses for
licensing and product development increased by $3.777 million. This was mainly
caused by the write-off of the AeroLEF intangible and the amortization of the
Cytopia intangible asset.





Nimotuzumab


Costs
associated with development activities for nimotuzumab were $1.691million for
the three months ended June 30, 2010, compared to $1.314 million for the three
months ended June 30, 2009.  Q4 2010 costs were mainly attributable to the
NSCLC and Brain Met trials.  These expenses were partially offset by the
decrease in expenditures for the Phase II pediatric pontine glioma and
colorectal trials.





AeroLEF


AeroLEF
expenses decreased by $91 thousand to $94 thousand for the three months ended
June 30, 2010 compared to the same period in the prior year.  The decrease
was primarily due to the shift from the creation of a product development plan,
regulatory matters, and preparation for a Phase III clinical trial in fiscal
2009, to out-licensing initiatives, and IP management in fiscal 2010.  In
June 2010, the Company decided to no longer pursue the AeroLEF program, and to
terminate the development program associated with the product. 
Accordingly, the net asset remaining on the balance sheet has been written down
to zero in Q4 of fiscal 2010.





Tesmilifene


Costs
related to tesmilifene were less that $20 thousand the fourth quarters of both
fiscal 2009 and 2010, and were primarily related to patents.





CYT387
and CYT997


Costs
associated with development activities for the CYT products were $944 thousand
for the three months ended June 30, 2010.  These costs were primarily
attributable to clinical trial and IP costs since the date of
acquisition.




General
and Administrative Expenses


General
and administrative expenses for the fourth quarter of fiscal 2010 increased by
$482 thousand to $1.791 million, compared to $1.309 million in the same quarter
of the prior year.  This increase was attributable to higher stock option
expense ($289 thousand in fiscal 2010 compared to $186 thousand in fiscal 2009),
as well as increased travel and salaries with the acquisition of the Australian
office.




7


SUMMARY
OF QUARTERLY RESULTS





Out-Licensing
                  Revenue
                
                
                Net Loss
                
                
                Basic and
                  diluted loss
                  per common
                  ShareJune
      30, 2010
                
                $
                494,854
                
                
                $
                (8,624,160
                )
                
                $
                (0.11
                )March
      31, 2010
                
                $
                690,585
                
                
                $
                (5,490,879
                )
                
                $
                (0.09
                )December
      31, 2009
                
                $
                697,583
                
                
                $
                (3,375,537
                )
                
                $
                (0.06
                )September
      30, 2009
                
                $
                727,538
                
                
                $
                (3,502,788
                )
                
                $
                (0.06
                )June
      30, 2009
                
                $
                719,984
                
                
                $
                (3,264,030
                )
                
                $
                (0.06
                )March
      31, 2009
                
                $
                776,127
                
                
                $
                (3,474,839
                )
                
                $
                (0.06
                )December
      31, 2008
                
                $
                1,832,224
                
                
                $
                (3,174,385
                )
                
                $
                (0.06
                )September
      30, 2008
                
                $
                1,214,945
                
                
                $
                (3,156,212
                )
                
                $
                (0.06
                )




Licensing
revenue results primarily from recognition, over time, of non-refundable
up-front payments from out-licensing agreements plus milestone payments. 
The decrease in out-licensing revenue is mainly attributable to the fact that
several contracts have been fully recognized and for others, the period of
recognition has been extended, resulting in lower revenue recognized in each
period.





It is
inherent in the development of drug products that planned expenditures vary
depending on results achieved.  Our current plan calls for an increase in
expenditures for CYT387 and CYT997.





LIQUIDITY
AND CAPITAL RESOURCES





Since
inception, the Company has financed the evaluation, licensing, acquisition and
further development of its products principally through equity issuances. Since
the Company does not have net earnings from its operations, the Company’s
long-term liquidity depends on its ability to out-license its products or to
access the capital markets, both of which will depend substantially on results
of product development programs.





The
Company’s cash requirements will be affected by the extent of its clinical
trials, the results of its regulatory submissions, the achievement of
commercialization agreements, the costs associated with obtaining and protecting
the patents for products in development, and its general operating
expenses.





The
consolidated financial statements have been prepared on a going-concern basis
which assumes that the Company will continue in operation for the foreseeable
future and, accordingly, will be able to realize on its assets and discharge its
liabilities in the normal course of operations.  The Company’s ability to
continue as a going concern has always been dependent on obtaining capital and,
ultimately, the achievement of profitable operations.  There can be no
assurance that the Company will be successful in increasing revenue or raising
additional capital to generate sufficient cash to continue as a going
concern.  The consolidated financial statements do not reflect the
adjustments that might be necessary to the carrying amount of reported assets,
liabilities and revenue and expenses and the balance sheet classifications used
if the Company were unable to continue operations in accordance with this
assumption.





On June
2, 2010, the Company completed a prospectus offering of 2,500,000 common shares
at U.S. $1.27 per common share for gross proceeds of U.S. $3,175,000 (Cdn.
$3,367,723), resulting in net cash proceeds of Cdn. $3,326,838.





On April
23, 2010, the Company entered into a Sales Agreement, with Cantor Fitzgerald
& Co., under which it may, at its discretion, from time to time, sell up to
a maximum of 7,750,000 of its common shares through an "at-the-market" equity
offering program known as a Controlled Equity Offering. Cantor Fitzgerald &
Co. (CF&Co) will act as sales agent for any sales made under the Controlled
Equity Offering. The common shares will be sold at market prices prevailing at
the time of a sale (if any) of the common shares or at prices negotiated with
CF&Co, and, as a result, prices may vary as between purchasers and during
the period of the offering. The Company is not required to sell any of the
reserved shares at any time during the term of the Controlled Equity Offering,
which extends until October 16, 2011, and the Sales Agreement does not prohibit
the Company from conducting additional financings.  There are no stand-by
fees for having established the arrangement.  CF&Co will receive a cash
fee equal up to but not exceeding 5.0% of the first aggregate gross proceeds of
US$5 million and thereafter 3% of the gross proceeds realized from the sale of
common shares for services rendered in connection with the offering.  The
total expenses of this offering, excluding CF&Co’s fee, of $129 thousand
were included in general and administration expenses in the fourth quarter of
fiscal 2010.  As at June 30, 2010, no common chares have been sold under
this agreement.





8


On March
10, 2010, the Company completed a prospectus offering of 14,583,000 units for
gross proceeds of US$17,499,600 (Cdn $17,895,081) and net proceeds after cash
issuance costs of US$15,712,614 (Cdn $16,067,710). Each unit consisted of one
common share and one-half common share purchase warrant. In connection with the
financing, the Company issued 874,980 broker warrants having an aggregate fair
value of US$171,496 (Cdn $175,371) estimated using the Black-Scholes option
pricing model. Each whole common share purchase warrant and each broker warrant
entitles the warrant holder to acquire one common share at an exercise price of
US$1.60 per share at any time from September 10, 2010 to its expiry on March 10,
2015.




The
allocation of the US$1.20 unit issue price to the common shares and the one-half
common share purchase warrants was based on the relative fair values of the
common shares and the common share purchase warrants. The fair value of the
warrants was determined using the Black-Scholes option pricing model. The common
shares were allocated a price of US$1.102 per share and the one-half common
share purchase warrants were allocated a price of $0.098 per half-warrant. The
costs of the issue were allocated on a pro rata basis to the common shares and
one-half common share purchase warrants.





As a
condition of this offering, the Company agreed to restrict the use of $12.337
million of the net proceeds raised to fund drug development activities not
related to Cuban originated products or for general corporate purposes not
related to the Cuban licensed products and technologies, except for those
activities expressly allowed under the licenses granted by the Office of Foreign
Assets Control (OFAC). As at June 30, 2010, the remaining restricted proceeds
were approximately $6.829 million and unrestricted cash and short-term deposits
totaled approximately $38.816 million.





As at
June 30, 2010 the Company had cash and short-term deposits totalling $45.645
million and accounts payables and accrued liabilities totalling $2.785 million
compared to $42.051 million and $918 thousand respectively, at June 30,
2009.  The Company’s short-term deposits are bankers’ acceptances issued by
Canadian Schedule A banks, maturing in less than one year. These financial
instruments have been classified as held-for-trading and all gains and losses
are included in the loss for the period in which they arise.





Management
believes that the cash and short-term deposits at June 30, 2010 are sufficient
to support the Company’s activities for at least the next twelve
months.




COMMITMENTS
AND OFF-BALANCE SHEET ARRANGEMENTS





The
Company fully consolidates a joint venture (CIMYM BioSciences Inc.) in which it
is considered the primary beneficiary; and as such, the Company has recognized
100% of the cost of operations and cash flows of this entity.





In
addition, the Company is party to certain licensing agreements that require the
Company to pay a proportion of any fees that the Company may receive from
sublicensees in the future.  As of June 30, 2010 no amounts were owing and
the amount of future fees thereon, if any, is not determinable.





In
November 2007, the Company entered into a contract for services of a clinical
research organization (“CRO”), relating to a pediatric pontine glioma clinical
trial for nimotuzumab in the U.S. at a cost of approximately $1.557 million
(U.S. $1.463 million) of which approximately $1.337 million has been paid as at
June 30, 2010 and the remaining $220 thousand has not yet been incurred. The
Company may cancel the contract with 30 days’ notice and is obligated for
services rendered by the CRO through to the effective date of termination and
for any closeout services furnished by the CRO after the termination of the
agreement. As at June 30, 2010 the Company continues to open clinical sites and
is in the process of recruiting patients.





9


In
February 2009, the Company entered into 2 contracts for CRO services relating to
clinical trials for nimotuzumab.  The first pertains to a randomized, Phase
II, double-blind trial in brain metastases from NSCLC at a cost of $1.161
million, of which approximately $839 thousand has been incurred as at June 30,
2010 and the remaining $322 thousand is yet to be incurred.  The second
contract pertains to a randomized, Phase II, double-blind trial in NSCLC
patients ineligible for radical chemotherapy and costs approximately $1.500
million, of which approximately $1.074 million has been incurred as at June 30,
2010 and the remaining $426 thousand is yet to be incurred.  The Company
may cancel either contract with a 30-day notice and is obligated for services
rendered by the CRO through the effective date of termination and for any
close-out services furnished by the CRO after the termination of the
agreement.





In
addition to these above contracts, the Company has entered into many additional
contracts for pre-clinical and other studies, none of which individually exceeds
$1 million, totaling approximately $5.239 million of which $2.502 million has
been incurred as at June 30, 2010 and the remaining $2.737 million has not yet
been incurred. Any early termination penalties cannot exceed the amount of the
contract commitment.





The
Company plans to expend funds to continue the development of nimotuzumab and the
two Cytopia products CYT387 and CYT997.  There are also ongoing activities
directed at out-licensing commercial rights for nimotuzumab and both CYT387 and
997, as well as in evaluating new products to in-license.




TREND
INFORMATION





Historical
patterns of expenditures cannot be taken as an indication of future
expenditures. The amount and timing of expenditures and therefore liquidity and
capital resources vary substantially from period to period depending on the
pre-clinical and clinical studies being undertaken at any one time and the
availability of funding from investors and prospective commercial
partners.





Other
than as discussed above, the Company is not aware of any material trends related
to the Company’s business of product development, patents and
licensing.




RISKS
AND UNCERTAINTIES





Prospective
investors should give careful consideration to the risk factors contained under
“Risk Factors” in the Form 20-F filed as the Annual Information Form dated
September 23, 2010 in respect of the fiscal year ended June 30, 2010, as well as
those discussed in Schedule A of this MD&A. These risk factors include: (i)
We are susceptible to general economic conditions; (ii) dealing with products
that are in the early stages of development and, as a result, are unable to
predict whether we will be able to profitably commercialize our products; (iii)
having few revenues and a history of losses and, therefore, are unable to
predict the extent of any future losses or when or if the Company will become
profitable; (iv) depending upon being able to identify promising molecules for
licensing or acquisition and successfully completing the acquisitions or
licensing on economic terms. There is no assurance that the Company can continue
to identify and license molecules for development; (v) depending upon others for
the manufacture, development and sale of our products. If the Company is unable
to establish or manage collaborations in the future, there could be a delay in
the manufacture, development and sale of  products; (vi) expecting to enter
into out-licensing agreements with others with respect to the manufacturing and
marketing of the Company’s drug products. The Company may retain co-development
and marketing rights if management determines it appropriate to do so; (vii)
lack of experience in commercial manufacturing of products and may encounter
problems or delays in making arrangements for products to be commercially
manufactured, which could result in delayed development, regulatory approval and
marketing; (viii) dependence on licenses from third parties and the maintenance
of licenses is necessary for our success; (ix) although all of the funds
advanced to our joint venture subsidiaries have been expensed, we are only
entitled to recover those expenditures when the joint venture’s net income
exceeds the amount of cumulative advances; (x) reliance on licensors and others
for research on new products; (xi) conducting our development internationally
and are subject to laws and regulations of several countries which may affect
the Company’s ability to access regulatory agencies and may affect the
enforceability and value of the Company’s licenses; (xii) the Company conducts
in-licensing internationally and currently owns or licenses products and
technologies from sources in Canada, Australia and Cuba. The Company has
previously licensed, and intends to and may license, products from sources in
other jurisdictions; (xiii) the acquisition of YM BioSciences Australia Pty Ltd.
(formerly Cytopia Limited) will result in increased expenditures; (xiv) the
Company expects to be a “passive foreign investment company” for the current
taxable year, which would likely result in materially adverse US federal income
tax consequences for US investors; (xv) the Company may not be able to obtain
necessary funding from sales, license fees, milestones or royalties and, as a
result, may need to try to obtain capital through the public market or private
financing which may not be available on acceptable terms, or at all; (xvi)
operating results and stock price may fluctuate significantly; (xvii) there is
no assurance that an active trading market in the Company’s common shares will
be sustained; (xviii) our share price is volatile; (xiv) we have not paid
dividends; (xx) Our outstanding common shares could be subject to dilution;
(xxi) it may be difficult for non-Canadian investors to obtain and enforce
judgments against us because of our Canadian incorporation and presence; (xxii)
if there are substantial sales of our common shares, the market price of our
common shares could decline; (xxiii) we have adopted a shareholder rights plan
which could make it more difficult for a third party to acquire us, thus
potentially depriving our shareholders of a control premium; (xxiv) if our
clinical testing of drug products do not produce successful results, we will not
be able to commercialize our products; (xxv) competitors develop and market
products that are more effective than the Company’s existing product candidates
or any products that the Company may develop, or obtain marketing approval
before the Company does, the Company’s products may be rendered obsolete or
uncompetitive; (xxvi) subject to extensive government regulation that increases
the cost and uncertainty associated with gaining final regulatory approval of
product candidates; (xxvii) changes in government regulations although beyond
the Company’s control could have an adverse effect on business; (xxviii) success
depends upon the Company’s ability to protect intellectual property and
proprietary technology; (xxix) potential involvement in intellectual property
litigation could negatively affect business; (xxx) product liability claims are
an inherent risk of the Company’s business, and if the clinical trial and
product liability insurance prove inadequate, product liability claims may harm
business.




10





OUTLOOK





The
business of YM is the identification, licensing, acquisition, and further
development of products it believes to have the prospect for utility in the
treatment of patients with cancer. The Company is continually evaluating the
economic and prospective viability of its various products. YM owns YM
BioSciences Australia Ltd., which owns two products in clinical development,
CYT387 and CYT997.YM’s majority-owned joint venture, CIMYM BioSciences Inc., an
Ontario corporation, is the licensee for nimotuzumab for Western and Eastern
Europe, North America, and Japan as well as Australia, New Zealand, Israel and
certain Asian and African countries.





In June
2010 YM issued 2.5 million common shares for proceeds of US$3.2 million and in
March 2010, YM issued 14,583,000 units comprised of one common share and one
half common share purchase warrants for proceeds of US$17.5
million.





Our JAK
1/2 targeting molecule, CYT387, is currently in a Phase I/II trial at Mayo
Clinic.  Safety data and early signals of efficacy obtained at the end of
the Phase I dose escalation stage of this trial were announced on August 3, 2010
and these data from the Phase I stage along with preliminary Phase II data are
scheduled for release at the Annual Meeting of the American Society of
Hematology (ASH) in December 2010.





The first
US patient for YM’s randomized, Phase II, double-blind trial for brain
metastasis from non-small cell lung cancer (NSCLC) was recruited in May 2010,
following previous initiation in Canada. Recruitment commenced in March 2009 in
our other randomized, double-blind Phase II trial to treat palliative stage
NSCLC. Recruitment into both Phase II trials lags expectations and the targeted
recruitment period of end Q4 2010 is under review as a consequence. A trial at
multiple sites in the US, Canada, and Israel for a Phase II, second-line,
single-arm trial in children with progressive diffuse intrinsic pontine glioma
(DIPG) has concluded recruitment and is expected to report prior to the end of
calendar 2010.





Daiichi
Sankyo Co., Ltd., CIMYM’s licensee for nimotuzumab in Japan, previously
initiated a randomized trial with nimotuzumab in second line gastric cancer,
together with Kuhnil Pharma Co. Ltd., CIMYM’s licensee in Korea, which they
report completed recruitment in calendar 2009, and Daiichi also launched a Phase
II trial in first-line NSCLC for which YM has been advised that recruitment has
been completed. Reports on both trials are expected during the period Q4 2010 –
Q1 2011, as data matures.





Oncoscience
AG (OSAG), CIMYM’s licensee for Europe, reported that a Pediatric Investigative
Program (PIP) submitted to the Pediatric Committee (PDCO) of the EMEA based on
data from a single-arm Phase II monotherapy trial in DIPG did not result in the
definition of a plan for registration at this time.. Preliminary data from a
single-arm, Phase III trial of nimotuzumab as first-line therapy in combination
with radiotherapy for DIPG was released at ASCO in 2008 and was expanded on at
the annual international pediatric oncology forum, SIOP, held in São Paulo,
Brazil in October 2009. Safety data from a Phase III trial in adult glioma
patients was presented at ASCO 2010 and OSAG continues to recruit patients
into a Phase IIb/III trial in pancreatic cancer patients. We are advised by OSAG
that data from the adult glioma trial are expected in 2010.





11


Innogene
Kalbiotech PTE Ltd. (IGK), a CIMYM licensee, has reported marketing approval for
nimotuzumab in the Philippines and Indonesia. In January 2009, the National
Cancer Centre of Singapore (NCCS) announced that it was launching a worldwide
Phase III, 710-patient trial of nimotuzumab in the post-operative or adjuvant
setting in head and neck cancer in cooperation with IGK. This trial is in
addition to the ongoing NCCS Phase II trial in locally advanced head and neck
cancer and the initiation of a Phase II trial in cervical cancer also being
conducted by IGK.





At June
30, 2010, nimotuzumab is reportedly being tested in some 35 clinical trials
worldwide having completed 25 trials to date for a total of 60 clinical
studies.  Eleven of these ongoing trials are either at Phase II or Phase
III trials being conducted by YM or our four licensees. CIMAB S.A. (CIMAB)
advises that over 10,000 patients have been treated with nimotuzumab through
clinical trials, commercial sales or compassionate use or expanded access
programs.





In August
2009, YM received a license from the US Department of the Treasury’s Office of
Foreign Assets Control (OFAC) removing limitations on initiating US clinical
trials with nimotuzumab for patients in the United States.  Under this
expanded license clinical development may also include extending other trials
being conducted by the Company’s worldwide licensees into the US, potentially
including the multinational 710-patient Phase III trial of nimotuzumab in the
post-operative, or adjuvant setting, in head and neck cancer.





YM
previously announced its application to OFAC for a license to permit activities
related to partnering, licensing or otherwise commercializing nimotuzumab in
order to more rapidly advance its pivotal stage development. Licenses containing
permission for commercial activity have been previously granted by OFAC to two
companies seeking to commercialize Cuban-origin therapeutics in the US, although
only YM has proceeded into clinical trials subsequent to issuance of an OFAC
license. Agreement on terms for the US commercialization continues to be under
review by YM’s licensor.





For
Fiscal 2011, YM BioSciences anticipates further data concerning nimotuzumab’s
clinical utility becoming available from completed trials, supporting its
continued differentiation from the other marketed drugs in its class. Scale-up
and related nimotuzumab manufacturing process improvements are ongoing to
support prospective registration trials and to enhance supply capabilities for
commercial release.





A
presentation of 48-month survival data for patients treated for locally advanced
head and neck cancer in a Phase IIb trial known as “BEST” was made at the ASCO
Annual Meeting in Chicago in June 2010.  At four years of follow-up,
overall survival was 65% in chemotherapy + nimotuzumab (aka h-R3mAb) 
versus 35% chemotherapy (p=0.01) and 43% radiotherapy + h-R3mAb versus 26%
radiotherapy (not significant). Nimotuzumab also produced a survival advantage
when added to radiation over radiation alone.





Our
vascular disrupting agent, CYT997, is also in clinical development, and is
capable of being developed in IV and oral dose formulations,. Preliminary data
from our current Phase I/II trial of CYT997 given IV in glioma, patients are
expected during 2010.





Anticipated
clinical data include:


·
            CYT387
      US data in myeloproliferative neoplasms in a Phase I/II trial at Mayo
      Clinic is anticipated to be presented at ASH
  2010


·
            Nimotuzumab
      Phase II (Japan) gastric cancer data in
2010


·
            Nimotuzumab
      European Phase III adult glioma data in
2010


·
            Nimotuzumab
      North American Phase II pediatric glioma data in
  2010


·
            Nimotuzumab
      Phase II (Japan) first-line non-small cell lung cancer date in
      2010/11


·
            CYT997
      (Australia) data from patients with glioma treated with CYT997 and
      carboplatin in 2010





In July
2010, YM terminated further development of AeroLEF. The product’s unique
profile, positive clinical data from each of its four trials, and the
concurrence from a number of regulatory bodies supporting its Phase
III-readiness were insufficient to secure the partners YM sought to share the
risks and costs remaining in the final stages of development and we were unable
to secure a licensing agreement on reasonable terms.





12


While
expenditures will increase with additional clinical activity we believe YM has
the resources to conclude the Phase II trial of CYT387, to participate in
activities supporting marketing authorization for nimotuzumab, assuming upcoming
data supports the initiation of registration trials, and for the continued
clinical development of CYT997.




ACQUISITION
OF CYTOPIA





On
January 29, 2010, the Company acquired Cytopia, a clinical-stage, drug
development company based in Melbourne, Australia. The Company applied the
acquisition method of accounting for the business combination.





The
purchase price, determined by the fair value of the consideration given at the
date of acquisition, and the fair value of the assets acquired and liabilities
assumed on the date of acquisition was as follows:





Fair
      value of consideration paid:7,276,688
      common shares of YM
                    
                    $
                    12,515,903138,442
      stock options of YM
                    
                    
                    126,000$
                    12,641,903Assets
      acquired:Cash
                    
                    $
                    909,579Accounts
      receivable
                    
                    
                    187,186Property
      and equipment
                    
                    
                    10,573Intangible
      assets
                    
                    
                    13,524,05414,631,392Liabilities
      assumed:Accounts
      payable and accrued liabilities
                    
                    
                    (1,989,489
                    )Net
      assets acquired
                    
                    $
                    12,641,903




This
transaction was conducted by a Scheme of Arrangement (the "Arrangement") whereby
the Company acquired all of the issued shares and options in Cytopia. The terms
of the Arrangement were as follows:





(a)
            Cytopia
      shareholders received 0.0852 common shares of the Company for each Cytopia
      common share held at the record date. This resulted in the issuance of a
      total of 7,215,053 common shares of the Company, based on the number of
      Cytopia common shares outstanding on the date of the
      Arrangement.





(b)
            The
      holders of Cytopia partly paid shares received 61,635 common shares of the
      Company and 138,442 fully vested stock options in the Company as
      consideration for the exchange of their partly paid
  shares.





The value
of the Company's common shares issued was determined using the closing price of
the Company's common shares on the Toronto Stock Exchange on the acquisition
date of January 29, 2010 of $1.72. The $126,000 value of the stock options
issued to holders of Cytopia partly paid shares was determined using the
Black-Scholes option pricing model.





Cytopia
option holders received 225,950 fully vested YM stock options in consideration
for the cancellation of their Cytopia options. The value of these stock options
of $57,000 was recorded in stock-based compensation expense.





For the
year ended June 30, 2010, the Company incurred $800,000 of acquisition costs for
Cytopia, respectively, which were included in general and administrative
expenses.





The
assets and liabilities and revenues and expenses of Cytopia have been included
in the consolidated financial statements of the Company from the date of
acquisition, January 29, 2010. From January 30, 2010 to June 30, 2010, the total
revenue and loss (including amortization of the intangible asset) of Cytopia
included in the consolidated financial statements was $58 thousand and $1.897
million, respectively.





13


Supplemental
financial information presented below summarizes selected results of operations
on a pro forma basis as though the acquisition of Cytopia occurred as of the
beginning date of the current period (July 1, 2009). This pro forma information
is for informational purposes only and does not purport to represent what the
results of operations for the period presented would have been had the
acquisition of Cytopia occurred at the beginning of the period, or to project
the results of operations for any future period.





The pro
forma condensed combined revenue and loss for the year ended June 30, 2010, had
the acquisition date been July 1, 2009, was $2.631 million and $26.789 million,
respectively.




CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





The
preparation of financial statements in conformity with Canadian GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements, and the reported amount of revenue and
expenses during the reporting period. Significant accounting policies and
methods used in preparation of the financial statements are described in note 2
to the Consolidated Annual Financial Statements. Significant estimates affect:
revenue recognition; intangible assets; research and development costs; the
consolidation of variable interest entities; stock-based compensation; and the
income tax valuation allowance.





Revenue
recognition


Revenue
from licensing agreements is recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
amount is determinable and collectability is reasonably assured. Contingent
revenue attributable to the achievement of milestones is recognized only on the
achievement of the milestone. Non-refundable up-front fees for access to the
Company’s proprietary technology are deferred and recognized on a systematic
basis over the estimated remaining period of collaboration required until the
milestone associated with commercial approval of the first indication in the
licensee’s territory has been satisfied and the milestone payment received or
until it is determined that no further collaboration is required.  The
estimated term is based on a drug development plan as discussed with
licensees.  Currently we have license agreements that specify that certain
royalties are earned by the Company on sales of licensed products in the
licensed territories.  Licensees report sales and royalty information in
the 90 days after the end of the quarter in which the activity takes place and
typically do not provide us with forward estimates or current-quarter
information.  Because we are not able to reasonably estimate the amount of
royalties earned during the period in which these licensees actually ship
products, we do not recognize royalty revenue until the royalties are reported
to us and the collection of these royalties is reasonably assured.





Intangible
assets


The
Company’s identifiable intangible assets consist of patents and in-process
research and development technologies acquired on the acquisition of Cytopia in
January 2010. The Cytopia intangible assets are amortized on a straight-line
basis over the estimated time to partner of three years for technologies
acquired. The estimated useful lives of the intangible assets are considered
each reporting period and the carrying value is reviewed on the occurrence of a
triggering event, to determine if there has been impairment in their
value.





Research
and development costs


The
Company does not engage in basic scientific research but does incur significant
product development costs. Only development costs that meet strict criteria
related to technical, marketing and financial feasibility would be capitalized
under Canadian GAAP. To date, no costs have met such criteria and, accordingly,
all development costs have been expensed when incurred.





Variable
interest entity


The
Company has a majority interest in a joint venture that is funded entirely by
the Company. This joint venture is classified as a variable interest entity
since the Company maintains a controlling financial interest. The Company has
recorded 100% of the results of operations and cash flows of this entity since
its inception.





Stock-based
compensation


The
Company expenses all stock-based payments using the fair value method and uses
the Black-Scholes option pricing model in estimating the fair value.  Under
the fair value method and the option pricing model used to determine fair value,
estimates are made as to the volatility of the Company’s shares, the expected
life of the options and expected forfeitures.





14


Income
tax valuation allowance


The
Company and its joint venture have a net tax benefit resulting from non-capital
losses carried forward, pools of scientific research and experimental
development expenditures, investment tax credits, and withholding taxes paid. In
view of the history of net losses incurred, management is of the opinion that it
is not more likely than not that these tax assets will be realized in the
foreseeable future and hence, a full valuation allowance has been recorded
against these future tax assets. Accordingly, no future tax assets are recorded
on the balance sheet.




ACCOUNTING
POLICIES





The
following new accounting pronouncements were adopted July 1, 2009:





Goodwill
and Intangible assets


In
February 2008, the CICA issued Section 3064, Goodwill and Intangible Assets,
which replaces Section 3062, Goodwill and Other Intangible Assets, and Section
3450, Research and Development Costs.  This new section established
standards for the recognition, measurement and disclosure of goodwill and
intangible assets and was adopted effective July 1, 2009.  The adoption of
this change did not have an impact on the consolidated financial
statements.





Business
combinations, consolidated financial statements and non-controlling
interests


In
January 2009, the CICA issued Section 1582 Business Combinations, to replace
Section 1581 Business Combinations, which aligns this section with International
Financial Reporting Standard IFRS 3, "Business Combinations"; Section 1602
Non-controlling Interests which is equivalent to the corresponding provisions of
International Financial Reporting Standard 27, “Consolidated and Separate
Financial Statements”; and Section 1601 Consolidated Financial Statements which
together with Section 1602 establishes standards for the preparation of
consolidated financial statements, replacing Section 1600, Consolidated
Financial Statements. These sections are effective for fiscal years beginning on
or after January 1, 2011, however, earlier adoption is permitted if all sections
are adopted together. As a result of the acquisition of Cytopia Limited and
given current differences among Canadian GAAP, IFRS and US GAAP, the company has
elected to early adopt these sections effective July 1, 2009. One of the impacts
of adopting Section 1582 is that acquisition costs for business combinations are
expensed in the statement of operations rather than capitalized as a part of the
net assets of the acquired company. For the three and twelve months ended June
30, 2010, acquisition costs included in general and administrative expenses were
$57 thousand and $857 thousand, respectively. Section 1582 also requires
supplemental pro forma disclosures of consolidated operating results of the
company and the acquired entity.





Financial
Instruments


In June
2009, the CICA issued amendments to Handbook Section 3862, Financial Instruments –
Disclosures, enhancing disclosure requirements about liquidity risk and
fair value measurements of financial instruments.  The adoption of this
change did not have an impact on the consolidated financial
statements.





The
following new accounting pronouncements have been issued and are not yet
effective:





International
financial reporting standards


The
Accounting Standards Board of Canada has announced that public companies in
Canada are required to adopt IFRS for fiscal years beginning on or after January
1, 2011.  The Company is required to prepare its first financial statements
that are compliant with IFRS for the interim period ending September 30,
2011.  The Company’s plan will assess the impact that IFRS has on its
accounting policies and implementation decisions, financial statement
presentation and disclosure options available on initial changeover to IFRS,
information technology and data systems, and internal control over financial
reporting.  The company has completed an initial assessment of the
differences between IFRS and Canadian GAAP and identified the only significant
measurement difference is in the accounting for stock-based compensation
expenses.  Both Canadian GAAP and IFRS require the fair value of stock
options granted to be expensed over the vesting period.  YM stock options
generally vest one third immediately and one third on each of the first and
second anniversaries.  YM currently expenses one third of the fair value
immediately and two thirds equally over 24 months.  IFRS requires one third
of the fair value to be expensed immediately, one third equally over 12 months
and one third equally over 24 months.  The impact on the consolidated
financial statements as at June 30, 2010 would be an increase in the net loss
for the year ended June 30, 2010 of approximately $51,000 with a corresponding
increase in equity of the same amount.  YM is in the process of detailed
review, documentation and selection of accounting policy choices, and is
evaluating the effect the adoption of the standards will have on its
consolidated financial statements.





15


DISCLOSURE
CONTROLS AND PROCEDURES





The Chief
Executive Officer and the Chief Financial Officer, after evaluating the
effectiveness of the Company’s "disclosure controls and procedures" (as defined
in National Instrument 52-109 Certification of Disclosure in Issuer's Annual and
Interim Filings) as of June 30, 2010 (the "Evaluation Date") have concluded that
as of the Evaluation Date, our disclosure controls were effective to provide
reasonable assurance that information required to be disclosed in our reports
filed or submitted under Canadian securities laws is recorded, processed,
summarized and reported within the time periods specified by those rules, and
that material information relating to our Company and any consolidated
subsidiaries is made known to management, including the chief executive officer
and chief financial officer, particularly during the period when our periodic
reports are being prepared to allow timely decisions regarding required
disclosure.





In
connection with the evaluation referred to in the foregoing paragraph, we have
identified no change in our disclosure controls and procedures that occurred
during the year ended June 30, 2010 that has materially affected, or is
reasonably likely to materially affect, our disclosure controls over financial
reporting.




INTERNAL
CONTROLS OVER FINANCIAL REPORTING





Management
assessed the design and effectiveness of internal controls over financial
reporting as at June 30, 2010, and based on that assessment determined that
internal controls over financial reporting were designed and operating
effectively to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP. No changes were made to the design of the
Company’s internal controls over financial reporting during the fiscal year
ended June 30, 2010 that has materially affected, or is reasonably likely to
materially affect, the design of our internal controls over financial
reporting.




INHERENT
LIMITATIONS ON EFFECTIVENESS OF CONTROLS





The
Company’s management, including the chief executive officer and chief financial
officer, do not expect that our disclosure controls or our internal controls
over financial reporting will prevent or detect all error and all fraud. A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system’s objectives will be
met. The design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, within the Company have been detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Internal control over financial reporting can also be
circumvented by collusion or improper management override. The design of any
system of controls is based in part on certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Projections of
any evaluation of controls effectiveness to future periods are subject to risks.
Over time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or
procedures.






OTHER
MD&A REQUIREMENTS





As
at  June 30, 2010:


Amount
                                    
                                    
                                    NumberCommon
      shares
                                    
                                    $
                                    203,498,239
                                    
                                    
                                    
                                    80,359,623Warrants
                                    
                                    $
                                    1,473,246
                                    
                                    
                                    
                                    8,166,480Note 1:  If all warrants
      were to be exercised, 8,166,480 shares would be issued for total proceeds
      of $13,066,368.





Additional
information relating to the Company, including the Company’s Annual Information
Form, is available on SEDAR at www.sedar.com
..


16


Schedule
A




RISK
FACTORS




An
investment in our securities is speculative and involves a high degree of risk.
Prospective investors should carefully consider, together with other matters
referred to herein, the following risk factors. If any event arising from these
risks occurs, our business, prospects, financial condition, results of
operations and cash flows could be materially adversely affected.




Risks Related To Our
Business




We
are susceptible to general economic conditions




The past
two years have been marked by global economic turmoil.  Economic conditions
worsened over the course of 2008 and 2009.  These negative conditions have
extended into 2010. General economic conditions may have a significant impact on
YM, including our commercialization opportunities, our ability to raise
financing and our ability to work with others upon whom we rely for basic
research, manufacture, development and sale of our products.




We
deal with products that are in the early stages of development and, as a result,
are unable to predict whether we will be able to profitably commercialize our
products.




Since our
incorporation in 1994, none of our products, licensed or owned, has received
regulatory approval for sale in any major market country in which we have an
economic interest in a product. Accordingly, we have not generated any
significant revenues from the product sales. A substantial commitment of
resources to conduct clinical trials and for additional product development will
be required to commercialize most of the products. There can be no assurance
that our remaining products will meet applicable regulatory standards, be
capable of being produced in commercial quantities at reasonable cost or be
successfully marketed, or that the investment made by us in the
commercialization of the products will be recovered through sales, license fees
or related royalties.




We
have few revenues and a history of losses and, therefore, are unable to predict
the extent of any future losses or when or if we will become
profitable.




As at
June 30, 2010, we have an accumulated deficit of $167.245 million. We expect
expenditures and the accumulated deficit to increase as we proceed with our
commercialization programs until such time as sales, license fees and royalty
payments, if any, may generate sufficient revenues to fund our continuing
operations. There can be no assurance that the revenues from the
commercialization of our products will be sufficient to support required
expenditures and therefore there can be no assurance of when or if we will
become profitable.




We
depend upon being able to identify promising molecules for licensing or
acquisition and successfully completing the acquisitions or licensing on
economic terms. There is no assurance that we can continue to identify and
license molecules for development.




We do not
conduct basic research of our own.  Basic research on a particular drug
product is conducted by other biopharmaceutical companies, scientific and
academic institutions and hospitals, or scientists affiliated with those
institutions. Generally, once the basic research is complete, we enter into
agreements to in-license the right to develop and market the products or acquire
them.




We
depend upon others for the manufacture, development and sale of our products. If
we are unable to establish or manage collaborations in the future, there could
be a delay in the manufacture, development and sale of our
products.




We enter
into arrangements with and are dependent on others with respect to the
manufacture, development and sale of our in-licensed products. Product
development includes, but is not limited to, pre-clinical testing, regulatory
approval processes, clinical testing and the development of additional
regulatory and marketing information. Our ability to successfully develop and
commercialize our in-licensed products is dependent on our ability to make
arrangements with others on commercially acceptable terms and subject to our
depending upon them to meet regulatory quality standards. The product
development process may be delayed or terminated if we cannot secure or maintain
such arrangements on terms acceptable to us or at all. We do not have long-term,
material, third party manufacturing, formulation or supply agreements, except
with respect to one of our licensed products, nimotuzumab, which is manufactured
in quantities sufficient for clinical testing by CIMAB or a related party,
subject to certain terms and conditions of the licensing agreements between us
and CIMAB and CIMAB has contracted to supply commercial quantities or will
source such supply if, as and when approval for sale has been granted. 
Should CIMAB be unable to supply us, we have no readily available alternative
source for the product.




17


We
expect to enter into out-licensing agreements with others with respect to the
manufacturing and marketing of our drug products. We may retain co-development
and marketing rights if management determines it appropriate to do
so.




There can
be no assurance that we will be successful in maintaining our relationships with
research institutions or others or in negotiating additional in-licensing or
out-licensing agreements on terms acceptable to us or at all, or that any such
arrangements will be successful. In addition, there can be no assurance that
other parties will not enter into arrangements with such entities for the
development or commercialization of similar products or that the parties with
whom we have made such arrangements will not pursue alternative technologies or
develop products on their own or in collaboration with others, including our
competitors. If we do not establish sufficient in-licensing and out-licensing
arrangements, we may encounter delays in product introductions or may find that
the development, manufacture or sale of our licensed products could be
materially adversely affected.




We
have no experience in commercial manufacturing of our products and may encounter
problems or delays in making arrangements for products to be commercially
manufactured, which could result in delayed development, regulatory approval and
marketing.




We have
not commercially launched any of our licensed or owned products and have no
commercial manufacturing experience with respect to our products. To be
successful, the products must be manufactured in commercial quantities in
compliance with regulatory requirements and at acceptable costs over which we
have no control. We do not have, and do not intend to acquire, facilities for
the production of our products, although we may invest in the ownership of
production facilities, or parts of the production process, if appropriate
opportunities are available.




Nimotuzumab
is required to be manufactured in quantities sufficient for clinical testing by
CIMAB or a related party, subject to certain terms and conditions of the
licensing agreements between us and CIMAB. Currently these expectations are
being met. There can be no assurance, however, that such entities will be able
to develop adequate manufacturing capabilities for sufficient commercial scale
quantities in a commercially reasonable manner.  In addition, there are
risks that we cannot control regarding the CIMAB manufacturing plant, including
amongst others, events such as weather, fire and other natural disasters. 
All manufacturing facilities must comply with applicable regulations in their
jurisdiction or where products are to be sold. In addition, production of the
licensed and owned products may require raw materials for which the sources and
amount of supply are limited. An inability to obtain adequate supplies of such
raw materials could significantly delay the development, regulatory approval and
marketing of our licensed and owned products.




We
are dependent on licenses from third parties and the maintenance of licenses is
necessary for our success.




We have
obtained our rights to the licensed products under license agreements from
various third party licensors as follows:




(a)
            License
      Agreement between CIMAB and us dated May 3, 1995 as amended with respect
      to nimotuzumab; and




(b)
            License Agreement
      betweenCIMYMand us
      dated January 24, 2001 with respect to TGFα vaccine and HER-1
      vaccine.




As we own
CYT997 and CYT387, there are no license terms.




We depend
upon the license rights to the licensed products for commercialization of the
licensed products. While we believe we are in compliance with our obligations
under the licenses, certain licenses may be terminated or converted to
non-exclusive licenses by the licensors if there is a breach of the terms of the
licenses. There can be no assurance that the licenses are enforceable or will
not be terminated or converted. The termination or conversion of the licenses or
our inability to enforce our rights under the licenses would have a material
adverse effect on our business as we would not have the rights to the products
that we are developing. To the extent that management considers a particular
license to be material to our undertaking, we have entered into a signed license
agreement for that license. Terms of certain remaining licenses are to be
determined at a later date. The in-license agreements to which we are currently
a party require us to maintain and defend the patent rights that we in-license
against third parties.




18


Although
our current licenses are governed by the laws of Ontario, the enforcement of
certain of them may necessitate pursuing legal proceedings and obtaining orders
in other jurisdictions, including the US and the Republic of Cuba. There can be
no assurance that a court judgment or order obtained in one jurisdiction will be
enforceable in another. In international venture undertakings it is standard
practice to attorn to a neutral jurisdiction to seek remedy for unresolved
commercial disputes. These arrangements are usually negotiated as part of the
original business agreement. In the case of the license agreements with us, the
parties have agreed that the law governing the agreements is Ontario law and the
parties will attorn to the courts of Ontario or the Federal court of Canada to
resolve any dispute regarding the agreements.




One of
our products in clinical development is licensed from Cuba. The commercial and
legal environment in Cuba is in a formative stage and may be subject to
political risk. It is possible that we may not be able to enforce our legal
rights in Cuba or against Cuban entities to the same extent that we would be
able to do in a country with a more established commercial and legal system.
Termination of our license arrangements or difficulties in enforcement of such
arrangements could have a material adverse effect on our ability to continue
development of our licensed products from that country.




We have a
number of license agreements with CIMAB. CIMAB is a corporation owned by an
institution of the Government of Cuba that purportedly operates at arms-length
from the state bureaucracy with regard to its business, scientific and
administrative decision-making. CIMAB is reportedly akin to a “crown
corporation” in Canada. CIMAB’s management is purportedly both autonomous and
responsible for the success of its business decisions. Despite the fact that
CIMAB’s management is purportedly both autonomous and responsible for business
decisions and that the license agreements with us declare Ontario law as the
governing law, because of the fact that CIMAB is ultimately a state-owned entity
we will not necessarily be able to enforce compliance by CIMAB with any judgment
if CIMAB or the Government of Cuba refuses to comply.




Although
all of the funds advanced to our joint venture subsidiaries have been expensed,
we are only entitled to recover those expenditures when the joint venture’s net
income exceeds the amount of cumulative advances.




YM and
CIMAB entered into a funding agreement with CIMYM (now CIMYM BioSciences Inc.)
in November 1995 (the “Funding Agreement”) in connection with the 1995 CIMYM
license with respect to nimotuzumab. The Funding Agreement provides that we will
arrange for the appropriate studies and clinical trials for the licensed
products held by CIMYM BioSciences. and will fund the cost of such studies and
trials provided that doing so would not be commercially or scientifically
unreasonable. Accordingly, we make the final determination as to whether or not
a clinical trial expense is justified with respect to any given
product.




We are
entitled to reimbursement of all advances made by us pursuant to the Funding
Agreement, from the results of the successful development of the licensed
products and generation of income.  CIMYM BioSciences repays such advances
out of a portion of its revenues in priority to eventual revenue or
profit sharing arrangements under the 1995 CIMYM License.




As at
June 30, 2010, we had advanced $69 million to CIMYM BioSciences. Since we have
expensed the total amount no further accounting for those advances would affect
our balance sheet or income statement and any reimbursement of such advances
would be considered to be income by us.




We
are reliant on licensors and others for research on new products.




We do not
conduct our own basic research with respect to the identification of new
products. Instead, we review and analyze research and development work conducted
by others as a primary source for new products. While we expect that we will be
able to continue to identify licensable products or research suitable for
licensing and commercialization by us, there can be no assurance that useful
products will be available to us on commercially acceptable terms.




19


We
conduct our development internationally and are subject to laws and regulations
of several countries which may affect our ability to access regulatory agencies
and may affect the enforceability and value of our licenses.




Clinical
trials on our development products have been conducted by us and our
sub-licensees in more than 20 jurisdictions including Canada, the United
Kingdom, the European Union, Japan, India, Indonesia, Korea, Russia and the US,
and we intend to, and may, conduct future clinical trials in these and other
jurisdictions. There can be no assurance that any sovereign government,
including Canada’s, will not establish laws or regulations that will be
deleterious to our interests. There is no assurance that we, as a Canadian
corporation, will continue to have access to the regulatory agencies in any
jurisdiction where we might want to conduct clinical trials or obtain final
regulatory approval, and there can be no assurance that we will be able to
enforce our licenses in foreign jurisdictions. Governments have, from time to
time, established foreign exchange controls which could have a material adverse
effect on our business and financial condition, since such controls may limit
our ability to flow funds into a particular country to meet our obligations
under in-licensing agreements, and to flow funds which we may be entitled to, in
the form of royalty and milestone payments, under out-licensing agreements out
of a particular country  In addition, the value of our licenses will depend
upon the absence of punitive or prohibitive legislation in respect of biological
materials.




We
also conduct our in-licensing internationally and we currently own or license
products and technologies from sources in Canada, Australia and Cuba. We have
previously licensed, and intend to and may license, products from sources in
other jurisdictions.




We have
licensed nimotuzumab from CIMAB, a corporation representing a scientific
institute in Cuba. The US has maintained an embargo against Cuba, administered
by the US Department of Treasury. The laws and regulations establishing the
embargo have been amended from time to time, most recently by the passage of the
Cuban Liberty and Democratic Solidarity Act (the “Helms-Burton Act”). The
embargo applies to almost all transactions involving Cuba or Cuban enterprises,
and it bars from such transactions any US persons unless such persons obtain
specific licenses from the US Department of Treasury authorizing their
participation in the transactions. There is Canadian legislation (the Foreign
Extraterritorial Measures Act) which provides generally that judgments against
Canadian companies under the Helms-Burton Act will not be enforceable in Canada.
The US embargo could have the effect of limiting our access to US capital, US
financing, US customers and US suppliers. In particular, our products licensed
from Cuban sources, noted above, are likely to be prohibited from being licensed
or sold in the US unless the US Department of Treasury issues a license or the
embargo is lifted.




The
Helms-Burton Act authorizes private lawsuits for damages against anyone who
“traffics” in property confiscated, without compensation, by the Government of
Cuba from persons who at the time were, or have since become, nationals of the
US. We do not own any real property in Cuba and, to the best of our knowledge,
and based upon the advice of the Cuban government, none of the properties of the
scientific centers of the licensors in which the licensed products were
developed and are or may be manufactured was confiscated by the Government of
Cuba from persons who at the time were, or have since become, nationals of the
US. However, there can be no assurance that this is correct.




The
United States has imposed economic sanctions against Cuba. These sanctions apply
to certain transactions from the United States or activities by a person subject
to US jurisdiction. Among other things, the sanctions prohibit transactions that
involve property in which Cuba or any Cuban national has or has had any interest
whatsoever, direct or indirect.




For
purposes of interpreting the sanctions, ‘‘person subject to US jurisdiction’’
means any US citizen, any US permanent resident alien, any entity organized
under the laws of the United States or any jurisdiction within the United States
(including foreign branches and subsidiaries) or any person in the United
States. We (other than our subsidiary YM USA) are not a person subject to US
jurisdiction for purposes of the sanctions and are not subject to the sanctions
with respect to our activities outside of the United States.




Nevertheless,
we cannot assure you that the Office of Foreign Assets Control (“OFAC”) of the
US Department of the Treasury, which administers the US government’s Cuba
sanctions, would agree that the measures we have taken and will take are
sufficient to comply with the sanctions described above.




20


We are
the exclusive licensee of US, European and other patents related to nimotuzumab
owned by CIMAB, a Cuban company responsible for commercializing products
developed at Cuba’s Centro de Immunologia Molecular, a research institute formed
by the government of Cuba.  In connection with a default judgment obtained
from a US federal court in Miami, Florida by an individual claimant against the
Republic of Cuba, the Cuban government and a number of other parties, including
CIMAB, the claimant has recorded a lien against the US patents that are licensed
by us from CIMAB. These are patents US5,891,996 and US6,506,883, each of which
expires in November 2015. The claimant also has commenced an action to enforce
that default judgment.  If the claimant succeeds in its action to enforce
the judgment, ownership of the licensed US patents could be transferred from
CIMAB to the claimant or sold to a third party. Based on the advice of our
counsel, we believe that any transfer of the US patents will be subject to our
existing license from CIMAB and that any such transfer should have no bearing on
our rights under the license agreement.  However, there can be no assurance
that any subsequent owner of the US patents will fully cooperate with us in
connection with our efforts to continue the development of nimotuzumab in the
United States, will not attempt to invalidate our license agreement, or will not
attempt to take any other action that could potentially impact our license to
the US patents.




The
acquisition of YM BioSciences Australia Pty Ltd. (formerly Cytopia Limited) will
result in increased expenditures.




The
acquisition of YM BioSciences Australia Pty Ltd. (formerly Cytopia Limited) will
result in an increase of expenditures for the additional staff and resources, as
well as the advancement of the YM BioSciences Australia Pty Ltd. products in
clinical development. This will result in the reduction of our previously
anticipated duration of our cash assets. If we are unsuccessful in our financing
efforts, we may have insufficient funds to complete our clinical development
plans as originally anticipated.




Risks Related To Our
Financial Results And Need For Financing




We
expect to be a “passive foreign investment company” for the current taxable
year, which would likely result in materially adverse US federal income tax
consequences for US investors.




We will
be designated as a “passive foreign investment company” (a "PFIC") under the
meaning of Section 1297 of the United States Internal Revenue Code of 1986, as
amended (the “Code”) if (a) 75% or more of our gross income is “passive income”
(generally, dividends, interest, rents, royalties and gains from the disposition
of assets producing passive income) in any taxable year, or (b) at least 50% of
the average value of our assets produce, or are held for the production of,
passive income. US shareholders should be aware that we believe that we
constituted a PFIC during one or more prior taxable years, and based on current
business plans and financial projections, we expect to be a PFIC for the current
taxable year. If we are designated as a PFIC for any taxable year during which a
US shareholder holds our common shares, it would likely result in materially
adverse US federal income tax consequences for such US shareholder, including,
but not limited to, any gain from the sale of our common shares would be taxed
as ordinary income, as opposed to capital gain, and such gain and certain
distributions on our common shares would be subject to an interest charge,
except in certain circumstances. In addition, US shareholders should be aware
that there can be no assurances that the Corporation will satisfy the record
keeping requirements that apply to a PFIC, or that the Corporation will supply
US shareholders with the information that such US shareholders require to make
certain elections available under the Code that are intended to mitigate the
adverse tax consequences of the PFIC rules. The PFIC rules are extremely
complex. A US shareholder of our common shares is encouraged to consult a tax
advisor regarding the PFIC Rules and the US federal income tax consequences of
the acquisition, ownership and disposition of our common shares.





We
may not be able to obtain necessary funding from sales, license fees, milestones
or royalties and, as a result, may need to try to obtain capital through the
public market or private financing which may not be available on acceptable
terms, or at all.




We will
require additional funding for the commercialization of our products, licensed
and owned, and if new products are licensed or acquired and put into
development. The amount of additional funding required depends on the status of
each project or new opportunity at any given time. Our business strategy is to
in-license or acquire rights to promising products, further develop those
products by progressing the products toward regulatory approval by conducting
and managing clinical trials, and finally, generally, to out-license rights to
manufacture and/or market resulting products to other pharmaceutical firms
generally in exchange for royalties and license fees. Due to the in- and
out-licensing arrangements and our dependence on others for the manufacture,
development and sale of our in-licensed products, we do not have consistent
monthly or quarterly expenditures and cannot determine the amount and timing of
required additional funding with any certainty. As at June 30, 2010 we had cash
and short-term deposits totalling $45,645 million and accounts payables and
accrued liabilities of $2,785.




21


We assess
our additional funding needs on a project-by-project basis from time-to-time. To
the extent that we are unable to fund our expenditures from sales, license fees
and royalties, it will be necessary to reconsider whether to continue existing
projects or enter into new projects, or to access either the public markets or
private financings if conditions permit. In addition, we have no established
bank financing arrangements and there can be no assurance that we will be able
to establish such arrangements on satisfactory terms or at all. Such financing,
if required and completed, may have a dilutive effect on the holders of our
common shares. There is no assurance that such financing will be available if
required or that it will be available on favorable terms.




Our
operating results and stock price may fluctuate significantly.




The
trading price of our common shares, as with many pharmaceutical and
biotechnology companies, has historically been and is likely to remain highly
volatile.  The market has from time to time experienced significant price
and volume fluctuations that are unrelated to the operating performance of
particular companies.  Factors such as the efficacy and safety of our
products or the products of our competitors, announcements of technological
innovations by us or our competitors, governmental regulations, developments in
our patents or other proprietary rights, our licensors or our competitors,
litigation, fluctuations in our operating results, thin capitalization, market
conditions for biopharmaceutical stocks and general market and economic
conditions could have a significant impact on the future trading price of our
common shares. In addition, the price of our common shares is highly volatile
since it may take years before any of our licensed products will receive final
regulatory approval to be marketed in Canada, the US or other territories, if at
all.




There
is no assurance that an active trading market in our common shares will be
sustained.




Our
common shares are listed for trading on the TSX and NYSE Amex. However, there
can be no assurance that an active trading market in our common shares on these
stock exchanges will be sustained.




Our
share price is volatile.




The
market price of our common shares, like that of the securities of many other
biotechnology companies in the development stage, has been, and is likely to
continue to be, highly volatile. This increases the risk of securities
litigation related to such volatility. Factors such as the results of our
preclinical studies and clinical trials, as well as those of our collaborators
or our competitors other evidence of the safety or effectiveness of our products
or those of our competitors, announcements of technological innovations or new
products by us or our competitors, governmental regulatory actions, developments
with our collaborators, developments (including litigation) concerning patent or
other proprietary rights of our company or our competitors, concern as to the
safety of our products, period-to-period fluctuations in operating results,
changes in estimates of our performance by securities analysts, market
conditions for biotechnology stocks in general and other factors not within the
control of our company could have a significant adverse effect on the market
price of our common shares.




We
have not paid dividends.




We have
never paid cash dividends on our common shares and do not anticipate paying any
cash dividends in the foreseeable future.  We currently intend to retain
our future earnings, if any, to finance further research and the expansion of
our business.




Our
outstanding common shares could be subject to dilution.




The
exercise of stock options and warrants already issued by us and the issuance of
other additional securities in the future, including upon the exercise of the
warrants offered hereby could result in dilution in the value of our common
shares and the voting power represented by the common shares.  Furthermore,
to the extent holders of our stock options or other securities exercise their
securities and then sell the common shares they receive, our share price may
decrease due to the additional amount of our common shares available in the
market.




22


It
may be difficult for non-Canadian investors to obtain and enforce judgments
against us because of our Canadian incorporation and presence.




We are a
corporation existing under the laws of Nova Scotia, Canada.  Most of our
directors and officers, and certain of the experts named herein, are residents
of Canada or otherwise reside outside the United States, and all or a
substantial portion of their assets, and a substantial portion of our assets,
are located outside the United States. Consequently, although we have appointed
an agent for service of process in the United States, it may be difficult for
holders of these securities who reside in the United States to effect service
within the United States upon those directors and officers and the experts who
are not residents of the United States. It may also be difficult for holders of
these securities who reside in the United States to realize in the United States
upon judgments of courts of the United States predicated upon our civil
liability and the civil liability of our directors, officers and experts under
the United States federal securities laws.  Investors should not assume
that Canadian courts (1) would enforce judgments of US courts obtained in
actions against us or such directors, officers or experts predicated upon the
civil liability provisions of the US federal securities laws or the securities
or “blue sky” laws of any state within the United States or (2) would enforce,
in original actions, liabilities against us or such directors, officers or
experts predicated upon the US federal securities laws or any such state
securities or “blue sky” laws. In addition, we have been advised by our Canadian
counsel that in normal circumstances, only civil judgments and not other rights
arising from United States securities legislation are enforceable in Canada and
that the protections afforded by Canadian securities laws may not be available
to investors in the United States.




If
there are substantial sales of our common shares, the market price of our common
shares could decline.




Sales of
substantial numbers of our common shares could cause a decline in the market
price of our common shares. Any sales by existing shareholders or holders of
options may have an adverse effect on our ability to raise capital and may
adversely affect the market price of our common shares.




We
have adopted a shareholder rights plan which could make it more difficult for a
third party to acquire us, thus potentially depriving our shareholders of a
control premium.




We have
adopted a shareholder rights plan. The provisions of such plan could make it
more difficult for a third party to acquire a majority of our outstanding common
shares, the effect of which may be to deprive our shareholders of a control
premium that might otherwise be realized in connection with an acquisition of
our common shares. See “Description of Share Capital, Common Shares and Related
Information”.




Risks Related To Our
Industry




If
our clinical testing of drug products do not produce successful results, we will
not be able to commercialize our products.




Each of
our products, licensed or owned, must be subjected to additional clinical
testing in order to demonstrate the safety and efficacy of our products in
humans. Our ability to commercialize our products will depend on the success of
currently ongoing clinical trials and subsequent clinical trials that have not
yet begun.




We are
not able to predict the results of pre-clinical and clinical testing of our drug
products. It is not possible to predict, based on studies or testing in
laboratory conditions or in animals, whether a drug product will prove to be
safe or effective in humans. Further, preclinical data may not be sufficient for
regulators to accept positive clinical data for approval to commercialize a
product. Pre-clinical data must have been conducted to high regulatory standards
and may be found, on review by health regulatory authorities, to be of
insufficient quality to support an application for commercialization of our
products. In addition, success in one stage of testing is not necessarily an
indication that the particular drug product will succeed in later stages of
testing and development. There can be no assurance that the pre-clinical or
clinical testing of our products will yield satisfactory results that will
enable us to progress toward commercialization of such products. Unsatisfactory
results may have a material adverse effect on our business, financial condition
or results of operations as they could result in us having to reduce or abandon
future testing or commercialization of particular drug products.




If
our competitors develop and market products that are more effective than our
existing product candidates or any products that we may develop, or obtain
marketing approval before we do, our products may be rendered obsolete or
uncompetitive.




Technological
competition from pharmaceutical companies, biotechnology companies and
universities is intense and is expected to increase. Many of our competitors and
potential competitors have substantially greater product development
capabilities and financial, scientific, marketing and human resources than we
have. Our future success depends in part on our ability to maintain a
competitive position, including our ability to further progress our products,
licensed or owned, through the necessary pre-clinical and clinical trials
towards regulatory approval for sale and commercialization. Other companies may
succeed in commercializing products earlier than we are able to commercialize
our products or they may succeed in developing products that are more effective
than our products. With respect to nimotuzamab, we consider our main competitors
to be Amgen, AstraZeneca, BMS, Roche, Eli Lilly, Genentech, Genmab, Merck KGaA
and OSI. With respect to CYT387, we consider our main competitors to be
Novartis, Eli Lilly, Incyte, S*Bio, Onyx and Sanofi-Aventis. With respect to
CYT997 we consider our main competitors to be Oxigene, Antisoma and
Novartis.




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Our
success depends in part on developing and maintaining a competitive position in
the development and commercialization of our products, licensed or owned, and
technological capabilities in our areas of expertise. The biotechnology and
pharmaceutical industries are subject to rapid and substantial technological
change. While we will seek to expand our technological capabilities in order to
remain competitive, there can be no assurance that developments by others will
not render our products non-competitive or that we or our licensors will be able
to keep pace with technological developments. Competitors have developed
technologies that could be the basis for competitive products. Some of those
products may have an entirely different approach or means of accomplishing the
desired therapeutic effect than our products and may be more effective or less
costly than our products. In addition, other forms of medical treatment may
offer competition to the products.  The success of our competitors and
their products and technologies relative to our technological capabilities and
competitiveness could have a material adverse effect on the future pre-clinical
and clinical trials of our products, including our ability to obtain the
necessary regulatory approvals for the conduct of such trials.




We
are subject to extensive government regulation that increases the cost and
uncertainty associated with gaining final regulatory approval of our product
candidates.




Securing
final regulatory approval for the manufacture and sale of human therapeutic
products in Canada and our other markets, including the US, is a long and costly
process that is controlled by that particular country’s national regulatory
agency. The national regulatory agency in Canada is Health Canada, in Europe it
is the EMA and in the US it is the FDA. Other national regulatory agencies have
similar regulatory approval processes, but each is different. Approval in
Canada, Europe or the US does not assure approval by other national regulatory
agencies, although often test results from one country may be used in
applications for regulatory approval in another country.




Prior to
obtaining final regulatory approval to market a drug product, every national
regulatory agency has a variety of statutes and regulations which govern the
principal development activities. These laws require controlled research and
testing of products, government review and approval of a submission containing
pre-clinical and clinical data establishing the safety and efficacy of the
product for each use sought, approval of manufacturing facilities including
adherence to GMP during production and storage and control of marketing
activities, including advertising and labelling.




None of
our products have been completely developed or tested and, therefore, we are not
yet in a position to seek final regulatory approval to market any of our
products. To date we have obtained various regulatory clearances to develop and
test our products. CYT387 has been cleared for trial by the FDA, Health Canada
and the Australian Regulatory Authority and CYT997 by the latter. CYT387 has
been designated an orphan drug by the FDA for myelofibrosis. Nimotuzumab has
been cleared for testing in the US, Canada, Europe, Japan, Korea and
Indonesia/Malaysia/Singapore and has been designated as an orphan drug for
certain indications in Europe and the US. It is in Phase II and III trials in
certain of those territories.




Nimotuzumab,
which is being developed in Canada, the US, Europe, Japan, Korea, certain
African countries and Southeast Asian countries sub-licensed by YM, is also
being separately developed, tested or marketed in Argentina, Brazil, China,
Cuba, India and Mexico, amongst others. The US established an embargo against
Cuba in 1961, reinforced by the Helms-Burton Act in 1996, and Cuba is among
several nations which have been identified by the US Department of State as
being a state sponsoring terrorism. As such the US Government has put in place
certain limitations on conduct of business with Cuba and anti-terrorism
legislation against Cuba. Although as of the date of this filing such
anti-terrorism controls have not had any adverse effect on our operations,
because of the anti-terrorism controls and the Helms-Burton Act, there is no
assurance that the Company will be able to complete clinical testing in the US
or obtain OFAC or final regulatory approval in order to successfully
commercialize our nimotuzumab in the US. We were successful in September 2006 in
our application for a Special License to import nimotuzumab for a clinical trial
in the US, received clearance for this trial from the FDA following the fiscal
2007 year end and subsequently received a Special License in 209 to treat any
solid tumors with further FDA clearances in 2010.




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There can
be no assurance that the licensed products will be successfully commercialized.
The process of completing clinical testing and obtaining final regulatory
approval to market the licensed products is likely to take a number of years for
most of the licensed products and require the expenditure of substantial
resources. Any failure to obtain, or a delay in obtaining, such approvals could
adversely affect our ability to develop the product and delay commercialization
of the product. Further, there can be no assurance that our licensed products
will prove to be safe and effective in clinical trials under the standards of
the regulations in our territories or receive applicable regulatory approvals
from applicable regulatory bodies.




Changes
in government regulations, although beyond our control, could have an adverse
effect on our business.




We have,
or have had, licenses with, or clinical trials at, various academic
organizations, hospitals and companies in Australia, Canada, Cuba, India, Italy,
Japan, Korea, Germany, the US, the United Kingdom, countries in Southeast Asia
and other countries and we depend upon the validity of our licenses and access
to the data for the timely completion of clinical research in those
jurisdictions. Any changes in the drug development regulatory environment or
shifts in political attitudes of a government are beyond our control and may
adversely affect our business.




Our
business may also be affected in varying degrees by such factors as government
regulations with respect to intellectual property, regulation or export
controls. Such changes remain beyond our control and the effect of any such
changes cannot be predicted.




These
factors could have a material adverse effect on our ability to further develop
our licensed products.


Risks Related To
Intellectual Property And Litigation




Our
success depends upon our ability to protect our intellectual property and our
proprietary technology.




Our
success will depend, in part, on our ability and our licensors’ ability to
obtain patents, maintain trade secrets protection and operate without infringing
on the proprietary rights of third parties or having third parties circumvent
our rights. Certain licensors and the institutions that they represent, and in
certain cases, us on behalf of the licensors and the institutions that they
represent, have filed and are actively pursuing certain applications for
Canadian and foreign patents. The patent position of pharmaceutical and
biotechnology firms is uncertain and involves complex legal and financial
questions for which, in some cases, certain important legal principles remain
unresolved. There can be no assurance that the patent applications made in
respect of the owned or licensed products will result in the issuance of
patents, that the term of a patent will be extendable after it expires in due
course, that the licensors or the institutions that they represent will develop
additional proprietary products that are patentable, that any patent issued to
the licensors or us will provide us with any competitive advantages, that the
patents of others will not impede our ability to do business or that third
parties will not be able to circumvent or successfully challenge the patents
obtained in respect of the licensed products. The cost of obtaining and
maintaining patents is high. Furthermore, there can be no assurance that others
will not independently develop similar products which duplicate any of the
licensed products or, if patents are issued, design around the patent for the
product. There can be no assurance that our processes or products or those of
our licensors do not or will not infringe upon the patents of third parties or
that the scope of our patents or those of our licensors will successfully
prevent third parties from developing similar and competitive
products.




Much of
our know-how and technology may not be patentable, though they may constitute
trade secrets. There can be no assurance, however, that we will be able to
meaningfully protect our trade secrets. To help protect our intellectual
property rights and proprietary technology we require employees, consultants,
advisors and collaborators to enter into confidentiality agreements. There can
be no assurance that these agreements will provide meaningful protection for our
trade secrets, know-how or other proprietary information in the event of any
unauthorized use or disclosure.




We
maintain patents in connection with CYT387, CYT997 and nimotuzumab. See “General
Development of the Business – Intellectual Property” for a list of our key
current and pending patents in connection with these products.




There may
also be risks related to nimotuzumab as our license originates from Cuba. 
Cuba is a formally socialist country and, under the current patent law,
ownership of the inventions of the Cuban inventors for which patent applications
have been filed rests with the State. The material license agreement for our
Cuban sourced products is a license agreement between us and CIMAB, dated May 3,
1995, as amended, with respect to nimotuzumab. There is no guarantee that, with
any future changes in the political regime, the Cuban government would continue
to honour such a license agreement.




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Our
potential involvement in intellectual property litigation could negatively
affect our business.




Our
future success and competitive position depend in part upon our ability to
maintain our intellectual property portfolio. There can be no assurance that any
patents will be issued on any existing or future patent applications. Even if
such patents are issued, there can be no assurance that any patents issued or
licensed to us will not be challenged. Our ability to establish and maintain a
competitive position may be achieved in part by prosecuting claims against
others who we believe are infringing our rights and by defending claims brought
by others who believe that we are infringing their rights. In addition,
enforcement of our patents in foreign jurisdictions will depend on the legal
procedures in those jurisdictions. Even if such claims are found to be invalid,
our involvement in intellectual property litigation could have a material
adverse effect on our ability to out-license any products that are the subject
of such litigation. In addition, our involvement in intellectual property
litigation could result in significant expense, which could materially adversely
affect the use or licensing of related intellectual property and divert the
efforts of our valuable technical and management personnel from their principal
responsibilities, whether or not such litigation is resolved in our
favor.




Product
liability claims are an inherent risk of our business, and if our clinical trial
and product liability insurance prove inadequate, product liability claims may
harm our business.




Human
therapeutic products involve an inherent risk of product liability claims and
associated adverse publicity. We currently maintain clinical trial liability
insurance with an ultimate net loss value of up to $10 million per claim and a
policy aggregate of $10 million. We currently have no other product liability
insurance and there can be no assurance that we will be able to obtain or
maintain product liability insurance on acceptable terms or with adequate
coverage against potential liabilities. Such insurance is expensive, difficult
to obtain and may not be available in the future on acceptable terms, or at all.
An inability to obtain sufficient insurance coverage on reasonable terms or to
otherwise protect against potential product liability claims could have a
material adverse effect on our business by preventing or inhibiting the
commercialization of our products, licensed and owned, if a product is withdrawn
or a product liability claim is brought against us.




Risks Related To Being A
Canadian Entity




We
are governed by the corporate laws in Nova Scotia, Canada which in some cases
have a different effect on shareholders than the corporate laws in Delaware,
US.




The
material differences between the Nova Scotia Companies Act (the “NSCA”) as
compared to the Delaware General Corporation Law (“DGCL”) which may be of most
interest to shareholders include the following: (i) for material corporate
transactions (such as amalgamations, other extraordinary corporate transactions,
amendments to the memorandum of association and amendments to the articles of
association) the NSCA generally requires three-quarter majority vote by
shareholders which in most instances requires a confirmatory resolution by a
majority of the shareholders (and, in addition, especially where the holders of
a class of shares is being affected differently from others, approval will be
required by holders of two-thirds of the shares of such class voting in a
meeting called for the purpose), whereas DGCL generally only requires a majority
vote of shareholders for similar material corporate transactions; (ii) quorum
for shareholders meetings is not prescribed under the NSCA and is only 5% under
our articles of association, whereas under DGCL, quorum requires the holders of
a majority of the shares entitled to vote to be present; and (iii) our articles
of association require a special resolution and the Corporations Miscellaneous
Provisions Act (Nova Scotia) requires three-quarters of all shareholders
entitled to vote to pass a resolution for one or more directors to be removed,
whereas DGCL only requires the affirmative vote of a majority of the
shareholders.




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