<PAGE>   1
[LOGO]



Annual
report

1998
<PAGE>   2
 
To our Shareholders,
 
     1998 was a significant starting point for our company. The CliniChem shares
were registered via a prospectus cleared by securities regulatory agencies in
both Canada and the United States. On June 8th, BioChem Pharma contributed
$143.5 million to CliniChem; on June 10th, the company commenced operations; and
on June 26th, CliniChem shares were distributed to BioChem shareholders, as a
dividend-in-kind, on the basis of one CliniChem share for each 40 BioChem shares
held and the CliniChem shares began trading on the NASDAQ national market, the
Toronto Stock Exchange and the Montreal Exchange.
 
     The products or programs that were licensed to CliniChem represent a rich
pipeline of anti-cancer, anti-infectives and vaccines in areas that the World
Health Organization has identified as top priorities in terms of global health
care needs. By contracting the research and development of these programs to
BioChem Pharma, we are assured that a world class scientific team is at work to
develop the products through to commercialization.
 
     A Phase I/II trial of dOTC (BCH-10652), our HIV treatment compound, got
underway during the third quarter of 1998. Results of the Phase I clinical
trials were presented in February at the annual Chicago Conference on
Retroviruses and Opportunistic Infections. dOTC is showing many of the same
qualities that made BioChem's 3TC the world's top selling anti-HIV treatment.
These are a long plasma half-life, no restrictions in terms of food or liquid
intake, a good safety profile and strong activity against HIV. dOTC is likely to
be the first of CliniChem's products to be commercialized.
 
     Troxacitabine (BCH-4556) also began Phase II trials during the first
quarter of 1999. This anticancer candidate drug is designed to treat several
types of tumors and Phase I trials showed good tolerance of the drug, good
pharmacokinetic profile and preliminary indications of anti tumor activity.
Phase II trials got underway in April and will initially target a number of
different solid tumors such as renal, prostate, breast, ovarian, colorectal, non
small cell lung, pancreatic, melanoma and also leukemia.
 
     A new vaccine development group has been formed by BioChem in Northborough,
just outside Boston, to carry out clinical development of the recombinant-
protein vaccine programs, on behalf of CliniChem. Our recombinant meningococcal
meningitis vaccine, Neisseria meningitidis, will be the first candidate to be
developed and it is expected that an Investigational New Drug (IND) submission
will be filed with the U.S. Food and Drug Administration to begin Phase I
testing in the fourth quarter of 1999.
 
     The remaining products in the vaccine portfolio are designed to provide
protection against:
 
     -  Streptococcus pneumoniae, a cause of more than 1.3 million child deaths
        worldwide, nearly 500,000 severe cases of pneumonia each year, claiming
        about 40,000 lives. It is also the cause of acute otitis media: a middle
        ear infection in children. No vaccine is currently available to protect
        young children against pneumococcal disease.
 
     -  Group B Streptococcus, a neo-natal infection, transmitted at birth that
        is considered the single greatest cause of infant mortality in the
        world.
 
     -  Haemophilus influenzae non-typeable which causes meningitis and otitis
        media.
 
     -  Chlamydia pneumoniae, a bacteria that causes upper respiratory infection
        and which researchers believe may have a link to cardiovascular disease.
 
     All of the above vaccine candidates are currently in the preclinical or
research phase of development.
 
     In the angiogenesis program, BioChem's scientists have optimized a series
of compounds that appear to be potent and selective inhibitors of angiogenesis
(tumor induced blood vessel development).
 
     At its meeting of April 27, 1999, CliniChem's Board of Directors approved
the addition of two new research and development projects into the CliniChem
program portfolio. They are BCH-13520, an anti-HIV compound and a technology
called Second Look, which involves computer-assisted cancer detection. The Board
also decided to discontinue research funding of the Neisseria gonorrhoeae
vaccine program.
<PAGE>   3
 
     On the basis of the above, a solid foundation of building value for
CliniChem's shareholders has been laid. The CliniChem Board of Directors looks
forward to an exciting year of progress in 1999 and to sharing with you the
results of these developments.
 
                                            On behalf of the Board,
                                            (Signed)
                                            Francesco Bellini, Ph.D.
                                            Chairman and President
<PAGE>   4
 
                       SECURITIES AND EXCHANGE COMMISSION
 
                              WASHINGTON, DC 20549
                    ----------------------------------------
                                   FORM 20-F
                    ----------------------------------------
 
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
    EXCHANGE ACT OF 1934
 
  OR
 
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
    OF 1934
    For the fiscal year ended December 31, 1998
 
                                        OR
 
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
    ACT OF 1934
    For the transition period from                   to
 
   COMMISSION FILE NUMBER 000-24345
 
                           CLINICHEM DEVELOPMENT INC.
                          DEVELOPPEMENT CLINICHEM INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                                 NOT APPLICABLE
                (TRANSLATION OF REGISTRANT'S NAME INTO ENGLISH)
 
                                     CANADA
                (JURISDICTION OF INCORPORATION OR ORGANIZATION)
 
                           275 Armand-Frappier Blvd.
                         Laval, Quebec, Canada H7V 4A7
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
 
Securities registered or to be registered pursuant to Section 12(g) of the Act:
 
                             CLASS A COMMON SHARES
                                (TITLE OF CLASS)
 
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
 
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
 
                        2,713,260 Class A Common Shares
                          1,000 Class B Common Shares
 
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
 
                              Yes [X]      No [ ]
 
Indicate by check mark which financial statements item the registrant has elect
to follow.
 
                          Item 17 [X]      Item 18 [ ]
<PAGE>   5
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>          <C>                                                          <C>
PART I
Item 1       Description of Business.....................................         4
Item 2       Description of Properties...................................        22
Item 3       Legal Proceedings...........................................        22
Item 4       Control of Registrant.......................................        22
Item 5       Nature of Trading Market....................................        22
Item 6       Exchange Controls and Other Limitations Affecting Holders of
             Class A Common Shares.......................................        23
Item 7       Taxation....................................................        24
Item 8       Selected Financial Data.....................................        25
Item 9       Management's Discussion and Analysis of Financial Condition
             and Results of Operations...................................        25
Item 10      Directors and Officers of the Company.......................        28
Item 11      Compensation of Directors and Officers......................        29
Item 12      Options to Purchase Securities from the Company or
             Subsidiaries................................................        29
Item 13      Interest of Management in Certain Transactions..............        29
PART II
Item 14      Description of Securities to be Registered (1)..............        30
PART III
Item 15      Defaults Upon Senior Securities.............................        30
Item 16      Changes in Securities and Changes in Security for Registered
             Securities..................................................        30
PART IV
Item 17      Financial Statements........................................        30
Item 18      Financial Statements (2)....................................        30
Item 19      Financial Statements and Exhibits...........................        30
             Signatures..................................................        32
             Financial Statements........................................        33
</TABLE>
 
------------------
 
(1)  Pursuant to General Instruction G(b) of Form 20-F, this annual report
     includes the information specified in Parts I, III, and IV.
 
(2)  Pursuant to General Instruction G(c) of Form 20-F, the registrant has
     elected to provide the financial statements and related information
     specified in Item 17.
 
                                        2
<PAGE>   6
 
                                IMPORTANT NOTES
 
1.   EXCHANGE RATE DATA
 
     ALL CURRENCY AMOUNTS IN THIS ANNUAL REPORT ON FORM 20-F ARE STATED IN
CANADIAN DOLLARS, UNLESS OTHERWISE INDICATED.
 
     The high and low exchange rates, the average exchange rate (i.e., the
average of the exchange rates on the last day of each month during the period)
and the period-end exchange rate of the Canadian dollar in exchange for United
States dollars for the 205-day period ended December 31, 1998 based on the noon
buying rate in New York City for cable transfers in foreign currencies as
certified for customs purposes by the Federal Reserve Bank of New York, were as
follows:
 
<TABLE>
<CAPTION>
                                                             FISCAL YEAR ENDED
                                                               DECEMBER 31,
                                                                   1998
                                                             -----------------
                                                             (205-DAY PERIOD)
<S>                                                          <C>
High.....................................................        US$0.6341
Low......................................................        US$0.6833
Average..................................................        US$0.6571
Period-End...............................................        US$0.6504
</TABLE>
 
2.   TRADEMARKS
 
     All company and product names referred to in this document are the property
of their respective owners.
 
     BioChem Pharma Inc.'s ("BioChem") discovery to treat Human Immunodeficiency
Virus ("HIV"), including Acquired Immunodeficiency Syndrome ("AIDS"), sold in
certain countries under the brand name 3TC and in others under the brand name
Epivir or in a tablet also containing AZT and sold under the brand name
Combivir, has the generic name lamivudine. Lamivudine is also being developed to
treat chronic hepatitis B infection and has the brand name Epivir-HBV Tablets
and Oral Solution in the United States, Heptodin in China, Heptovir in Canada
and Zeffix in most other countries. To avoid confusion herein, 3TC will be used
to describe the product for HIV/AIDS and Zeffix will be used to describe the
product for chronic hepatitis B infection. 3TC, Epivir Combivir, Epivir-HBV
Tablets and Oral Solution, Zeffix, Heptovir and Heptodin are trademarks of Glaxo
Wellcome plc which, with its subsidiaries ("Glaxo Wellcome"), is the world-wide
licensee of 3TC and Zeffix, subject to special arrangements for Canada, where a
Glaxo Wellcome-BioChem partnership is commercialising 3TC and Zeffix. Second
Look is a trademark of Qualia Computing, Inc.
 
3.   SAFE HARBOUR
 
     THIS ANNUAL REPORT ON FORM 20-F CONTAINS PROJECTIONS AND FORWARD LOOKING
STATEMENTS REGARDING FUTURE EVENTS AND THE FUTURE FINANCIAL PERFORMANCE OF
CLINICHEM DEVELOPMENT INC. (THE "COMPANY"). WE WISH TO CAUTION YOU THAT THESE
STATEMENTS ARE ONLY OUR PREDICTIONS AND OBJECTIVES. ACTUAL EVENTS OR RESULTS MAY
DIFFER MATERIALLY. PLEASE NOTE IN PARTICULAR THROUGHOUT THIS DOCUMENT WHERE WE
HAVE HIGHLIGHTED SPECIFIC RISKS ASSOCIATED WITH THE COMPANY AND ITS ACTIVITIES.
WE ALSO REFER YOU TO THE DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION AND THE CANADIAN SECURITIES
ADMINISTRATORS, SUCH AS ITS MATERIAL CHANGE REPORTS AND ITS MANAGEMENT PROXY
CIRCULAR. THESE DOCUMENTS, AS WELL AS THIS ANNUAL REPORT ON FORM 20-F, CONTAIN
IMPORTANT FACTORS THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER FROM OUR CURRENT
EXPECTATIONS AND THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS ANNUAL REPORT
ON FORM 20-F. THE COMPANY WILL NOT UPDATE THE INFORMATION CONTAINED IN THIS
ANNUAL REPORT ON FORM 20-F EXCEPT IN THE NORMAL COURSE OF ITS PUBLIC DISCLOSURE
PRACTICES.
 
                                        3
<PAGE>   7
 
                                     PART I
 
ITEM 1.  DESCRIPTION OF BUSINESS
 
     OVERVIEW OF CLINICHEM'S BUSINESS
 
     CliniChem Development Inc. ("CliniChem" or the "Company") was incorporated
by articles of incorporation under the Canada Business Corporations Act by
BioChem Pharma Inc. ("BioChem") in January 1998 to conduct research and
development of potential products primarily for the treatment of cancer and
Human Immunodeficiency Virus ("HIV") infection, including Acquired
Immunodeficiency Syndrome ("AIDS"), and vaccine products for the prevention of
certain bacterial infectious diseases. The Articles of CliniChem were amended on
May 11, 1998 to provide for the creation of Class A Common Shares (the
"CliniChem Common Shares") and of Class B Common Shares (the "Class B Shares").
CliniChem began active operations on June 10, 1998.
 
     BioChem and CliniChem entered into a distribution agreement (the
"Distribution Agreement") providing for the terms and conditions of the
distribution by BioChem of all the outstanding CliniChem Common Shares to the
holders of common shares in the share capital of BioChem (the "BioChem Common
Shares"). Pursuant to the Distribution Agreement, BioChem contributed, on June
8, 1998, $150 million in cash to CliniChem of which $6.5 million were used to
cover the distribution costs, resulting in a net amount of $143.5 million to
CliniChem. Subsequently to this capital contribution, the then issued and
outstanding 1,000 common shares in the share capital of CliniChem held by
BioChem were exchanged for 2,713,260 CliniChem Common Shares and for 1,000 Class
B Shares. On June 26, 1998, BioChem distributed the CliniChem Common Shares to
the then holders of BioChem Common Shares (the "Distribution"). In addition, in
connection with the Distribution Agreement, BioChem and CliniChem entered into a
number of agreements, including a research and development agreement (the
"Research and Development Agreement"), a technology license agreement (the
"Technology License Agreement"), a product option agreement (the "Product Option
Agreement") and a services agreement (the "Services Agreement"). See
"Description of Business -- Arrangements with BioChem".
 
     CliniChem does not perform any research, development or other activities
itself, but rather has contracted with BioChem to perform all such activities
pursuant to the terms of the Research and Development Agreement. The development
programs (collectively, the "CliniChem Programs") conducted under the Research
and Development Agreement are the development of (i) troxacitabine (formerly
known as BCH-4556), a novel nucleoside analog to treat various forms of cancer,
(ii) dOTC (formerly known as BCH-10652) and BCH-13520, two novel nucleoside
analogs to treat HIV infection and AIDS (iii) small molecules to treat solid
cancer tumours by inhibiting angiogenesis through the antagonism of the
a(v)SS(3) receptors, (iv) recombinant protein vaccines to prevent bacterial
infections by: (a) Neisseria meningitidis, (b) Streptococcus pneumoniae, (c)
Haemophilus influenzae non-typeable, (d) Group B Streptococcus and (e) Chlamydia
pneumoniae, and (v) Second Look a computer-assisted breast cancer detection
system. BioChem has the right, with the consent of the Board of Directors of
CliniChem, to expand the scope of the CliniChem Programs and to select
additional development programs to be conducted as substitutes for, or in
addition to, the initial therapeutic and vaccine development programs. At a
meeting of the Board of Directors of CliniChem held on April 27, 1999, a
decision was made to discontinue research funding of the Neisseria gonorrhoeae
vaccine program and to approve the addition into the CliniChem Programs of
BCH-13520 and Second Look. The products developed according to the terms of the
Research and Development Agreement and pursuant to the CliniChem Programs are
herein referred to as the "CliniChem Products".
 
     In order to clinically test, manufacture and market drug products for
prevention or therapeutic use, rigorous mandatory procedures and standards
established by the regulatory agencies must be satisfied. See "Description of
Business -- Government Regulations".
 
     CliniChem's belief in the potential efficacy of some of the CliniChem
Products is based upon preclinical studies performed by BioChem or other third
parties. Neither BioChem nor CliniChem has received regulatory approval to begin
clinical trials on any CliniChem Product other than troxacitabine and dOTC, and
neither CliniChem nor BioChem has received regulatory approval for the
manufacturing and/or marketing of any of the CliniChem Products. Consequently,
there can be no assurance that the CliniChem Products or any
 
                                        4
<PAGE>   8
 
other products selected for research and development will receive the necessary
regulatory approvals, that either CliniChem or BioChem will commence
manufacturing or marketing of any of the CliniChem Products or as to when
manufacturing and marketing of the CliniChem Products will commence.
 
     In order to conduct its business, CliniChem contractually obtained from
BioChem and, as the case may be, from BioChem's licensors, rights to use all
proprietary technology, whether patented or unpatented, owned by, licensed to or
controlled by BioChem and related to the CliniChem Programs, including any
technology developed or otherwise obtained pursuant to the Research and
Development Agreement (the "Developed Technology"), which BioChem has the right
to license or sublicense without the consent of any third party and without
incurring additional liability to any third party (together, with any additional
technology which BioChem chooses to designate as such, the "BioChem
Technology"), for research and development activities, for administrative
services and, if BioChem exercises the option granted by CliniChem to acquire
all rights to each CliniChem Product (and to terminate CliniChem's corresponding
license with respect thereto), exercisable on a product-by-product and
country-by-country basis (the "Product Option"), for the commercialisation of
CliniChem Products. After the expiration of the Product Option for a CliniChem
Product, CliniChem may also perform directly, or engage other third parties to
perform on its behalf, the commercialisation of such CliniChem Product. It is
likely that the Available Funds (as defined under "Description of Business --
Arrangements with BioChem -- Research and Development Agreement") will be used
primarily to fund these activities under the Research and Development Agreement
and the Services Agreement and to pay the Technology Fee (as defined below).
CliniChem's Board of Directors is responsible for determining which products
will be developped, and for approving the work plans and other cost estimates
therefor. CliniChem's Board of Directors supervises and reviews BioChem's
ongoing activities on behalf of CliniChem.
 
     BioChem has also granted certain technology licenses and agreed to make
specified payments on sales of certain products in consideration, inter alia,
for the payments by CliniChem to BioChem of a technology fee (the "Technology
Fee"). In the early years, CliniChem's revenues are expected to be primarily
derived from investment income. In later years, if BioChem were to exercise its
Product Option for any CliniChem Product, or if a CliniChem Product were
commercialised by CliniChem itself or by a third party on behalf of CliniChem,
CliniChem would derive revenues and/or royalties from sales of the CliniChem
Products or from amounts paid to CliniChem by BioChem or third parties for the
rights to commercialise such CliniChem Products. The Available Funds do not
include payments made by BioChem to CliniChem pursuant to the Product Option
Agreement.
 
     Unless otherwise indicated, information regarding the number of persons
diagnosed with a particular disease, fatality rates associated with a particular
disease or indication or potential size of a market for treatment of a
particular disease has been obtained from sources published by The World Health
Organisation (the "WHO") or the Center for Diseases Control (the "CDC") in the
United States.
 
     ARRANGEMENTS WITH BIOCHEM
 
     Technology License Agreement
 
     CliniChem and BioChem have entered into the Technology License Agreement
pursuant to which BioChem has granted to CliniChem an exclusive perpetual
license, to use BioChem Technology (including any trade secrets, technical
information and data regarding product composition, manufacturing, dosage or
efficacy, drug formulations, and other proprietary preclinical, clinical,
pharmacological, toxicological, chemical, physical and analytical safety and
quality control data and information, as well as rights under patents held by
BioChem related to the CliniChem Programs) solely to conduct the CliniChem
Programs and related activities, and to manufacture and to commercialise the
CliniChem Products world-wide. The Technology License Agreement is subject to
pre-existing third-party rights and the receipt of certain third-party consents;
it is further subject to the Research and Development Agreement and the Product
Option Agreement and limited for each CliniChem Product, to a particular field
of use. See "Description of Business--Third-Party Rights and Consents".
 
     Pursuant to the Technology License Agreement, BioChem is obliged to use
commercially reasonable efforts to obtain the required consents in order to
grant certain sublicenses to CliniChem provided that, in each
 
                                        5
<PAGE>   9
 
case, the relevant CliniChem Product incorporating such licensed technology has
received regulatory approval for commercial marketing in at least one country,
BioChem has not exercised the world-wide Product Option with respect to such
CliniChem Product and BioChem has not exercised the Purchase Option (as defined
under '--Arrangements with BioChem--Purchase Option"). Any costs associated with
a consent obtained or sublicense granted pursuant to this provision shall be
paid by CliniChem and any such sublicense shall terminate on the exercise by
BioChem of the world-wide Product Option for such product or the Purchase
Option.
 
     The following table sets out the field of use for the current CliniChem
Programs:
 
<TABLE>
<CAPTION>
                     PROGRAM                                           FIELD OF USE
                     -------                                           ------------
<S>                                                  <C>
Development of troxacitabine.....................    Treatment of cancer
Development of dOTC and BCH-13520................    Treatment of HIV infection and AIDS
Development of a a(v)SS(3) antagonist to prevent
  angiogenesis...................................    Treatment of cancer
Development of recombinant protein vaccines......    To protect against infections by Neisseria
                                                     meningitidis, Haemophilus influenzae
                                                     non-typeable, Group B Streptococcus,
                                                     Streptococcus pneumonia and Chlamydia pneumoniae
Development of Second Look.......................    Detection of breast cancer
</TABLE>
 
     Pursuant to the terms of the Technology License Agreement, CliniChem's
right to obtain manufacturing will be subject to a right of first offer and a
right of first refusal on the part of BioChem to manufacture. In the event
BioChem does not exercise such right of first offer and right of first refusal,
then BioChem will have the right to approve any proposed manufacturer, the
approval of which may be withheld only if any such manufacturer has insufficient
or inadequate manufacturing capability or if any such manufacturer's activities
are likely to have a material adverse effect on BioChem's overall competitive
position in the pharmaceutical industry. In the event that BioChem exercises its
right to reject a manufacturer, BioChem will be obliged to manufacture or obtain
manufacturing for any such CliniChem Product for CliniChem at prevailing market
rates, but not less than BioChem's cost of manufacture plus 15% of such cost.
 
     Pursuant to the Technology License Agreement, CliniChem does not have the
right to grant a sublicense under the BioChem Technology to anyone other than
BioChem until such time as the Product Option with respect to any CliniChem
Product in one or more countries expires unexercised. From and after the
expiration of such Product Option in any such country, CliniChem may sublicense
the BioChem Technology to one or more third parties solely to the extent
necessary to complete the development of, or to make or have made and use such
CliniChem Product, or to sell or have sold such CliniChem Product in such
country. BioChem shall have the right to approve any proposed sublicensee or any
manufacturer on behalf of a sublicensee but such approval may only be withheld
if any such sublicensee or manufacturer has insufficient manufacturing
capability or if any such sublicensee's or manufacturer's activities are likely
to have a material adverse effect on BioChem's overall competitive position in
the pharmaceutical industry.
 
     In consideration for the license to use the existing BioChem Technology
relating to the CliniChem Programs, CliniChem is paying the Technology Fee to
BioChem. The Technology Fee is payable monthly at a rate of $352,000 a month
over a period of 48 months following the Distribution date; provided that the
Technology Fee will no longer be payable at such time as the number of CliniChem
Products being developed by CliniChem plus the number of CliniChem Products
having been acquired by BioChem pursuant to the exercise of the Product Option
is less than two.
 
     Either BioChem or CliniChem may terminate the Technology License Agreement
upon the occurrence of a material breach of the Technology License Agreement or
the Product Option Agreement by the other party which continues for 60 days
after written notice. The Technology License Agreement will automatically
terminate upon termination by BioChem of the Research and Development Agreement
due to a breach thereof by CliniChem or CliniChem's entering into any proceeding
in bankruptcy, reorganisation of creditors' rights or similar arrangement. The
Technology License Agreement shall terminate on a product-by-product and
country-by-country basis in connection with BioChem's corresponding exercise of
the Product Option.
 
                                        6
<PAGE>   10
 
     BioChem is engaged in ongoing licensing and development of new products.
While BioChem has licensed the rights to conduct the CliniChem Programs and
manufacture and commercialise the CliniChem Products to CliniChem, BioChem is
not prohibited from developing other products, including those that may compete
with the CliniChem Products, or from in-licensing or acquiring products that may
compete with the CliniChem Products. BioChem's activities may, in some
circumstances, lead to the development, in-licensing or acquisition of products
that compete with the CliniChem Products being developed by or on behalf of
CliniChem. It is possible that BioChem's rights with respect to such competitive
products could reduce BioChem's incentive to exercise the Product Option or the
Purchase Option.
 
     Research and Development Agreement
 
     Under the Research and Development Agreement, BioChem has agreed to perform
diligently all work necessary to conduct the activities agreed upon by BioChem
and CliniChem pursuant to the CliniChem Programs. BioChem is not required to
devote any specific amount of time or resources to conduct the CliniChem
Programs under the Research and Development Agreement, and BioChem expects to
devote a substantial amount of its time and resources to activities for its own
account. Activities under the Research and Development Agreement are undertaken
pursuant to work plans and cost estimates proposed by BioChem and accepted by
CliniChem. CliniChem may approve all or any portion of a proposed work plan and
cost estimate or may determine not to approve any proposed work plan and cost
estimate. CliniChem is not obliged to fund development of the CliniChem Programs
in excess of amounts reflected in approved work plans and cost estimates.
BioChem is not required to undertake activities that would result in Research
and Development Costs exceeding those in approved work plans and cost estimates.
"Research and Development Costs" shall mean the fully-burdened cost of
activities undertaken pursuant to the Research and Development Agreement plus 5%
of such costs, including research expenses, general and administrative expenses,
capital asset costs, costs for licenses or acquisition of technology, products
or therapeutic agents from third parties for the CliniChem Programs and costs of
third-party collaborations or contract research undertaken for the CliniChem
Programs.
 
     Under the Research and Development Agreement, CliniChem is expected to
utilise substantially all of the Available Funds to make payments to BioChem for
its Research and Development Costs. "Available Funds" shall mean all of the
funds contributed to CliniChem by BioChem, plus any investment income earned
thereon, less (i) Research and Development Costs, (ii) CliniChem's ongoing
administrative expenses and income taxes paid (less income taxes refunded),
(iii) the Technology Fee, (iv) payments made pursuant to the Services Agreement,
and (v) reasonable amounts actually paid by CliniChem for consultants to advise
the Board of Directors of CliniChem with respect to the CliniChem Products and
the CliniChem Programs. Available Funds shall not include payments made by
BioChem to CliniChem pursuant to the Product Option Agreement.
 
     Payments to BioChem under the Research and Development Agreement are the
full amount of all Research and Development Costs incurred by BioChem in
performing these activities. Such costs consist of direct costs, including
collaborative research agreement payments, payments for compound supply,
payments for biologicals, drug substances and drug products, payments for
chemical precursors, payments for assay acquisitions, payments for clinical
studies, payments for toxicological and pharmacokinetic studies, process
development contracts, manufacturing of batches of vaccines for clinical trials,
immunological studies and other outside services, payments for other BioChem
functions (non-research and development) which provide services, payments for
investigation or research grants, payments for consulting services, hiring
expenses, salaries and fringe benefits for people who will work directly on
CliniChem Programs, milestone payments to third parties, project-related travel,
entertainment and related expenses, capital equipment and other materials
purchased exclusively for CliniChem Programs, miscellaneous project expenses,
regulatory and filing fees, telephone and communications, patent and trademark
expenses including the cost of prosecution, defence and maintenance of
intellectual property rights, software, payments for clinical research
organisations, payments for monitoring, payments for data management and
insurance, and indirect costs including salaries and fringe benefits of people
managing and supporting those working directly on CliniChem Programs, general
supplies and chemicals, general information systems and communications support,
general equipment depreciation, general facilities depreciation, utilities,
rent, miscellaneous indirect expenses and miscellaneous general and
 
                                        7
<PAGE>   11
 
administrative expenses. Under the Research and Development Agreement, BioChem
also may license technology or products used to conduct the CliniChem Programs
from third parties and may conduct the CliniChem Programs in combination with
third parties and the costs of such licensing or conduct will be paid by
CliniChem. BioChem may enter into research contracts with third parties in its
own name, but on behalf of CliniChem as agent.
 
     CliniChem has agreed to use diligent efforts to conduct the CliniChem
Programs in accordance with approved work plans and cost estimates under the
Research and Development Agreement by contracting with BioChem to perform
research and development services. CliniChem is required to utilise the
Available Funds only in accordance with the Research and Development Agreement,
the Technology License Agreement and the Services Agreement. Prior to
expenditure, CliniChem invests the Available Funds in interest-bearing,
investment-grade securities. CliniChem may not encumber, pledge or otherwise
take any action with respect to the Available Funds that could prevent the full
expenditure of such funds under the Research and Development Agreement. Based on
CliniChem's current development schedule, CliniChem does not expect that most of
the CliniChem Products will reach commercial marketability prior to expenditure
of the Available Funds.
 
     As between BioChem and CliniChem, BioChem owns all Developed Technology,
including patents, and such Developed Technology, as is required for the field
of use of the CliniChem Products, is licensed to CliniChem pursuant to the
Technology License Agreement. BioChem is responsible to determine whether and to
what extent to seek patent protection for Developed Technology. If BioChem
declines to seek patent protection for any technology, CliniChem does not have
the right to do so.
 
     The Research and Development Agreement will terminate upon the exercise or
expiration of the Purchase Option. Either party may terminate the Research and
Development Agreement if the other party (i) breaches the Research and
Development Agreement, Product Option Agreement or any material obligations
thereunder (if such breach continues for 60 days after written notice by the
terminating party), or (ii) enters into any proceeding, whether voluntary or
involuntary, in bankruptcy, reorganisation of creditors' rights or similar
arrangement for the benefit of creditors. In addition, CliniChem's product
license in any country with respect to a particular CliniChem Product will
terminate after BioChem's exercise of the Product Option for such product in
such country.
 
     Product Option Agreement
 
     Pursuant to the Product Option Agreement, CliniChem has granted the Product
Option to BioChem pursuant to which BioChem may, on a product-by-product and
country-by-country basis, terminate CliniChem's license to a CliniChem Product
as to which the Product Option has been exercised by BioChem (an "Acquired
Product"), and sell and have sold the Acquired Product in the country or
countries as to which the Product Option is exercised (the "Territory"). BioChem
may exercise the Product Option with respect to any CliniChem Product on a
country-by-country basis at any time until (i) with respect to the United
States, 30 days after the United States Food and Drug Administration (the "FDA")
clearance to market such CliniChem Product in the United States and (ii) with
respect to any other countries, 30 days after the clearance by the appropriate
regulatory agency to commercially market such CliniChem Product in such country.
The Product Option will expire, to the extent not previously exercised, 30 days
after the expiration of the Purchase Option. BioChem must exercise the Product
Option for any country prior to the date of the first commercial sale of the
CliniChem Product in such country.
 
     If BioChem exercises the Product Option for a CliniChem Product, BioChem
will be required to use diligent efforts to complete the research and
development of and to commercialise such Acquired Product in each of the
following countries: Canada, France, Germany, Italy, Japan, the United Kingdom
or the United States (each a "Major Market Country") in which the Product Option
has been exercised. BioChem will devote to its commercialisation efforts the
same resources as other biopharmaceutical companies of similar size devote to
products with similar market potential and similar relative importance in their
product portfolios and may use reasonable discretion in allocation of its
resources in performing such obligations.
 
     BioChem will make payments (each a "Product Payment") to CliniChem with
respect to each Acquired Product. Such payments will be a percentage of the
total amount invoiced, net of taxes, on sales of an
 
                                        8
<PAGE>   12
 
Acquired Product by BioChem to unrelated third parties, such as wholesalers,
hospital distributors, marketing partners, and others, in bona fide arm's-length
transactions, less discounts, allowances, credits and charges for freight or
insurance as customarily determined under BioChem's accounting policies (the
"Net Sales"), and percentage-of-sales payments and front-end distribution fees,
prepaid royalties, one-time, infrequent or special payments or non-monetary
consideration (including licenses of technology) from a licensee, distributor or
marketing partner to BioChem with respect to an Acquired Product but excluding
any payments for research and development-related services or capital
expenditures received by BioChem from unrelated third parties with respect to
Acquired Products (collectively, the "Licensing Revenues").
 
     It is common for biopharmaceutical companies to enter into marketing
agreements, which provide that the marketing partner pay a percentage of its
sales and/or up front payments to the biopharmaceutical company. If BioChem
exercises the Product Option, it may enter into such agreements and receive such
payments, which would be included in the definition of "Licensing Revenues".
These payments will range from 1 to 6% of Net Sales and from 10 to 25% of
Licensing Revenues. Because the marketing expenses associated with a newly
introduced product during the first few years after launch are generally
significantly higher than those for an established product, the Product Payments
will not exceed 3% of Net Sales plus 12.5% of Licensing Revenues, on a quarterly
basis, for the first twelve calendar quarters during which the Acquired Product
is commercially sold in the first Major Market Country.
 
     In determining the payments due to CliniChem with respect to any Acquired
Product, Net Sales by and Licensing Revenues of BioChem will be reduced by the
amount of any license or similar payments made by or due from BioChem to third
parties with respect to sales of such Acquired Product in the Territory. It is
possible that, to develop the CliniChem Products, additional licenses or other
arrangements with third parties may be necessary or appropriate. Such
arrangements could also require payments by BioChem that would reduce the
Product Payments owed to CliniChem.
 
     Subject to BioChem's buy-out option described below, Product Payments will
commence on the date of the first commercial sale of such Acquired Product in
any country for which the Product Option has been exercised. BioChem will make
such Product Payments, with respect to all countries for which the Product
Option has been exercised, until ten years after the first commercial sale of
the Acquired Product in the first Major Market Country in which such product is
commercially sold (the "Payment Period").
 
     BioChem has the option to buy out CliniChem's right to receive Product
Payments for any Acquired Product on either a country-by-country or global basis
in accordance with a formula set forth in the Product Option Agreement. A
country-specific buy-out option may be exercised for any Acquired Product at any
time after the end of the twelfth calendar quarter following the date on which
the Acquired Product was first commercially sold in such country. The global
buy-out option may be exercised for any Acquired Product, for all countries for
which BioChem has exercised the Product Option, at any time after the end of the
twelfth calendar quarter following the date on which the Acquired Product was
first commercially sold in either the United States or two other Major Market
Countries. At the time BioChem exercises the global buy-out option for any
Acquired Product, the Product Option for such product will expire for all
countries for which it had not been previously exercised.
 
     If BioChem exercises the Product Option for any CliniChem Product, BioChem
will continue to own and have the right to use any clinical supplies, materials
and other tangible assets purchased, manufactured or developed for use
exclusively in the development of such CliniChem Product under approved work
plans and cost estimates (the "Development Assets"), without any additional
payment to or reimbursement of CliniChem. To the extent BioChem does not
exercise the Product Option for any CliniChem Product prior to its expiration,
or to the extent BioChem notifies CliniChem that it will not exercise its
Product Option for any CliniChem Product, BioChem must make Development Assets
exclusively relating to such CliniChem Product available to CliniChem at no
charge to the extent such assets are being used by CliniChem and will not be
used under the Research and Development Agreement.
 
     During the Payment Period for an Acquired Product, BioChem will provide
quarterly reports to CliniChem detailing payments due for such period with
respect to the Acquired Product.
 
                                        9
<PAGE>   13
 
     To the extent BioChem does not exercise the Product Option with respect to
any CliniChem Product, CliniChem will retain exclusive rights (subject to
pre-existing third-party rights and subject to receipt of certain third-party
consents) to develop and commercialise such CliniChem Product.
 
     If BioChem does not exercise its Product Option for a CliniChem Product
(and does not exercise the Purchase Option), CliniChem may need to find other
means to commercialise that CliniChem Product not involving BioChem, and there
can be no assurance that CliniChem will be able to do so.
 
     Purchase Option
 
     BioChem, as the holder of all the majority of the outstanding Class B
Shares, has the right, provided for in CliniChem's Articles, to acquire all, but
not less than all, of the issued and outstanding CliniChem Common Shares (the
"Purchase Option"). The Purchase Option will be exercisable by written notice
given at any time from and after the Distribution date and ending on the earlier
of (i) March 31, 2003 or (ii) the 90th day after the date CliniChem provides
BioChem (as the holder of the majority of the outstanding Class B Shares) with
quarterly financial statements of CliniChem showing cash or cash equivalents of
less than $5.0 million, although BioChem may, at its election, extend such
period by providing additional funding, including through loans, for the
continued conduct of any or all of the CliniChem Programs (but in no event
beyond March 31, 2003).
 
     If the Purchase Option is exercised, the amount payable upon such exercise
(the "Purchase Option Exercise Price") will be the greatest of:
 
          (a)  (i) 25 times the aggregate of (a) all world-wide payments made by
     and all world-wide payments due to be made by BioChem to CliniChem with
     respect to all Acquired Products for the four calendar quarters immediately
     preceding the quarter in which the Purchase Option is exercised (the "Base
     Period") and (b) all payments that would have been made and all payments
     due to be made by BioChem to CliniChem during the Base Period if BioChem
     had not previously exercised its Payment Buy-Out Option with respect to any
     product; less (ii) any amounts previously paid to exercise any payment
     buy-out option for any CliniChem Product;
 
          (b)  the fair market value of 420,000 BioChem Common Shares determined
     as of the date BioChem provides notice of its intention to exercise its
     Purchase Option;
 
          (c)  $175 million plus any additional funds contributed to CliniChem
     by BioChem less the aggregate amount of all Technology Fee payments,
     Research and Development Costs and Services Agreement payments paid or
     incurred by CliniChem as of the date the Purchase Option is exercised; and
 
          (d)  $50 million.
 
     In each case, the amount payable as the Purchase Option Exercise Price will
be reduced (but not to less than $1.00) to the extent, if any, that CliniChem's
liabilities at the time of exercise (other than liabilities under the Research
and Development Agreement, the Services Agreement and the Technology License
Agreement and any debt owed to BioChem) exceed CliniChem's cash and cash
equivalents and short-term and long-term investments (excluding the amount of
Available Funds remaining at such time). For this purpose, liabilities will
include, in addition to liabilities required to be reflected on CliniChem's
financial statements under generally accepted accounting principles, certain
contingent liabilities relating to guarantees and similar arrangements.
 
     BioChem may pay the Purchase Option Exercise Price in cash, in BioChem
Common Shares, or in any combination of cash and BioChem Common Shares. For the
purpose of determining either the Purchase Option Exercise Price or the fair
market value of the BioChem Common Shares to be issued in payment thereof, the
fair market value of BioChem Common Shares shall be deemed to be the average of
the closing sales price of BioChem Common Shares on the Nasdaq National Market
converted to Canadian dollars using the noon buying rate in New York City for
cable transfers in foreign currencies as certified for customs purposes by the
Federal Reserve Bank of New York for the day on which each such closing sales
price occurred for the 20 trading days ending with the trading day that is two
trading days prior to the date of exercise of the Purchase Option.
 
                                       10
<PAGE>   14
 
     The closing of the acquisition of the CliniChem Common Shares pursuant to
exercise of the Purchase Option will take place on a date selected by BioChem,
but no later than 60 days after the exercise of the Purchase Option unless, in
the judgement of BioChem, a later date is required to satisfy any applicable
legal requirements or to obtain required consents. Between the time of exercise
of the Purchase Option and the time of closing of the acquisition of the
CliniChem Common Shares, CliniChem may not, without BioChem's consent as the
holder of the majority of the outstanding Class B Shares, incur additional debt,
dispose of assets, pay or declare any dividends or operate its business other
than in the ordinary course.
 
     In the event that prior to BioChem's exercise of the Purchase Option, the
number of outstanding BioChem Common Shares is increased by virtue of a stock
split or a dividend payable in BioChem Common Shares or the number of such
shares is decreased by virtue of a combination or reclassification of such
shares, then the number of BioChem Common Shares used to compute the Purchase
Option Exercise Price (if the Purchase Option Exercise Price is the fair market
value of 420,000 shares of BioChem Common Shares) shall be increased or
decreased, as the case may be, in proportion to such increase or decrease in the
number of outstanding BioChem Common Shares.
 
     BioChem is not obligated to exercise the Purchase Option or the Product
Option, and it will exercise either or both of such options only if, in the
opinion of BioChem, it is in BioChem's best interest to do so. Even if the
CliniChem Products are developed and approved, if BioChem does not exercise the
Product Option for a CliniChem Product and/or does not exercise the Purchase
Option, CliniChem will be required to find alternative ways to commercially
market or exploit such CliniChem Products and there can be no assurance that
CliniChem will be able to do so. In the event BioChem fails to exercise the
Purchase Option and CliniChem determines to market the CliniChem Products itself
(other than any CliniChem Product as to which BioChem has exercised the Product
Option), CliniChem will require substantial additional funds. There can be no
assurance that such funds will be available on attractive terms, if at all.
Similarly, if CliniChem determines to license the CliniChem Products to third
parties, such arrangements, if available, may be on terms less favourable to
CliniChem or its shareholders than would be the exercise of the Purchase Option.
 
     Services Agreement
 
     CliniChem and BioChem have entered into a Services Agreement pursuant to
which BioChem has agreed to provide CliniChem with administrative services,
including accounting and legal services, and other services for an annual fee of
$400,000.
 
     The Services Agreement expires six months after the expiration of the
Purchase Option. CliniChem may terminate the Services Agreement at any time upon
60 days' written notice.
 
     THE CLINICHEM PROGRAMS
 
     Troxacitabine (formerly known as BCH-4556)
 
     Troxacitabine is a nucleoside analog being developed to treat various forms
of cancer. Few nucleoside analogs, such as gemcitabine and Ara-C, are used in
the treatment of some cancer. These nucleoside analogs inhibit tumour growth by
preventing cell replication. Currently marketed nucleoside analogs have two
major disadvantages that impair their anti-cancer activity and have limited
their use to date. First, they are rapidly deaminated by cellular enzymes, which
leads to a loss of efficacy and consequently to the resistance of the cancer to
treatment. Second, existing nucleoside analogs are typically unable to
completely stop cell division and therefore do not optimally treat cancer.
Troxacitabine is a nucleoside analog which CliniChem believes will provide
significant benefits in treating various forms of cancer due to its novel
structure and mechanism of action. Discovered and synthesised by BioChem
scientists, troxacitabine is structurally different from currently marketed
nucleoside analogs. Troxacitabine is not vulnerable to deamination and because
of its mechanism of action, being a complete DNA chain terminator, it may be
able to completely stop tumour cell division. CliniChem believes that both of
these characteristics could lead to improved efficacy compared to other
currently marketed nucleoside analogs. CliniChem plans to administer
troxacitabine initially by intravenous injection.
 
                                       11
<PAGE>   15
 
     Troxacitabine was selected for clinical development based on the activity
it demonstrated against a variety of human tumours grown in immunocompromised
mice and against human tumour cells taken directly from patients. Phase I safety
and pharmacokinetic studies performed in advanced stage cancer patients with
solid tumours are close to completion. A single dose regimen has been evaluated
in collaboration with the National Cancer Institute of Canada. Two additional
multiple doses regimens studies were conducted in the United States. A Phase I
safety and pharmacokinetic study in leukemia patients is also ongoing in the
United States. CliniChem has initiated a Phase II clinical trial program with
troxacitabine which will target various types of cancer (e.g. renal, prostate,
breast, ovarian, colorectal, non-small cell lung, pancreatic, melanoma and
leukemia). CliniChem hopes the initial pilot Phase II studies will demonstrate
the types of cancer in which troxacitabine shows activity. If positive results
are obtained, CliniChem will then focus on certain types of cancer in the Phase
II/III trial program.
 
     According to DataMonitor Healthcare Reports, 1997; Cancer to 2005,
approximately 8 million people world-wide are diagnosed each year with cancer.
The world-wide market for anti-cancer treatments in 1996 was approximately
US$10.2 billion, or 4.3% of the global pharmaceutical market. In 1996, the
anti-cancer market grew by approximately 12% over the previous year. Factors
influencing the strong growth in the cancer market include: (a) increased
incidence of cancer; (b) improved diagnosis; and (c) development of effective
adjunct therapies which enable more intense, more effective and more widespread
use of chemotherapy. The increased incidence of cancer is due to many factors,
including: (a) world-wide population growth; (b) longer life expectancies; and
(c) increased exposure to carcinogenic environmental or dietary factors.
 
     dOTC (formerly known as BCH-10652)
 
     dOTC is a compound being developed for the treatment of HIV infection and
AIDS which has been shown to stop the replication of the HIV virus in vitro.
dOTC is a nucleoside analog with a novel structure which targets the HIV reverse
transcriptase enzyme. By targeting the reverse transcriptase enzyme, dOTC
appears to interfere with the transcription of viral RNA to viral DNA, a process
necessary for HIV replication. Other nucleoside analogs, such as AZT and 3TC,
also inhibit the reverse transcriptase enzyme. However, dOTC appears to be
capable of inhibiting the replication of HIV viruses that have become resistant
to 3TC and AZT and to some protease inhibitors. In addition, based on in vitro
studies, in contrast to 3TC, resistance to dOTC appears slow to develop and when
mutations do emerge, they confer only a relatively small diminished dOTC
sensitivity to the virus. CliniChem believes these properties may give dOTC a
role in the treatment of both HIV-infected patients in whom standard triple
combination regimens are no longer effective and in patients who have never
received anti-HIV therapy (first-line therapy). The current approach to HIV
treatment usually relies on triple combination therapy, typically two nucleoside
analogs and a protease inhibitor or a non-nucleoside reverse transcriptase
inhibitor.
 
     Various preclinical tests performed to assess the safety of dOTC have
indicated a good safety profile for this compound. Because of the long-term use
of HIV infection treatments, a potent, safe and convenient compound has a
significant competitive advantage. Two Phase I clinical trials in healthy adult
volunteers have shown that dOTC is very well tolerated with an excellent
pharmacokinetic profile. These studies have shown that single oral doses up to
1,600 milligrams were well tolerated. dOTC is well absorbed, with an absolute
bioavailability of approximately 80% and has a long plasma half-life. The
pharmacokinetic appears to be linear with a low inter subject variability and is
not influenced by the administration of food. The elimination half-life suggests
that dose intervals of 12 to 24 hours would be reasonable. Based on these
results, a Phase I/II clinical trial has been initiated in HIV-1 positive
antiretroviral-naive patients in the third quarter of 1998. Preliminary results
from this trial indicate that dOTC administered twice daily has potent
anti-HIV-1 activity. dOTC is currently being investigated as a once daily
regimen.
 
     According to World-Wide Antiretroviral Sales, IMS Report, 1997, in 1997,
the antiretroviral (anti-HIV) market was approximately US$2 billion in sales,
divided between reverse transcriptase inhibitors (US$1.2 billion) and protease
inhibitors (US$800 million). The vast majority of the sales were generated in
North America, Western Europe and Japan. The WHO estimates that, as of the end
of 1998, 33.4 million people world-wide had been infected with HIV, the virus
that causes AIDS. It is generally believed that the vast majority of individuals
infected with HIV will ultimately develop AIDS if they are not properly treated.
Assuming that trends in many parts of the world will continue, the WHO estimates
that, by the year 2000,
                                       12
<PAGE>   16
 
more than 40 million people world-wide will have been infected with HIV. In 1998
alone, there were 5.8 million new infections.
 
     BCH-13520
 
     BCH-13520 is a new anti-HIV-1 nucleoside analog that is at the advanced
research stage and on which, in view of the promising results, the anti-viral
research team is concentrating its efforts. BCH-13520 showed good in vitro
anti-HIV activity and was shown to be synergistic with 3TC and AZT. Resistance
in vitro towards BCH-13520 seems to develop slowly and the compound is effective
against AZT and 3TC resistant viruses. BCH-13520 has also shown good oral
bioavailability in animal models. CliniChem is conducting further research work
in order to better define the activity, the resistance and the safety profile of
this new promising anti-HIV compound. CliniChem expects to bring BCH-13520
forward to the candidate drug stage and to proceed to its preclinical
development in the second-half of 1999.
 
     Angiogenesis Inhibitors
 
     Angiogenesis is the process whereby new blood vessels are formed. Over the
last few years, it has been recognised that tumour growth is dependent upon the
formation of new blood vessels to supply the cancer mass with oxygen and
nutrients and to remove carbon dioxide and other metabolic products.
Consequently, angiogenesis is required for the growth and proliferation of
tumours. The inhibition of angiogenesis, therefore, may prevent tumour growth.
 
     One of the required elements of the angiogenic process is the activation of
the alphaVbeta3 receptors. CliniChem is pursuing the discovery and development
of small molecules that block these receptors and thus should inhibit solid
cancer tumour growth and progression. Such molecules are expected to be utilised
in combination with standard chemotherapeutic agents to treat a wide variety of
solid tumours. This project originated form a collaboration between BioChem
scientists and scientists from the Beth Israel Deaconess Hospital in Boston,
Massachusetts. CliniChem has optimised one class of small molecules that have
demonstrated potent activity in in vitro and in in vivo angiogenesis models
through alphaVbeta3 antagonism. Some of these agents are currently being
evaluated for their anti-cancer in vivo activity in animal models. If results
are positive, it is anticipated that the most promising compounds would be
progressed to preclinical development through the second-half of 1999 with the
objective of identifying drug candidates suitable for clinical development.
 
     There is no product currently marketed which has been approved for the
treatment of cancer by inhibiting angiogenesis. However, there are a number of
agents in preclinical and clinical development which are being studied alone or
in conjunction with chemotherapeutic agents. Due to the nature of the angiogenic
process, these agents are likely to be administered over a long period of time
to prevent angiogenesis. If effective in preventing the recurrence of cancer
tumours, CliniChem believes that the market for these angiogenesis inhibitors
may be substantial. CliniChem also believes that such products, if successfully
developed, could be used as: (a) an adjunct to chemotherapy or radiotherapy; (b)
a follow-up to chemotherapy to prevent recurrence of the tumours and metastases;
(c) therapy for large, slow-growing tumours that are less responsive to
cytotoxic chemotherapy; and (d) first-line therapy to bypass drug resistance.
 
     Vaccines
 
     Vaccines stimulate the immune system to induce protective immunity.
Vaccines may consist of whole viruses or bacteria or of specific antigens which
are sometimes formulated with an adjuvant (an agent, such as aluminium salt,
added to antigens to enhance their immunogenicity). CliniChem is developing
recombinant protein vaccines against numerous bacterial infections for which
there are no vaccines currently available or for which existing vaccines have
low or narrow efficacy. CliniChem is initially focusing its efforts on the
development of candidate vaccines against bacterial diseases resulting from
infections of Neisseria meningitidis (bacterial meningitis). Group B
Streptococcus (neonatal infections) and Streptococcus pneumoniae (pneumonia,
meningitis, otitis media (acute middle ear infections)) and also will be
developing vaccines against infections of Haemophilus influenzae non-typeable
(otitis media), and Chlamydia pneumoniae. On April 27, 1999, the Board of
Directors of CliniChem decided to discontinue research funding of the Neisseria
gonorrhoeae (gonorrhea) vaccine research program.
 
                                       13
<PAGE>   17
 
     CliniChem has adopted the strategy of identifying specific bacterial
proteins for each pathogen that are able to elicit a broad immune response
against all strains of the pathogen and which are immunogenic in young children.
This approach offers potential advantages over alternative approaches.
 
     Many bacterial vaccines available today are polysaccharide vaccines or
polysaccharide conjugate vaccines. Polysaccharide vaccines suffer from a number
of disadvantages. First, polysaccharide vaccines are T-cell-independent
antigens, which do not stimulate immune memory. They therefore produce only
short-term immunity. Second, the existing polysaccharide vaccines generally are
poorly immunogenic in young children and the elderly. Therefore, they do not
produce strong or long-lasting immunity in young children and the elderly and
are non-immunogenic in children under two years of age. Third, they do not
elicit good secondary responses and, therefore, they cannot be used to produce a
booster effect. Furthermore, there is a strong antigenic variation among the
capsular polysaccharides of different bacterial strains of the same bacteria,
which necessitates the combination of multiple polysaccharide antigens to ensure
a broader immunity. In other words, different bacterial strains have unique
capsular polysaccharides, making it impossible for a single polysaccharide
vaccine to provide global protection against a broad range of strains of the
particular bacterium. Consequently, numerous polysaccharide antigens must be
administered to protect against multiple strains of an encapsular bacterium. The
production of such multivalent vaccines is time-consuming and expensive.
Finally, there are certain bacteria that have no capsular polysaccharides.
 
     In part to overcome certain limitations of polysaccharide-based vaccines,
polysaccharide conjugate vaccines have been and are being developed. One such
vaccine to protect against Haemophilus influenzae type b is currently marketed.
These polysaccharide conjugate vaccines chemically couple a polysaccharide with
a protein carrier. Because of the protein carrier, polysaccharide conjugate
vaccines induce a T-cell dependent response, which induces a memory effect and
can be used to produce a booster effect. These polysaccharide conjugate
vaccines, however, have their own limitations. Because of the limited number of
polysaccharide conjugate vaccines that can be combined in a single dose, current
polysaccharide conjugate vaccines provide protection against only a limited
number of strains of a bacterium. In addition, because of the conjugation
process, polysaccharide conjugate vaccines are relatively expensive, time
consuming and difficult to manufacture.
 
     CliniChem is developing recombinant protein vaccines that attempt to
overcome the problems and limitations of both polysaccharide vaccines and
polysaccharide conjugate vaccines. CliniChem's recombinant protein vaccines
elicit T-cell-dependent immunity. CliniChem hopes that these vaccines will
produce (a) immunogenicity in children under the age of two and (b) a better and
long-lasting immunity in people of all ages. In addition, CliniChem believes
that the development of a vaccine based on an antigen common and conserved among
all the strains of a given bacterium should allow the design of a single protein
vaccine that could provide global protection against multiple strains of a
bacterium. Furthermore, such vaccines should be easier and less expensive to
manufacture and could be combined more easily with other vaccines for other
infectious diseases.
 
     CliniChem is working on the development of recombinant protein vaccines
against the following bacterial infections.
 
     Neisseria meningitidis
 
     Neisseria meningitidis ("N. meningitidis") causes both endemic and epidemic
disease, principally meningitis and meningococcal septicemia.
 
     Acute meningitis and meningococcal septicemia have a high rate of
mortality. The latest outbreak in Sub-Saharan Africa, in 1996, affected over
100,000 people and claimed at least 10,000 lives. The WHO estimates that
approximately 35,000 of the 310,000 cases reported world-wide each year are
fatal. The development of a highly effective vaccine against meningococcal
infection is a research priority identified by the WHO and by the Committee of
the Children's Vaccine Initiative of the United States.
 
     In the United States, infection by N. meningitidis is the second most
common cause of bacterial meningitis (approximately 30 to 40% of all cases),
affecting approximately 4,000 people each year. The fatality rate is
approximately 10% for meningococcal meningitis and 20% for meningococcal
septicemia, despite therapy with antimicrobial agents such as penicillin. The
incidence of endemic meningococcal meningitis is highest among children aged
6-12 months and then steadily declines with age. By 5 years of age,
                                       14
<PAGE>   18
 
the incidence approximates that for adults. Serogroup B, for which no vaccine
exists, accounts for about 50% of all cases of infection by N. meningitidis.
While serogroup A causes only a small portion of endemic disease in the United
States, it is the most common cause of epidemics in developing countries.
 
     The current polysaccharide vaccine has antigens associated with only four
(A, C, W135 and Y) of the twelve serogroups (groups of bacterial strains that
share a common capsular polysaccharide antigen) of N. meningitidis. The protein
discovered by BioChem appears to hold potential for the development of a new
vaccine against all strains of N. meningitidis, including serogroup B strains,
which are prevalent in industrialised countries and for which no vaccine
currently exists. CliniChem has found that this protein is present in all
meningococcal isolates and that it is exposed at the surface of intact
meningococcal bacteria, where it is accessible to antibodies. CliniChem believes
that this vaccine will have all the benefits of recombinant protein vaccines
described above.
 
     In research experiments, CliniChem used its candidate vaccine to immunise
mice in order to evaluate the vaccine's ability to confer protection against
lethal infection by N. meningitidis strain of serogroup B. This preclinical work
showed that the purified protein was immunogenic and protective when
administered with an aluminium-based adjuvant. The antibodies present in the
serum fraction of the blood obtained from the immunised mice recognised
CliniChem's recombinant protein as well as N. meningitidis cells. Work done in
research laboratories showed that the antibodies killed N. meningitidis
bacteria. This type of bactericidal activity is commonly recognised as being
indicative of protection. BioChem has developed a clinical trial scale
manufacturing process and CliniChem is currently conducting additional
preclinical development work in the newly equipped vaccine development
facilities of BioChem in Northborough near Boston, Massachusetts. CliniChem
expects to begin clinical trials toward the end of 1999.
 
     Group B Streptococcus
 
     Group B Streptococcus ("GBS") is classified into seven serotypes based on
their capsular polysaccharide antigenicity and two subtypes based on the
antigenic characteristics of their surface proteins. GBS infections are the
leading cause of life-threatening bacterial infections such as pneumonia, sepsis
and meningitis during the neonatal period. In the United States, there are about
10,000 cases of invasive GBS infections per year with a mortality rate of about
10%. Many infants that survive meningitis may suffer from neurologic sequelae.
In addition, GBS has emerged as an important pathogen among non-pregnant adults,
especially the elderly or patients with chronic underlying disease. This
situation makes it of interest to develop a GBS vaccine suitable for human use.
 
     In research work, CliniChem used its candidate recombinant vaccine to
immunise mice in order to evaluate the protein's ability to confer protection
against GBS bacteria. This preclinical research showed that the recombinant
protein vaccine is immunogenic and protective in mice against all major
serotypes of GBS bacteria. The protein has been sequenced by BioChem scientists.
The presence of the protein has been observed so far in all serotypes evaluated.
Based on these results, it is anticipated that preclinical process development
will be initiated in the second half of 1999.
 
     Streptococcus pneumoniae
 
     Streptococcus pneumoniae ("S. pneumoniae") infections are among the leading
causes world-wide of illness and death in young children, persons with
underlying debilitating medical conditions and the elderly. S. pneumoniae
infection is a cause of meningitis, pneumonia and otitis media (middle ear
infection). S. pneumoniae has 84 known different serotypes. A polysaccharide
vaccine against the 23 most common serotypes has been available since the early
1980s. It is no more than 60% effective in preventing S. pneumoniae-caused
meningitis and pneumonia in adults but is poorly effective in infants and is not
currently used to prevent otitis media. Polysaccharide conjugate vaccines (7-9
polysaccharide types) are being developed by third parties and are in Phase
II/III clinical studies. These potential vaccines cover 60 to 80% of serotypes.
BioChem has discovered two promising candidate protein vaccines. Further work
has suggested the protection potential of the proteins. Further research work is
still ongoing with the objective of progressing the project to the development
stage toward the beginning of 2000.
 
                                       15
<PAGE>   19
 
     Each year, S. pneumoniae accounts for three to six thousand cases of
meningitis, 500,000 cases of pneumonia and seven to ten million cases of acute
otitis media in the United States alone. Case fatality rates vary by age and the
underlying illness of the patient. According to the CDC, the case fatality rates
for some immunocompromised and other high-risk patients have been reported to be
higher than 55% for meningitis and 40% for pneumonia, despite appropriate
antibiotic therapy. In children, S. pneumoniae causes approximately 35 to 40% of
otitis media.
 
     CliniChem believes that S. pneumoniae-caused diseases will become more
difficult to effectively manage as strains resistant to antibiotic therapies
become more prevalent. In the past, S. pneumoniae was almost uniformly
susceptible to penicillin, allowing most physicians to treat persons with severe
infections with penicillin alone without testing for antibiotic resistance.
However, since the late 1980s, resistance to penicillin and other antibiotic
agents has spread rapidly. Investigations by CDC of S. pneumoniae-caused
diseases have revealed that, in some areas of the United States, as many as 30%
of disease-causing S. pneumoniae strains are not susceptible to penicillin. A
smaller percentage of disease-causing S. pneumoniae strains is also resistant to
multiple antibiotic therapies.
 
     Haemophilus influenzae non-typeable
 
     Haemophilus influenzae ("H. influenzae") is a bacterium that is considered
a major human pathogen. There are two types of H. influenzae: the encapsulated
form that has six antigenetically distinct capsular types (types a to f) and the
unencapsulated form (non-typeable) that may cause diseases of less virulence
than the encapsulated form. The unencapsulated form is recognised as responsible
for acute respiratory infections, chronic bronchitis, otitis media (25 to 30% of
all cases), bacteremia and meningitis (5% of all cases). H. influenzae
non-typeable is among the five most common causes of community-acquired
pneumonia (between 5 to 15% of the 500,000 hospital admissions annually in the
United States). Annually, there are typically approximately 4,000 cases of
invasive disease in adults including bacteremic pneumonia (70%), obstetric
infections, epiglotitis, meningitis and tracheobronchitis due to H. influenzae
non-typeable. A polysaccharide conjugate vaccine effective against H. influenzae
type b exists, but there is no vaccine currently available against non-typeable
H. influenzae.
 
     BioChem has discovered a new surface outer membrane protein which is an
antigenically cross-reactive protein found in all serotypes of H. influenzae as
well as non-typeable H. influenzae. This protein is molecularly conserved and is
distinct from other known bacterial proteins. The recombinant protein is highly
immunogenic. Preclinical data suggest that this protein is a potentially
valuable component for a sub-unit vaccine against non-typeable H. influenzae
disease.
 
     Neisseria gonorrhoeae
 
     The research program for a recombinant vaccine against infection by
Neisseria gonorrhoeae, which was part of the initial CliniChem Programs, has
been discontinued following a decision of the Board of Directors of CliniChem at
its April 27, 1999 meeting.
 
     Chlamydia pneumoniae
 
     According to 1994 estimates of the American Heart Association,
approximately 58 million Americans have one or more forms of cardiovascular
disease, among whom approximately 13.7 million have coronary heart disease and
approximately 3.9 million have strokes. Cardiovascular diseases claimed almost
one million lives in 1994. Coronary heart disease is most commonly caused by
atherosclerotic narrowing of the coronary arteries. It is likely to produce
angina pectoris, heart attack or both.
 
     Chlamydia pneumoniae ("C. pneumoniae") infections may play a role in the
development of atherosclerosis. The organism is often present in upper and lower
respiratory tract infections and has been thought recently to contribute to the
process of atherosclerosis. However, substantially more research will be needed
in order to confirm this hypothesis. A vaccine against C. pneumoniae would offer
a viable alternative or supplement to current management of heart diseases.
 
     CliniChem's research program on Chlamydia pneumoniae is at an early stage.
 
                                       16
<PAGE>   20
 
     Second Look
 
     Second Look is a computer-based breast cancer detection system developed
under a license and development agreement with Qualia Computing, Inc.
("Qualia"), a privately held U.S. medical computer science company. Second Look
is a system which, in its first application, was designed by Qualia engineers to
assist radiologists in the earlier diagnosis of breast cancer by enhancing their
ability to interpret mammograms. Early stage detection has been shown to
dramatically improve survival rates and reduce cost of treatment. The Second
Look system digitises the x-rays and then applies advanced image processing and
neural network software in a manner that directs radiologists to anomalies such
as microcalcifications and atypical masses, early indicators of disease that
might otherwise go undetected on visual inspection alone. This product is
expected to enter into clinical trials in mid-1999. There are other potential
detection applications of this technology platform. The next stage in the
development of this product is to have a software product to perform the same
functions within a digital radiology system.
 
     PATENTS
 
     BioChem has been granted certain patents world-wide and has pending patent
applications world-wide relating to the CliniChem Programs. It is expected that
BioChem will attempt to secure patent coverage to protect each of the CliniChem
Products. Any such patents will be owned by BioChem, included among the
Developed Technology and licensed to CliniChem pursuant to the Technology
License Agreement. BioChem believes that these current patents, and patents
relating to the CliniChem Programs that may be obtained in the future, are
important to its future operations and to CliniChem.
 
     BioChem currently holds a United States patent covering troxacitabine and
related compounds, as well as issued patents and pending applications in
numerous countries covering troxacitabine and methods of using the same. BioChem
also holds a United States patent claiming processes for preparing troxacitabine
and related compounds, and numerous issued patents and pending applications
world-wide claiming processes of preparing troxacitabine and related compounds.
 
     BioChem holds an issued patent in the United States claiming dOTC and
related compounds, as well as issued patents and pending applications in
numerous countries claiming dOTC, processes of preparation and methods of using
the same to treat viral infections, including HIV.
 
     BioChem has patent applications pending covering BCH-13520.
 
     BioChem has numerous patent applications pending world-wide covering
proteins of N. meningitidis and vaccines containing such proteins. BioChem also
has numerous patent applications covering proteins of S. pneumoniae and GBS and
their use in vaccines.
 
     Patent protection generally has been important in the pharmaceutical
industry, and the commercial success of the CliniChem Products may depend, in
part, upon BioChem's ability to obtain and enforce patent protection. Although
BioChem's existing patents, pending patents and any patents obtained in the
future may be of importance to CliniChem, there can be no assurance that any
additional patents will be issued or that any patents now or hereafter issued
will be of commercial benefit.
 
     The grant of a patent is not conclusive as to such validity or
enforceability of the claims therein. The validity and enforceability of a
patent after its issuance by the United States Patent and Trademark Office can
be challenged in litigation and re-examination proceedings, and the validity of
a patent granted by the European Patent Office can be challenged through
opposition proceedings. If the outcome of such litigation or proceeding is
adverse to the owner of the patent, third parties may then be able to use the
invention pertaining to the patent, in some cases without payment. There can be
no assurance that patents covering the CliniChem Products, if and when issued,
will not be infringed or successfully avoided through design innovation.
 
     As of the date of this Annual Report, to the knowledge of CliniChem, there
is no significant proceeding against BioChem in relation to the CliniChem
Programs.
 
     Emory University filed an opposition to BioChem's granted patent in Europe
covering troxacitabine and related nucleoside analog. The Opposition Division of
the European Patent Office dismissed Emory's opposition and maintained BioChem's
patent. It is always possible that Emory will appeal the decision and there can
be no assurance that BioChem's patent will be upheld on appeal.
                                       17
<PAGE>   21
 
     In addition, CliniChem may use unpatented technology. There can be no
assurance that others will not develop similar technology. Under the terms of
certain of the license and collaboration agreements to which BioChem is a party
and which relate to the CliniChem Programs, BioChem is obliged to exercise
diligence and make certain royalty and milestone payments as well as incur costs
related to filing and prosecuting the underlying patents. Certain agreements may
be terminated by either party upon notice if the other party defaults in its
obligations. Should BioChem default under any of its agreements, BioChem and
therefore CliniChem may lose its right to market and sell CliniChem Products
based upon such licensed technology. In addition, there can be no assurance that
BioChem's licensors will meet their obligations to BioChem pursuant to such
licenses. In such event, CliniChem's results of operations and business
prospects would be materially and adversely affected.
 
     CliniChem is aware of certain issued patents and patent applications of
others, and there may be other patents and patent applications, containing
subject matter which BioChem or CliniChem or their licensees or collaborators
may require in order to research, develop or commercialise certain of the
CliniChem Products. There can be no assurance that CliniChem or its
collaborators will be able to obtain a license to any third-party technology or
patents that they may require to conduct the CliniChem Programs or that such
technology or patents can be licensed at a reasonable cost. Failure by BioChem,
CliniChem or their collaborators to obtain a license to any technology or
patents that they may need to commercialise the BioChem Technology or the
CliniChem Products may result in delays in marketing the CliniChem Products or
the inability to proceed with the development, manufacture or sale of the
CliniChem Products requiring such licenses and may have a material adverse
effect on CliniChem.
 
     CliniChem substantially depends on BioChem Technology licensed to CliniChem
pursuant to the Technology License Agreement. Some of the BioChem Technology is
licensed to BioChem by third parties. BioChem does not expect the termination of
such third party licenses to interfere with the CliniChem Programs.
 
     FACILITIES AND PERSONNEL
 
     CliniChem does not expect to hire any employees or to acquire any real
property or tangible assets prior to completion of the development stage of the
CliniChem Products. However, pursuant to the Research and Development Agreement,
BioChem has been engaged by CliniChem to conduct the CliniChem Programs under
work plans and cost estimates recommended by BioChem and accepted by CliniChem.
Decisions as to whether and/or when to hire employees, purchase property or
assets, perform administrative functions, engage BioChem to perform
administrative services under the Services Agreement, engage others to do so or
engage third parties other than or in addition to BioChem to perform research
and development activities will be made by CliniChem. BioChem believes that its
facilities are sufficient for the current development of the CliniChem Programs
but expects that additional facilities and personnel will be required for the
long-term development of such programs. The timing and extent of such additional
facilities will turn, in large part, on the success of CliniChem in pursuing the
CliniChem Programs.
 
     At the present time, CliniChem does not have, nor, through the development
stage of the CliniChem Products, does it expect to develop, any manufacturing or
marketing capability. If CliniChem decides to manufacture or market one or more
CliniChem Products itself, CliniChem will need substantial additional funds.
There is no assurance that additional funds will be available, or will be
available on attractive terms, and BioChem has no obligation to supply any
additional funds to CliniChem. In addition, prior to the exercise or expiration
of the Purchase Option, CliniChem may not use the Available Funds for this
purpose without BioChem's consent.
 
     If either BioChem or CliniChem seeks a third party to manufacture or market
a CliniChem Product, there can be no assurance that satisfactory arrangements
can be successfully negotiated or that any such arrangements will be on
commercial terms acceptable to BioChem or CliniChem. In addition, even if
CliniChem decides to license any CliniChem Product to a third party, agreements
with that third party, if available, may be on terms less favourable to
CliniChem than the terms of the agreements between BioChem and CliniChem. Even
if acceptable manufacturing and marketing resources are available, there can be
no assurance that any CliniChem Products will be accepted in the marketplace.
 
                                       18
<PAGE>   22
 
     GOVERNMENT REGULATION
 
     Regulation by governmental authorities in Canada, the United States and
other countries will be a significant factor in the production and marketing of
the CliniChem Products and in the conduct of the CliniChem Programs.
 
     The laws of most countries require the licensing of manufacturing
facilities, carefully controlled research and extensive testing of products.
Biopharmaceutical companies must establish production complying with Good
Manufacturing Practices ("GMP"), the safety, efficacy and quality of their new
products and control over marketing activities before being allowed to market
their products. The safety and efficacy of a new drug must be shown through
clinical trials of the drug carried out in accordance with the mandatory
procedures and standards established by regulatory agencies.
 
     In Canada, the manufacture and sale of new drugs are controlled by the
Therapeutic Product Program of the HPB. New drugs must pass through a number of
testing stages including preclinical testing and clinical trials. Preclinical
testing involves testing pharmacology and toxicology in vitro and in animals.
Successful results (i.e., potentially valuable pharmacological activity combined
with an acceptable level of toxicity) can support an investigational new drug
("IND"). This enables the manufacturer of the new drug to begin clinical trials.
 
     An IND submission must be filed with the Health Protection Branch (the
"HPB") in Canada. The IND submission must contain specified information,
including the results of the preclinical tests completed prior to the IND
submission, together with any available information regarding the use of the
drug in humans. In addition, since the method of manufacture may affect the
efficacy and safety of a drug, information on manufacturing methods and
standards and the stability of the drug substance and dosage forms must be
presented so that the HPB can ensure that the product that may eventually be
sold to the public has the same composition as that determined to be effective
and safe in the clinical trials. Production methods and quality control
procedures must be in place to ensure a relatively pure compound, essentially
free of contamination and uniform with respect to all quality aspects.
 
     Once the HPB accepts the IND submission, the clinical trials presented in
the IND application can begin. Clinical trials are generally carried out in
three phases. Phase I involves pharmacological studies to evaluate safety and
toxicity in humans. The new drug is administered to patients or healthy
volunteers to determine rates of uptake and distribution, tolerance and
prevalence of adverse side effects. Phases II and III involve therapeutic
studies on the new drug. In Phase II, the drug's efficacy, dosage, side effects
and safety are established in a small number of patients who have the disease or
disorder that the drug is intended to treat. In Phase III, there are controlled
clinical trials in which the drug is administered to a large number of patients
who are likely to receive benefit from the drug. In Phase III, the effectiveness
of the new drug is also compared to a control treatment, either placebo or
standard therapy, in the anticipation that statistically significant clinical
efficacy can be demonstrated.
 
     If the clinical studies prove that the new drug has therapeutic value, the
manufacturer submits a new drug submission ("NDS") to the HPB for marketing
approval. The NDS contains all information known about the drug including the
results of preclinical testing and clinical trials. Information contained in the
NDS about the candidate drug includes its proper name, its chemical name,
details on method of manufacturing and purification and its biological,
pharmaceutical and toxicological properties. The NDS also provides information
about the dosage form of the drug, including the quantitative listing of all
ingredients used in the formulation, its methods of manufacture, packaging and
labelling, the results of stability tests, and its diagnostic or therapeutic
claims and side effects as well as details of the clinical studies to support
the safety and efficacy of the drug. All aspects of the NDS are reviewed by the
HPB. If the NDS is found to be satisfactory, a notice of compliance is issued
permitting the manufacturer to sell the drug product for a specific indication.
 
     As a condition of issuing a notice of compliance, the HPB may also require
the sponsor to conduct confirmatory studies. These confirmatory studies are
usually required when the HPB is interested in additional evidence of the
efficacy of the drug. All adverse reactions must be summarised and available to
the HPB on a periodic basis while the drug is being marketed.
 
                                       19
<PAGE>   23
 
     The regulatory controls on a new drug do not cease once it is in the market
place. Among other things, a manufacturer of a new drug must report any new
information received concerning serious side effects, including the failure of
the new drug to produce its desired effects. As well, changes in the
manufacturing process and facilities must be reported. If the HPB determines it
to be in the interest of the public health, a notice of compliance for a new
drug may be suspended and the drug can be removed from the market.
 
     The regulations under the Food and Drugs Act (Canada) permit the sale to
physicians of drugs which have not received regulatory approval for emergency
treatment of seriously ill patients. This permission is given for drugs used in
the treatment of serious, life threatening conditions prior to the HPB's
approval of the drug. In addition, if a product under clinical investigation is
requested by a physician and specific patient requirements are met, Canadian
food and drug regulations permit emergency drug release.
 
     In addition, regulatory control exists in Canada for the pricing of
patented medicines. All patented medicines sold in Canada are subject to pricing
review by the Patented Medicines Prices Review Board.
 
     The Canadian regulatory approval requirements for new drugs outlined above
are similar to those of other major pharmaceutical markets, including the United
States and Europe.
 
     In the United States, the manufacture and sale of new drugs are controlled
by the FDA. Prior to commercial sale, new drugs require FDA approval of a
marketing application (i.e., a new drug application, biologics license
application or product license application). Obtaining marketing approval
requires data from adequate and well-controlled clinical investigations
demonstrating to the FDA's satisfaction a new drug's safety and effectiveness
for its intended use. Such data are generated in studies conducted pursuant to
an IND submission, similar to that required in Canada. As in Canada, clinical
studies are characterised as Phase I, Phase II and Phase III trials or a
combination thereof. In a marketing application, the manufacturer must also
demonstrate the identity, potency, quality and purity of the active ingredients
of the new drug involved, and the stability of those ingredients and the drug
product(s). Furthermore, the manufacturing facilities, equipment, processes and
quality controls for the new drug and the drug product(s) must comply with GMP
regulations for drugs or biologic products both in a prelicensing inspection and
in subsequent periodic inspections after licensure. For some biologic products
an establishment license must also be obtained for the facilities engaged in the
manufacture and batch release of the products.
 
     As in Canada, the regulatory controls on a new drug do not cease once it is
in the marketplace. Any new information on serious side effects, failure to
produce the desired effects, changes in the manufacturing process and
facilities, among other things, are to be reported. An approval of a marketing
application may be suspended and the new drug can be removed from the market.
 
     A five-year period of market exclusivity for a drug comprising a new
chemical entity ("NCE") is available to an applicant that succeeds in obtaining
FDA approval of an NCE, provided that the active ingredient of the NCE has never
before been approved in a new drug application. During this exclusivity period,
the FDA may not accept for review any abbreviated application filed by another
sponsor for a generic version of the NCE. Further, a three-year period of market
exclusivity for a new use or indication for a previously approved drug is
available to an applicant that submits new clinical studies that are essential
to support the new use or indication. During the latter period of exclusivity,
the FDA may not approve an abbreviated application filed by another sponsor for
a generic version of the product for that use or indication.
 
     The FDA has "fast track" regulations intended to accelerate the
development, evaluation and approval process for the marketing of new drugs used
to diagnose or treat life-threatening and severely debilitating illnesses for
which no satisfactory alternative therapies exist. "Fast track" designation
affords early interaction with the FDA in terms of protocol design and permits,
although it does not require the FDA to issue marketing approval after
completion of early stage clinical trials (although the FDA may require
subsequent clinical trials or even post-approval efficacy studies).
 
     There are three procedures for obtaining a marketing authorisation in
Europe. First, an applicant may apply for a marketing authorisation in each
individual country. Such applications may need specific documentation tailored
to each country's language and requirements.
 
     Alternatively, an applicant who has obtained approval in one country can
expedite subsequent approvals through use of a mutual recognition procedure.
Under this mutual recognition procedure, the member states
                                       20
<PAGE>   24
 
to which a marketing authorisation application has been made are required to
grant authorisation to market the product or otherwise formulate reasoned
objections. In determining whether to raise any objections, the member states
typically review the documentation presented to the country that granted the
original marketing authorisation and generally take into account the fact that
such authorisation was granted by the original country. Where an objection is
raised, the matter is referred to the Committee for Proprietary Medicinal
Products (the "CPMP") of the European Medicines Evaluation Agency which then
considers the objection and issues a non-binding opinion. Each member state must
determine whether it will adopt the CPMP's opinion. This procedure is typically
used in respect of general drugs produced by a manufacturing process similar to
that of a previously-approved branded drug.
 
     The third possible procedure consists of a centralised process in which
applicants apply directly to the CPMP, which then issues an opinion binding on
all member states. This centralised procedure is mandatory in respect of
biotechnology products and is available in respect of other NCEs or new
formulations of existing approved products that offer a significant improvement
in efficacy or safety over the existing product.
 
     The process of completing clinical trials and obtaining regulatory approval
for a new drug will, in general, take a number of years and require the
expenditure of substantial resources. Even after initial approval has been
obtained, further studies, including post-marketing studies or confirmatory
studies, may be required to provide additional data on safety necessary to gain
approval for the use of the new drug as a treatment for clinical indications
other than those for which the new drug was initially tested. Also, regulatory
agencies may require post-marketing surveillance programs to monitor a new
drug's side effects. Results of post-marketing programs may limit or expand the
further marketing of new drugs. A serious safety or effectiveness problem
involving an approved new drug may result in a regulatory agency requiring
withdrawal of the new drug from the market and possible civil action.
 
     A number of companies in the biotechnology industry have suffered
significant setbacks in advanced clinical trials, even after achieving promising
results in earlier trials. In addition, government regulations specify standards
for manufacturing and marketing pharmaceutical products.
 
     The Center for Biologics Evaluation and Research (the "CBER") in the United
States, the Bureau of Biologics and Radiopharmaceuticals (the "BBR") in Canada,
and similar agencies or administrative centers in other countries regulate the
manufacturing, marketing and use of vaccines. Product License Applications and
Establishment License Applications or equivalent documentation are required to
be submitted to the governmental authorities for review prior to obtaining
marketing approval. Government regulations specify standards for manufacturing
and marketing vaccines and biological products. These regulations set standards
for proof of safety and effectiveness, establish GMP, require inspection of
vaccine manufacturing facilities and require reporting of adverse events to
regulatory authorities. These government authorities also conduct pre-release
testing of vaccines and authorise the sale of each lot of vaccines.
 
     Sales of therapeutic and vaccine products outside Canada and the United
States are subject to regulatory requirements that vary from country to country.
Whether or not FDA, HPB or BBR approval has been obtained, final approval of a
product by comparable regulatory authorities of other countries must be obtained
prior to the commencement of marketing the product in those countries. The time
required to obtain any such approval may be longer or shorter than that required
for FDA, HPB or BBR approval.
 
     The FDA, HPB and similar regulatory agencies in other countries also
regulate the manufacturing, marketing and use of medical devices such as Second
Look. In the United States and Canada, diagnostic products such as Second Look
are also considered medical devices and therefore are subject to these
regulations. Generally, these regulations set standards for medical devices,
require proof of safety and effectiveness, establish GMP and require inspections
of device manufacturing facilities, and require reporting of device defects to
regulatory authorities.
 
     In addition to the regulatory product approval framework, biotechnology
companies are subject to regulation under provincial, state and federal law,
including requirements regarding occupational safety, laboratory practices,
environmental protection and hazardous substance control, and may be subject to
other
 
                                       21
<PAGE>   25
 
existing and future local, provincial, state, federal and foreign regulation,
including possible future regulation of the biotechnology industry.
 
     Any failure by BioChem and CliniChem or their collaborators or licensees to
obtain, or any delay in obtaining, regulatory approvals could adversely affect
the marketing of any CliniChem Products and CliniChem's ability to receive
product or royalty revenue. There can be no assurance that any of CliniChem's
planned products will be approved by the FDA, HPB, BBR or any other governmental
agency on a timely basis, if at all.
 
     THIRD-PARTY CONSENTS AND RIGHTS
 
     Certain of the CliniChem Products are subject to existing third-party
rights, or would require the consent of a third party in order for BioChem to
sublicense certain rights to CliniChem. Under the Technology License Agreement,
BioChem is obliged, in certain circumstances, to use commercially reasonable
efforts to obtain such consents. There can be no assurance that such consent or
license would be available, or if available, that it would be available on
commercial terms acceptable to CliniChem.
 
ITEM 2.  DESCRIPTION OF PROPERTIES
 
     CliniChem's registered and principal executive office is located at 275
Armand-Frappier Boulevard, Laval, Quebec, Canada H7V 4A7. CliniChem does not own
any facilities.
 
ITEM 3.  LEGAL PROCEEDINGS
 
     There are no material pending legal proceedings to which CliniChem is a
party or to which any of its property is subject.
 
ITEM 4.  CONTROL OF REGISTRANT
 
     As far as known to CliniChem, it is not directly or indirectly owned or
controlled by another corporation or by any government.
 
     The following table sets forth the identity of any person, known to
CliniChem to be the direct or indirect beneficial owner of more than ten percent
of any class of CliniChem's voting securities and the total amount of any class
of CliniChem's voting securities owned by the officers and directors of
CliniChem as a group.
 
<TABLE>
<CAPTION>
                                             CLINICHEM
                                           COMMON SHARES           CLASS B SHARES       PERCENTAGE OF
                                       ---------------------    --------------------    -------------
                                       NUMBER     PERCENTAGE    NUMBER    PERCENTAGE       VOTING
      NAME OF BENEFICIAL OWNER          OWNED      OF CLASS     OWNED      OF CLASS      SECURITIES
      ------------------------         -------    ----------    ------    ----------    -------------
<S>                                    <C>        <C>           <C>       <C>           <C>
Glaxo Wellcome Inc. .................  396,274      14.61%       --         --              14.60%
BioChem Pharma Inc. .................    --         --          1,000        100%            0.04%
All directors and officers of
CliniChem as a group (5 persons).....  151,165       5.57%       --         --               5.57%
</TABLE>
 
     There are presently issued and outstanding 1,000 Class B Shares in the
share capital of CliniChem, all of which are owned by BioChem. BioChem, as
holder of the Class B Shares, has upon certain conditions, an option to purchase
all, but not less than all, of the CliniChem Common Shares issued and
outstanding. The Class B Shares confer other rights on BioChem as the holder
thereof. See "Description of Business--Arrangements with BioChem--Purchase
Option".
 
ITEM 5.  NATURE OF TRADING MARKET
 
     The CliniChem Common Shares have been authorised for quotation in the
United States on the Nasdaq National Market since June 18, 1998, and are traded
under the symbol "CCHE". The CliniChem Common Shares are traded in Canada on the
Montreal Exchange and on The Toronto Stock Exchange under the symbol "BCC.A".
The following table sets forth, for the periods indicated, the range of high and
low closing
 
                                       22
<PAGE>   26
 
sales prices of the CliniChem Common Shares on the Montreal Exchange
(CliniChem's principal non-United States exchange), The Toronto Stock Exchange
and on the Nasdaq National Market.
 
<TABLE>
<CAPTION>
                                      THE MONTREAL      THE TORONTO STOCK
                                        EXCHANGE            EXCHANGE         NASDAQ NATIONAL MARKET
                                     ---------------    -----------------    ----------------------
                                      HIGH      LOW      HIGH       LOW        HIGH          LOW
                                     ------    -----    -------    ------    ---------    ---------
<S>                                  <C>       <C>      <C>        <C>       <C>          <C>
1998
  Second Quarter(1)..............    $12.50    $8.25    $12.25     $8.20      US$8.38      US$5.63
  Third Quarter..................    $ 8.60    $6.10    $ 8.60     $6.00      US$6.00      US$3.63
  Fourth Quarter.................    $ 8.35    $6.60    $ 8.35     $6.50      US$5.50      US$4.13
1999
  First Quarter..................    $11.00    $7.05    $11.00     $7.00      US$6.91      US$4.50
</TABLE>
 
------------
 
(1)  Trading began on June 18, 1998.
 
     The following table indicates, as of April 30, 1999, the approximate total
number of holders of record of CliniChem Common Shares, the total number of
CliniChem Common Shares outstanding, the number of holders of record of
CliniChem Common Shares with United States addresses, the portion of the
outstanding CliniChem Common Shares held in the United States, and the
percentage of CliniChem Common Shares held in the United States.
 
<TABLE>
<CAPTION>
     TOTAL NUMBER          TOTAL NUMBER OF                               PORTION OF CLINICHEM        PERCENTAGE OF
      OF HOLDERS           CLINICHEM COMMON         NUMBER OF U.S.          COMMON SHARES          CLINICHEM COMMON
     OF RECORD(1)         SHARES OUTSTANDING     HOLDERS OF RECORD(2)    HELD IN THE U.S.(2)    SHARES HELD IN THE U.S.
     ------------         ------------------     --------------------    --------------------   -----------------------
<S>                     <C>                     <C>                     <C>                     <C>
         201                  2,713,260                   77                  1,645,942                 60.66%
</TABLE>
 
------------
 
(1)  A substantial number of the CliniChem Common Shares are held by
     depositories, brokerage firms and financial institutions in "street name".
     Based upon the number of annual reports and proxy statements requested by
     such nominees, management of the Company estimates that the total number of
     beneficial holders of CliniChem Common Shares is approximately 9,146
     holders of which approximately 5,000 could be United States residents.
 
(2)  The computation of the portion of CliniChem Common Shares held in the
     Unites States is based upon the number of holders of record with United
     States addresses. United States residents may beneficially own CliniChem
     Common Shares owned of record by non-United States residents.
 
     The Company has not paid any dividends since its inception. CliniChem
currently does not intend to pay any dividends in the foreseeable future but
intends to retain any future earnings to finance the development of its
products. The Company's dividend policy will be reviewed periodically depending
on the Company's financial position and on other factors.
 
     The market prices for the securities of biopharmaceutical and biotechnology
companies, including CliniChem, have historically been highly volatile, and 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 fluctuations in the Company's operating results,
announcements of technological innovations or new products by the Company or its
competitors, clinical trial results, governmental regulation, developments in
patent or other proprietary rights, public concern as to safety of products
developed by the Company or others and general market conditions can have an
adverse effect on the market price of the CliniChem Common Shares. In
particular, the realisation of any of the risks described herein could have a
material adverse impact on such market price.
 
ITEM 6.  EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING HOLDERS OF CLASS A
         COMMON SHARES
 
     There is no law or governmental decree or regulation in Canada that
restricts the export or import of capital, or affects the remittance of
dividends, interest or other payment to a non-resident holder of CliniChem
Common Shares, other than withholding tax requirements. See "Item 7. Taxation".
 
     There is no limitation imposed by Canadian law or by the Articles or other
charter documents of the Company on the right of a non-resident to hold or vote
CliniChem Common Shares, other than as provided by the Investment Canada Act
(Canada) (the "Investment Act") as amended by an Act to implement the Agreement
establishing the World Trade Organization (Canada) (the "WTO Implementation
Act"). The following summarises the principal features of the Investment Act for
non-residents who propose to acquire CliniChem Common Shares.
 
                                       23
<PAGE>   27
 
     Under the Investment Act, an investment by an individual, a government or
an agency thereof or an entity that is not a "Canadian" (as defined in the
Investment Act) a ("non-Canadian") may be subject to certain notification
requirements or review by the minister responsible for the administration of the
Investment Act (the "Minister"). Except as set forth below, an investment in
CliniChem Common Shares by a non-Canadian would be reviewable under the
Investment Act if (i) such investment constitutes an acquisition of direct
control of the Company where the value of the assets of the Company is at least
five million dollars, or an acquisition of indirect control of the Company where
the value of the assets of the Company is at least fifty million dollars, or
(ii) the Federal cabinet is of the opinion that an investment that constitutes
an acquisition of control is related to Canada's cultural heritage or national
identity. All investment subject to review require that the Minister be
satisfied that the investment is likely to be of net benefit to Canada.
 
     Pursuant to the WTO Implementation Act, an investment made by a WTO
Investor (as defined in the Investment Act) (a "WTO Investor") in CliniChem
Common Shares would be reviewable under the Investment Act if such investment
constitutes an acquisition of direct control of CliniChem and the value of the
assets of CliniChem is at least $184 million. An indirect acquisition of control
by a WTO Investor is no longer subject to review.
 
     The Investment Act states that a non-Canadian shall acquire control or
shall be deemed to acquire control if he or she acquires a majority of CliniChem
Common Shares. An acquisition of less than a majority but more than one-third of
the CliniChem Common Shares will be presumed to be an acquisition of control
unless it can be established that, upon the acquisition, the Company is not in
fact controlled by the acquiror through the ownership of CliniChem Common
Shares.
 
     The notification requirements which would be applicable in the event of a
proposed acquisition of control not otherwise subject to review require the
potential investor to supply certain information concerning the proposed
investment prior to the consummation thereof. However, the Federal cabinet
retains the right to require the review of any such proposed investment that is
related to cultural heritage and national identity if, within a specified
period, the Federal cabinet considers it in the pubic interest on the
recommendation of the Minister to issue an order for the review of the
investment.
 
     In certain limited circumstances transactions are exempt from both the
review and notification requirements of the Investment Act, including the
acquisition of CliniChem Common Shares by a person in the ordinary course of
that person's business as a trader or dealer in securities.
 
ITEM 7.  TAXATION
 
     A holder of CliniChem Common Shares who resides in the United States will
not be subject to tax under the Income Tax Act (Canada) on capital gains
realised on the disposition of such CliniChem Common Shares unless they are
deemed to be "taxable Canadian property". Such CliniChem Common Shares will be
deemed to be taxable Canadian property if they are used by the non-resident
holder in carrying on a business in Canada or if, at any time during the five
year period immediately preceding the disposition, 25% or more of CliniChem's
outstanding securities of any class were owned by such holder, or any group
consisting of such holder and person with whom such holder did not deal at arms'
length. If the CliniChem Common Shares are deemed to be "taxable Canadian
property" to shareholders residing in the United States, with any resulting
capital gain realised on the disposition of such shares subject to tax in
Canada, the gain will be exempt from tax in Canada under the tax treaty between
Canada and the United States, provided that the shares do not form part of the
business property of a permanent establishment or fixed base through which the
United States shareholder carries on business or performs independent personal
services in Canada.
 
     Dividends paid on the CliniChem Common Shares held by a shareholder
residing in the United States will be subject to Canadian withholding tax. Under
the tax treaty between Canada and the United States, a withholding rate of 5% is
applicable to corporations resident in the United States, who do not have a
permanent establishment in Canada, and who are beneficial owners of at least 10%
of the voting stock of CliniChem. Under the same treaty, a withholding rate of
15% is applicable to corporations resident in the United States, who do not have
a permanent establishment in Canada, and with a beneficial ownership of less
than 10% in the voting stock of CliniChem, and to individuals.
 
                                       24
<PAGE>   28
 
ITEM 8.  SELECTED FINANCIAL DATA
 
     The following selected consolidated financial data of CliniChem are
qualified by reference to and should be read in conjunction with the
consolidated financial statements, related notes thereto and other financial
data included elsewhere herein.
 
<TABLE>
<CAPTION>
                                                               205-DAY PERIOD ENDED
STATEMENT OF LOSS AND DEFICIT DATA                              DECEMBER 31, 1998
----------------------------------                            ----------------------
                                                              (in thousands, except
                                                              per share information)
<S>                                                           <C>
Revenue
  Interest income...........................................           $ 4,061
Expenses
  Research and development..................................            19,051
  Technology fee............................................             2,358
  General and administrative................................               729
  Scientific research and experimental development tax
    credits.................................................              (759)
                                                                    ----------
                                                                        21,379
                                                                    ----------
Loss before income taxes....................................            17,318
Income taxes................................................                66
                                                                    ----------
Net loss and deficit........................................           $17,384
                                                                    ==========
Loss per CliniChem Common Share and Class B Share...........           $  6.41
                                                                    ==========
Weighted average number of CliniChem Common Shares and Class
  B Shares outstanding......................................         2,714,260
                                                                    ==========
</TABLE>
 
<TABLE>
<CAPTION>
                                                                    AS AT
BALANCE SHEET DATA                                            DECEMBER 31, 1998
------------------                                            -----------------
                                                               (in thousands)
<S>                                                           <C>
Cash, cash equivalents and temporary investments............      $134,401
Total assets................................................       136,275
Total liabilities...........................................        10,158
Total shareholders' equity..................................       126,117
</TABLE>
 
ITEM 9.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS
 
     CliniChem is a corporation conducting research and development of potential
products primarily for the treatment of cancer and HIV infection, including
AIDS, and vaccine products for the prevention of certain bacterial infectious
diseases. The Company was incorporated in January 1998 under the Canada Business
Corporations Act and began active operations on June 10, 1998. All amounts are
shown in Canadian dollars.
 
     DESCRIPTION OF THE TRANSACTION AND AGREEMENTS
 
     On June 8, 1998, BioChem contributed $150 million in cash to CliniChem of
which $6.5 million were used to cover the Distribution costs, resulting in a net
amount of $143.5 million to CliniChem. The then issued and outstanding common
shares of CliniChem held by BioChem were exchanged for CliniChem Common Shares
and Class B Shares. On June 26, 1998, BioChem distributed to its common
shareholders one CliniChem Common Share for each 40 BioChem Common Shares held
as of June 22, 1998. As a result, a total of 2,713,260 CliniChem Common Shares
were distributed and 1,000 Class B Shares were retained by BioChem.
 
     CliniChem and BioChem have entered into a Technology License Agreement
pursuant to which BioChem has granted to CliniChem an exclusive perpetual
license, to use some specific BioChem technology solely to conduct the CliniChem
Programs and related activities and to manufacture and to commercialize
CliniChem Products world-wide. In consideration for the license to use the
existing BioChem Technology
 
                                       25
<PAGE>   29
 
relating to the CliniChem Programs, CliniChem pays a Technology Fee to BioChem
at a rate of $352,000 per month over a period of 48 months. The Technology Fee
will no longer be payable at such time as the number of CliniChem Products being
developed by CliniChem plus the number of CliniChem Products having been
acquired by BioChem pursuant to the exercise of the Product Option is less than
two.
 
     CliniChem's Board of Directors is responsible to determine which products
will be developed under the CliniChem Programs and for approving work plans and
other costs estimates. In order to conduct its business, CliniChem has
contracted with BioChem to perform research, development or other activities.
Under the Research and Development Agreement, BioChem has agreed to perform
diligently all work necessary to conduct the activities agreed upon by BioChem
and CliniChem pursuant to the CliniChem Programs. CliniChem's Board of Directors
supervises and reviews BioChem's ongoing activities on behalf of CliniChem.
According to the agreement, BioChem charges CliniChem the fully-burdened cost of
activities undertaken pursuant to the Research and Development Agreement plus 5%
of such costs. The Research and Development Agreement will terminate upon the
exercise or expiration of the Purchase Option. Either party may terminate the
Research and Development Agreement at predetermined conditions. The Board of
Directors of CliniChem may elect to expand the scope of the CliniChem Programs
and to select additional research and development programs to be conducted in
addition to or as substitutes for existing programs.
 
     CliniChem and BioChem have also entered into a Services Agreement pursuant
to which BioChem has agreed to provide CliniChem with administrative services,
including accounting, legal and other services for an annual fee of $400,000.
 
     CliniChem and BioChem have entered into a Product Option Agreement pursuant
to which CliniChem has granted the Product Option to BioChem. BioChem may
exercise the Product Option with respect to any CliniChem Product on a
product-by-product and country-by-country basis at predetermined conditions. The
Product Option will expire in a given country 30 days after any regulatory
approval to commercialise a product is obtained and, to the extent not
previously exercised, 30 days after the expiration of the Purchase Option.
 
     BioChem, as holder of the majority of the Class B Shares, has the option to
acquire all, but not less than all, of the issued and outstanding CliniChem
Common Shares at predetermined prices. The Purchase Option is exercisable at any
time prior to the earlier of March 31, 2003 or the 90th day after the date
CliniChem provides BioChem (as the holder of the majority of the outstanding
Class B Shares) with quarterly financial statements of CliniChem showing cash,
cash equivalents and temporary investments of less than $5 million, although
BioChem may, at its election, extend such period by providing additional
funding, including through loans, for the continued conduct of any or all of the
CliniChem Programs (but in no event beyond March 31, 2003). The exercice price
will be determined in accordance with the option exercise price formula
specified in the Company's articles of incorporation.
 
     RESULTS OF OPERATIONS
 
     Revenues, consisting solely of interest earned on cash and temporary
investments, amounted to $4,061,000 for the 205-day period from June 10, 1998,
when the operations began, to December 31, 1998 (the "period ended December 31,
1998"). As Available Funds are used to pay the Research and Development Costs,
the Technology Fee, the service fee as well as general and administrative
expenses, lower cash balances will be available for investments and therefore
interest income is expected to decrease. During the period in which products are
under research and development, CliniChem does not anticipate revenues from
other sources.
 
     Research and development expenses amounted to $19,051,000 for the period
ended December 31, 1998 and were all incurred under the Research and Development
Agreement. The research and development expenses are expected to increase in
1999 as CliniChem will conduct a full year of operations and, as compounds
advance through the development pipeline, it is expected that the activity level
of CliniChem will also increase accordingly.
 
     The Technology Fee was $2,358,000 for the period ended December 31, 1998
and was incurred pursuant to the Technology License Agreement.
 
                                       26
<PAGE>   30
 
     General and administrative expenses amounted to $729,000 for the period
ended December 31, 1998. These expenses include the cost associated with the
Services Agreement. It is anticipated that the general and administrative
expenses will increase in the future as CliniChem will conduct full years of
operations and as the activity level of CliniChem increases.
 
     The scientific research and experimental development tax credit was
$759,000 for the period ended December 31, 1998 and represents the Quebec
refundable tax credit on wages paid in Quebec that are included in research and
development expenses. It is anticipated that these credits will increase in the
future as CliniChem will conduct full years of operations and as the activity
level of CliniChem increases.
 
     For the period ended December 31, 1998, the net loss amounted to
$17,384,000 or $6.41 per share. CliniChem is expected to continue to record
significant net losses in future years. Research and development expenses as
well as general and administrative expenses should increase as products advance
through the development pipeline. Accordingly, interest income should decrease.
There can be no assurance that these losses could be recovered in the future.
 
     LIQUIDITY AND CAPITAL RESOURCES
 
     As at December 31, 1998, CliniChem had cash, cash equivalents and temporary
investments of $134,401,000. The cash equivalents and temporary investments
consist primarily of money market instruments, namely commercial paper. As
Available Funds continue to be utilized to pay the Research and Development
Costs, the Technology Fee, service fees as well as general and administrative
expenses, lower cash balances will be available for investments. Current assets
and total assets amounted to $136,275,000 and working capital was $126,117,000
as at December 31, 1998.
 
     With regard to temporary investments, CliniChem's investment policy is to
manage its marketable securities portfolio to preserve principal and liquidity
while maximizing the return on the investment portfolio through the full
investment of Available Funds. CliniChem diversifies its marketable securities
portfolio by investing in different types of money market securities, across a
broad range of issuers and through the use of different investment brokers. The
Company's marketable securities portfolio is generally invested in short-term
securities with at least a R1 rating, Dominion Bond Rating Service's top rating,
to minimize risk associated with interest rates and credit as well as to provide
for an immediate source of funds. While an increase or decrease in interest
rates would result in a decrease or increase in the market value of the
portfolio, the securities are generally held to maturity.
 
     From inception through December 31, 1998, CliniChem's funds were used
primarily to fund activities conducted under the Research and Development
Agreement and the Technology License Agreement with BioChem. Remaining funds
will be used primarily to continue the funding of activities under these
agreements. The rate at which the funds are spent will be a function of work
plans and cost estimates approved by CliniChem. At the time of its inception,
CliniChem was projected to spend its funds over a five-year period. As spending
on research and development is subject to a number of factors influencing the
rate of spending, the actual time required to expend all funds could vary
significantly from the original plan.
 
     CliniChem does not expect most of its product candidates to reach
commercial marketability prior to the expenditure of all of its capital, and
does not anticipate receiving any significant revenues unless and until these
products are successfully commercialized. Other than the Available Funds,
CliniChem may have no other source of funding to complete the development and
commercialization of its products. There can be no assurance that CliniChem will
be able to raise any additional capital. Such additional capital, unless loaned
from BioChem, would most likely reduce the per share proceeds available to
holders of CliniChem Common Shares if the Purchase Option were to be exercised.
BioChem is under no obligation to provide any additional funds and there can be
no assurance that it will provide such additional funds.
 
     The Company believes that its working capital and expected cash flows from
its cash, cash equivalents and temporary investments will be sufficient to fund
its cash requirements for the year ending December 31, 1999. The Company's
future requirements will depend on several factors, as discussed herein.
 
     Pharmaceutical product research and development plans are long-range in
nature. Hence research and development of a particular product or products could
be accelerated, slowed down or discontinued.
 
                                       27
<PAGE>   31
 
Furthermore, research and development with respect to additional CliniChem
Products could be commenced. Technology or products could also be purchased or
licensed and other unforeseen events could occur. All of these events would
significantly affect the timing and amount of expenditures to be made under the
Research and Development Agreement. There can be no assurance that CliniChem or
Biochem will be able to complete research, clinical development or product
development, gain regulatory approval or successfully commercialise any of the
CliniChem Products or that the Purchase Option will not expire prematurely or
that Biochem will be in a position to exercise the Purchase Option at that time.
 
     OTHER
 
     CliniChem, along with many other companies worldwide is exposed to the
risks and uncertainties associated with the Year 2000 issue. The majority of
CliniChem's activities are conducted under contract by BioChem. For example,
under the Services Agreement, CliniChem depends upon BioChem's operating and
accounting systems. Accordingly, the Company's exposure to potential Year 2000
readiness issues is dependent upon BioChem's exposure to the Year 2000 issue.
BioChem has indicated to CliniChem that it has evaluated its systems and
currently expects to have completed the activities to ensure compliance where
required by the end of the second quarter of 1999. Therefore, CliniChem does not
currently expect its operations, financial condition or results of operations to
be materially adversely affected by the arrival of the Year 2000. However, there
can be no assurance that this issue will not adversely affect CliniChem.
 
ITEM 10.  DIRECTORS AND OFFICERS OF THE COMPANY
 
     The following table provides information concerning the officers and
directors of CliniChem. The current officers of CliniChem are also officers and
employees of BioChem. As the holder of all the issued and outstanding Class B
Shares, BioChem has the right to elect one director. CliniChem has no employees.
Its three officers are full-time employees of BioChem.
 
<TABLE>
<CAPTION>
     NAME AND MUNICIPALITY OF RESIDENCE                   POSITION WITH CLINICHEM
     ----------------------------------                   -----------------------
<S>                                             <C>
Francesco Bellini, Ph.D.....................    Chairman and President
Town of Mount Royal, Quebec
Elizabeth Greetham..........................    Director
Hamilton, Bermuda
The Honourable Celine Hervieux-Payette......    Director
Montreal, Quebec
Frederick J. Andrew.........................    Chief Financial Officer
Morin Heights, Quebec
Guy Lord....................................    Secretary
Westmount, Quebec
</TABLE>
 
     FRANCESCO BELLINI, PH.D., has served as Chairman of the Board of Directors
and President of CliniChem since February, 1998. He is a co-founder of BioChem
which he joined as President and Chief Executive Officer in 1986. He is now the
Chief Executive Officer of BioChem. From 1984 to 1986, Dr. Bellini was the
Director of the Biochemicals Division at the Institut Armand-Frappier, and from
1968 to 1984, he was a research scientist with Ayerst Laboratories. Dr. Bellini
received a B.Sc. in chemistry from Loyola College in Montreal in 1972 and a
Ph.D. in chemistry from the University of New Brunswick in 1977.
 
     ELIZABETH GREETHAM has been a director of CliniChem since June 1998. She
was a portfolio manager with the Weiss, Peck & Greer Investments' Life Sciences
Fund, L.P. and its Institutional Life Sciences Fund, L.P. from 1990 until April
1999. She is the President and Chairman of the Board of ACCL Financial
Consultants Ltd., a financial consulting firm in Bermuda. Ms. Greetham has over
25 years experience as a portfolio manager and health care analyst. Ms. Greetham
earned a B.Sc. and an M.A. (Hons.) from the University of Edinburgh.
 
     THE HONOURABLE CELINE HERVIEUX-PAYETTE, P.C. has been a director of
CliniChem since June 1998. She has served in a variety of political capacities
for the province of Quebec and the federal government of
 
                                       28
<PAGE>   32
 
Canada. Sen. Hervieux-Payette has also twice served as Chair of the Standing
Committee on Policy Development of the Liberal Party of Canada, and also served
as Co-Chair of the Platform Committee. In March 1995, Sen. Hervieux-Payette was
appointed to the Senate of Canada by Prime Minister Jean Chretien and asked to
manage the 1997 federal election campaign as National Campaign Co-Chair. In the
Senate, Sen. Hervieux-Payette sits on the Standing Committee on Banking, Trade
and Commerce, and is Co-Chair of the Standing Committee on Scrutiny and
Regulations. Sen. Hervieux-Payette has also served in a variety of private
capacities, including Vice-President, Regulatory and Legal Affairs, with the
telecommunications company Fonorola, Inc. from 1991 until March 1995. In 1995,
she joined the Montreal office of the law firm Martineau Walker as Counsel.
 
     FREDERICK J. ANDREW has served as Chief Financial Officer of CliniChem
since February, 1998. Mr. Andrew joined BioChem in 1997 as Chief Financial
Officer. Prior to joining BioChem, he was Vice-President and Treasurer of BCE
Inc. from 1991 to 1997, Corporate Treasurer of Bell Canada from 1984 to 1991 and
occupied various positions within the BCE Inc. group of companies from 1964 to
1984. Mr. Andrew received a B.A. in economics from York University in 1964.
 
     GUY LORD has served as Secretary of CliniChem since April, 1999. Mr. Lord
joined BioChem in March, 1999 as Senior Vice President, Corporate Affairs and
Secretary and has been a director of BioChem since 1989. Prior to joining
BioChem, he was a partner in the law firm of Desjardins Ducharme Stein Monast
from 1993 to 1999 and, from 1989 to 1993, in the law firm of Clark Lord
Rochefort Fortier. From 1986 to 1989, Mr. Lord was a partner and the National
Director of Research in Taxation at Samson Belair Deloitte & Touche, from 1982
to 1986, he held senior positions with the Federal Department of Finance,
Government of Canada, and from 1969 to 1982, he was a professor at the
Universite de Montreal, Universite du Quebec and at the Universities of Oxford
and Bordeaux. Mr. Lord received a B.A. from Universite de Montreal in 1959, a
LL.L. (Licence in Law) from the same university in 1962 and, a D.Phil.
(Doctorate in public administration) from Oxford University in 1969. He is a
member of the Barreau du Quebec.
 
     All members of the Board of Directors hold office until the next annual
meeting of shareholders or the election of their successors. Officers serve at
the discretion of the Board of Directors. There are no family relationships
among any of the directors and officers of CliniChem. BioChem, as the holder of
all outstanding Class B Shares of CliniChem, is entitled to elect one director.
BioChem's nominee is Dr. Bellini.
 
     For as long as the Board of Directors of CliniChem is composed of three
directors, the Board of Directors shall assume and fulfil the duties of the
audit committee of CliniChem.
 
     CliniChem maintains directors' and officers' liability insurance against
claims made in the aggregate amount of $30 million per occurrence and a maximum
of $30 million per year.
 
ITEM 11.  COMPENSATION OF DIRECTORS AND OFFICERS
 
     Currently, all the officers of CliniChem are also officers of BioChem and
do not receive any compensation from CliniChem for their services to CliniChem.
 
     Each external director of CliniChem is paid an annual fee of $18,000 and a
further attendance fee of $1,000 for each meeting of the Board of Directors of
CliniChem.
 
ITEM 12.  OPTIONS TO PURCHASE SECURITIES FROM THE COMPANY OR SUBSIDIARIES
 
     There is no option outstanding to purchase securities from CliniChem.
 
ITEM 13.  INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
 
     Dr. Bellini, Chairman of the Board and President of CliniChem, is the Chief
Executive Officer of BioChem. Mr. Andrew, the Chief Financial Officer of
CliniChem, is the Chief Financial Officer of BioChem. Mr. Lord, Secretary of
CliniChem, is the Senior Vice President, Corporate Affairs and Secretary of
BioChem.
 
     CliniChem is involved in certain transactions with BioChem including the
Research and Development Agreement, the Technology License Agreement, the
Product Option Agreement and the Services Agreement. See "Description of
Business--Arrangements with BioChem".
 
                                       29
<PAGE>   33
 
                                    PART II
 
ITEM 14.  DESCRIPTION OF SECURITIES TO BE REGISTERED
 
     Not applicable.
 
                                    PART III
 
ITEM 15.  DEFAULTS UPON SENIOR SECURITIES
 
     Not applicable.
 
ITEM 16.  CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
          SECURITIES
 
     Not applicable.
 
                                    PART IV
 
ITEM 17.  FINANCIAL STATEMENTS
 
     The financial statements of the Company are annexed hereto and have been
prepared by the Company in accordance with generally accepted accounting
principles in Canada, which differ in certain respects from generally accepted
accounting principles in the United States as outlined in the financial
statements. The table of contents to the consolidated financial statements and
accompanying notes to the consolidated financial statements appears on page F-1
of this Annual Report on Form 20-F.
 
ITEM 18.  FINANCIAL STATEMENTS
 
     Not applicable.
 
ITEM 19.  FINANCIAL STATEMENTS AND EXHIBITS
 
     A.   FINANCIAL STATEMENTS
 
<TABLE>
         <S>                   <C>
         -                     Balance Sheet as at December 31, 1998.
         -                     Statement of Loss and Deficit for the 205-day period ended
                               December 31, 1998.
         -                     Statement of Changes in Financial Position for the 205-day
                               period ended December 31, 1998.
         -                     Notes to Financial Statements.
</TABLE>
 
     B.   EXHIBITS PREVIOUSLY FILED
 
<TABLE>
<CAPTION>
               Exhibit
               Number                                   Description
         <S>                    <C>
         3.1                    Articles of Incorporation of CliniChem
         3.2                    By-Laws of CliniChem
         3.3                    Restated Articles of Incorporation of CliniChem
         4.1                    Specimen Certificate of Class A Common Shares of CliniChem
         4.2                    Specimen Certificate of Common Shares of CliniChem
         5.1                    Opinion of Stikeman, Elliott as to legality of underlying
                                Class A Common Shares of CliniChem including consent
         5.2                    Opinion of Stikeman, Elliott as to legality of underlying
                                Common Shares of BioChem including consent
         8.1                    Opinion of Stikeman, Elliott as to Canadian tax matters,
                                including consent
         8.2                    Opinion of Kirkland & Ellis as to U.S. tax matters,
                                including consent
         10.1                   Technology License Agreement between CliniChem and BioChem
         10.2                   Research and Development Agreement between CliniChem and
                                BioChem
</TABLE>
 
                                       30
<PAGE>   34
 
<TABLE>
<CAPTION>
               Exhibit
               Number                                   Description
         <S>                    <C>
         10.3                   Product Option Agreement between CliniChem and BioChem
         10.4                   Distribution Agreement between CliniChem and BioChem
         10.5                   Services Agreement between CliniChem and BioChem
         10.6                   Amendment No. 1 to Research and Development Agreement
                                between CliniChem and BioChem
         10.7                   Amendment No. 1 to Technology License Agreement between
                                CliniChem and BioChem
         23.1                   Consent of Ernst & Young, re CliniChem
         23.2                   Consent of Stikeman, Elliott (included in Exhibit 5.1,
                                Exhibit 5.2, and Exhibit 8.1)
         23.3                   Consent of Kirkland & Ellis (included in Exhibit 8.2)
         23.4                   Consent of Merrill Lynch, Pierce, Fenner & Smith
                                Incorporated
         23.5                   Consent of Elizabeth Greetham
         23.6                   Consent of The Honourable Celine Hervieux-Payette
         23.7                   Consent of Raymond Chabot Grant Thornton
         24.1                   Powers of Attorney
</TABLE>
 
     C.   EXHIBITS FILED PREVIOUSLY THIS YEAR
 
        --  Interim Report for period ending June 30, 1998
 
        --  Escrow Agreement dated July 13, 1998
 
        --  Press Release: CliniChem Development Announces Third Quarter
            Results -- October 27, 1998
 
        --  Press Release: CliniChem Development Announces Fourth Quarter and
            Year-End 1998 Results -- January 26, 1999
 
        --  Press Release: Troxacitabine, A Novel Anticancer Compound, Begins
            Phase II Trials under Stewardship of BioChem Pharma -- March 31,
            1999
 
        --  Press Release: CliniChem Announces First Quarter Results -- April
            27, 1999
 
     D.   EXHIBITS FILED WITH THIS SUBMISSION
 
        --  No exhibit was filed.
 
        ADDITIONAL INFORMATION
 
        The following documents can be obtained upon request from the Secretary
        of CliniChem, at CliniChem Development Inc., 275 Armand-Frappier Blvd,
        Laval, Quebec, Canada H7V 4A7.
 
        (i) this Form 20-F, together with any document incorporated herein by
            reference;
 
        (ii) the interim financial statements of CliniChem filed with Securities
            Commissions subsequent to the audited financial statements for
            CliniChem's most recently completed financial year; and
 
        (iii) the Management Proxy Circular.
 
                                       31
<PAGE>   35
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 12 of the United States Securities
Exchange Act of 1934, as amended, the registrant certifies that it meets all of
the requirements for filing on Form 20-F and has duly caused this Annual Report
to be signed on its behalf by the undersigned, thereunto duly authorised.
 
                                            CLINICHEM DEVELOPMENT INC.
                                            DEVELOPPEMENT CLINICHEM INC.
                                            (Signed)
                     
                                         By: /s/ GUY LORD
                                             -------------
                                                 Guy Lord
                                                 Secretary
 
Dated: May 4, 1999
 
                                       32
<PAGE>   36
 
                              FINANCIAL STATEMENTS
 
                           CLINICHEM DEVELOPMENT INC.
 
                               DECEMBER 31, 1998
 

















































                                       33
<PAGE>   37
 
                              MANAGEMENT'S REPORT
 
     CliniChem Development Inc.'s financial statements, included herewith, and
all the information contained in this annual report are the responsibility of
management, and have been approved by the Board of Directors.
 
     The financial statements have been prepared by management according to
generally accepted accounting principles in Canada. While it was possible to
apply other accounting methods, management chose those which were judged most
appropriate for the circumstances. The financial statements include amounts
based on the use of best estimates and judgments. Management has established
these amounts in a reasonable manner in order to ensure that the financial
statements are fairly presented in all material respects. Management has also
prepared the financial information presented elsewhere in the annual report and
has ensured that it agrees with the financial statements. The Company maintains
internal control systems for accounting and administration. The objective of
these systems is to provide a reasonable assurance that the financial
information is pertinent, reliable and accurate and that the Company's assets
are properly accounted for and safeguarded.
 
     The Board of Directors is entrusted with ensuring that management assumes
its responsibilities with regard to the presentation of financial information
and is ultimately responsible for the examination and approval of the financial
statements. The Board of Directors meets periodically with management and the
external auditors to discuss the internal controls exercised over the process of
presenting the financial information, questions of auditing and the presentation
of financial information, to ensure that each party properly fulfills its
function and to examine the financial statements and the external auditors'
report.
 
     The financial statements have been verified on behalf of the shareholders
by the external auditors, Ernst & Young LLP, whose report is presented below.
The auditors have free and full access to the Board of Directors.
 
(Signed)                                     (Signed)
Francesco Bellini, Ph.D.                     Frederick J. Andrew
President                                    Chief Financial Officer
 
Laval, Quebec, Canada
January 26, 1999
 
                                AUDITORS' REPORT
 
To the Shareholders of
CLINICHEM DEVELOPMENT INC.
 
     We have audited the balance sheet of CliniChem Development Inc. as at
December 31, 1998 and the statements of loss and deficit and changes in
financial position for the 205-day period then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
 
     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
 
     In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 1998 and the
results of its operations and the changes in its financial position for the
205-day period then ended in accordance with generally accepted accounting
principles.
 
                                                                          
Montreal, Canada,                                                       (Signed)
January 18, 1999.                                          Chartered Accountants
 
                                       34
<PAGE>   38
 
                           CLINICHEM DEVELOPMENT INC.
                                 BALANCE SHEET
                            As at December 31, 1998
                        [Thousands of Canadian dollars]
 
<TABLE>
<S>                                                             <C>
ASSETS
Current
Cash and cash equivalents [note 3]..........................    $ 20,009
Temporary investments [note 3]..............................     114,392
Taxes and other receivables.................................       1,115
Scientific research and experimental development tax credits
  receivable................................................         759
                                                                --------
     Total current assets...................................     136,275
                                                                --------
                                                                 136,275
                                                                ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities....................      10,158
                                                                --------
     Total current liabilities..............................      10,158
                                                                --------
SHAREHOLDERS' EQUITY
Share capital [note 5]......................................           1
Contributed surplus [note 5]................................     143,500
Deficit.....................................................     (17,384)
                                                                --------
     Total shareholders' equity.............................     126,117
                                                                --------
                                                                $136,275
                                                                ========
</TABLE>
 
On behalf of the Board:
 
<TABLE>
<S>                                            <C>
         (Signed) FRANCESCO BELLINI                  (Signed) CELINE HERVIEUX-PAYETTE
                  Director                                       Director
</TABLE>
 
                             See accompanying notes
                                       35
<PAGE>   39
                           CLINICHEM DEVELOPMENT INC.
 
                         STATEMENT OF LOSS AND DEFICIT
 
                     205-day period ended December 31, 1998
         [Thousands of Canadian dollars, except per share information]
 
<TABLE>
<S>                                                             <C>
REVENUE
Interest income.............................................    $    4,061
                                                                ----------
EXPENSES
Research and development [note 4]...........................        19,051
Technology fee [note 4].....................................         2,358
General and administrative [note 4].........................           729
Scientific research and experimental development tax
  credits...................................................          (759)
                                                                ----------
                                                                    21,379
                                                                ----------
Loss before income taxes....................................        17,318
Income taxes [note 6].......................................            66
                                                                ----------
NET LOSS AND DEFICIT........................................    $   17,384
                                                                ==========
LOSS PER CLASS A AND B COMMON SHARE.........................    $     6.41
                                                                ==========
Weighted average number of Class A and B common shares
  outstanding...............................................     2,714,260
                                                                ==========
</TABLE>
 
                             See accompanying notes
                                       36
<PAGE>   40
                           CLINICHEM DEVELOPMENT INC.
 
                   STATEMENT OF CHANGES IN FINANCIAL POSITION
 
                     205-day period ended December 31, 1998
                        [Thousands of Canadian dollars]
 
<TABLE>
<S>                                                             <C>
OPERATING ACTIVITIES
Net loss....................................................    $(17,384)
Change in non-cash working capital items related to
  operations................................................       8,284
                                                                --------
CASH USED IN OPERATING ACTIVITIES...........................      (9,100)
                                                                --------
INVESTING ACTIVITIES
Increase in temporary investments...........................    (114,392)
                                                                --------
CASH USED IN INVESTING ACTIVITIES...........................    (114,392)
                                                                --------
FINANCING ACTIVITIES
Issuance of common shares...................................           1
Contributed surplus [note 5]................................     143,500
                                                                --------
CASH PROVIDED BY FINANCING ACTIVITIES.......................     143,501
                                                                --------
Net increase in cash and cash equivalents...................      20,009
Cash and cash equivalents, beginning of period..............          --
                                                                --------
CASH AND CASH EQUIVALENTS, END OF PERIOD....................    $ 20,009
                                                                ========
</TABLE>
 
                             See accompanying notes
                                       37
<PAGE>   41
                           CLINICHEM DEVELOPMENT INC.
 
                         NOTES TO FINANCIAL STATEMENTS
                               December 31, 1998
 
1.   BASIS OF PRESENTATION
 
     CliniChem Development Inc. [the "Company"] was incorporated in January 1998
under the Canada Business Corporations Act to conduct research and development
of certain potential human therapeutic and vaccine products primarily for the
treatment of cancer and HIV infection, and the prevention of certain infectious
diseases.
 
     The Company began active operations on June 10, 1998 and is expected to
experience significant losses as substantially all of its capital will be spent
to develop its products over a period of approximately four to five years. The
Company does not expect that most of its products will reach commercial
marketability prior to the expenditure of all of its capital and does not
anticipate to receive any significant revenues unless and until these products
become successfully commercialized. Other than its available funds, the Company
may have no other source of funding to complete the development and
commercialization of its products.
 
     The Company does not intend to perform any research, development or
activities itself, but rather has contracted with BioChem Pharma Inc.
["BioChem"] to perform all such activities pursuant to the terms of the Research
and Development Agreement [see note 4].
 
2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     These financial statements have been prepared in accordance with accounting
principles generally accepted in Canada which comply in material respects with
those accepted in the United States, except as noted below under "Research and
development expenses". No adjustments to the Company's financial statements
would be required to conform with accounting principles generally accepted in
the United States and the related rules and regulations adopted by the
Securities and Exchange Commission.
 
     The significant accounting policies used in their preparation are as
follows:
 
USE OF ESTIMATES
 
     Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amounts in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
 
SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT TAX CREDITS
 
     Scientific research and experimental development tax credits are applied
against the related expenses in the year the expenses are incurred. The amounts
recorded by the Company are subject to review and approval by the tax
authorities and it is possible that the final amounts granted will be different
from the amounts recorded.
 
FINANCIAL INSTRUMENTS
 
     The Company's financial instruments recognized on the balance sheet consist
of current assets and current liabilities. Their carrying values approximate
their fair values due to their short-term nature.
 
INCOME TAXES
 
     The provision for current income taxes is based on estimated taxable
income. Income taxes are accounted for using the liability method whereby
deferred income tax assets and liabilities are recognized for the future tax
consequences of temporary differences between carrying amounts of assets and
liabilities and their respective tax bases. Deferred income tax assets are also
recognized for the estimated future effects of tax loss carry forwards. Deferred
income tax assets are reduced when it is more likely than not that the
corresponding benefit will not be realized.
 
                                       38
<PAGE>   42
                           CLINICHEM DEVELOPMENT INC.
 
RESEARCH AND DEVELOPMENT EXPENSES
 
     Research expenses are charged to income as incurred. Development expenses
are charged to income as incurred, unless they meet all of the criteria for
deferment and provided their recovery can reasonably be regarded as assured.
However, for purposes of generally accepted accounting principles in the United
States, all such costs will be expensed as incurred.
 
LOSS PER SHARE
 
     Loss per share is calculated using the weighted average number of shares
outstanding during the year.
 
3.   CASH EQUIVALENTS AND TEMPORARY INVESTMENTS
 
     Cash equivalents [original maturities of 90 days or less] and temporary
investments [original maturities between 91 days and one year] consist primarily
of money market instruments having a Dominion Bond Rating Service Limited rating
of R-1. At December 31, 1998, there was one investment [commercial paper] which
represented 90% of cash equivalents. There were also three investees which
represented 52% of temporary investments.
 
     Since the Company has the positive intent and ability to hold these
instruments to maturity, they are valued at cost plus accrued interest. All the
funds are held in escrow and released only for activities undertaken pursuant to
the agreements entered into with BioChem [see note 4].
 
4.   ARRANGEMENTS WITH BIOCHEM PHARMA INC.
 
     During 1998, the Company entered into the following agreements with
BioChem:
 
RESEARCH AND DEVELOPMENT AGREEMENT
 
     Under the Research and Development Agreement, BioChem has been engaged to
conduct research and development of the Company's products in accordance with
the Company's programs. In exchange, the Company is required to pay BioChem for
the direct and indirect research and development costs incurred plus five
percent [5%] of such costs.
 
     All research and development expenses related to the products incurred by
BioChem starting June 10, 1998 are funded by the Company. For the period ended
December 31, 1998, the Company incurred $19,051,000 of expenses related to this
agreement.
 
TECHNOLOGY LICENSE AGREEMENT
 
     The Company has obtained an exclusive perpetual license to use certain
BioChem technology solely to conduct its programs and related activities, and to
manufacture and commercialize its products worldwide arising from the CliniChem
program.
 
     In consideration for the license to use BioChem technology to conduct these
programs, the Company pays a fee [the "technology fee"] to BioChem. The
technology fee is payable monthly at a rate of $352,000 a month over a period of
48 months starting on June 10, 1998. For the period ended December 31, 1998, the
technology fee amounted to $2,358,000.
 
     Pursuant to the terms of this license, the Company's right to pursue
manufacturing of its products is subject to a right of first offer and a right
of first refusal on the part of BioChem.
 
SERVICES AGREEMENT
 
     Under the Services Agreement, BioChem will provide the Company with
administrative services for an annual fee of $400,000.
 
PRODUCT OPTION
 
     The Company has granted BioChem an option to acquire all rights to each of
the Company's products, exercisable on a product-by-product and
country-by-country basis. Upon exercise of this option, BioChem will
 
                                       39
<PAGE>   43
                           CLINICHEM DEVELOPMENT INC.
 
make payments to the Company with respect to each of the product for which the
option is exercised. Such payments will be a percentage of Net Sales and
Licensing Revenues [as defined in the Product Option Agreement] over a ten year
period.
 
     Each product option expires thirty [30] days after any regulatory approval
to commercialize the product, or 30 days after the expiration of the Share
Purchase Option [see note 5].
 
5.   SHARE CAPITAL
 
AUTHORIZED
 
FROM JANUARY 30, 1998 TO MAY 10, 1998:
 
     An unlimited number of common shares.
 
FROM MAY 11 TO JUNE 22, 1998:
 
     A limited number of 1,000 common shares.
 
     An unlimited number of Class A common shares.
 
     A limited number of 1,000 Class B common shares.
 
AFTER JUNE 23, 1998:
 
     An unlimited number of Class A common shares.
 
     A limited number of 1,000 Class B common shares.
 
ISSUED AND OUTSTANDING
 
<TABLE>
<S>                                                             <C>
2,713,260  Class A common shares............................    $  167
    1,000  Class B common shares............................       833
                                                                ------
                                                                $1,000
                                                                ======
</TABLE>
 
     On February 5, 1998, BioChem subscribed to 1,000 common shares for a cash
consideration of $1,000.
 
     On June 8, 1998, BioChem contributed $150,000,000 in cash, of which
$6,500,000 were used to cover the Distribution costs, resulting in a net amount
of $143,500,000 to the Company. Subsequently, the 1,000 common shares held by
BioChem were exchanged for 2,713,328 Class "A" common shares having a par value
of $167 and 1,000 Class B Common shares having a par value of $833.
 
     On June 26, 1998, BioChem distributed to its common shareholders one Class
A common share of the Company for each 40 common shares of BioChem held on June
22, 1998. As a result, a total of 2,713,260 Class A common shares were
distributed. The remaining 68 Class A common shares were cancelled.
 
     As the holder of the majority of the outstanding Class B common shares,
BioChem has the option to purchase all, but not less than all, of the issued and
outstanding Class A common shares. The option is exercisable at any time up to
the earlier of March 31, 2003 or the 90th day after the date the Company
provides BioChem with quarterly financial statements of the Company showing
cash, cash equivalents and temporary investments of less than $5,000,000, unless
BioChem extends such period by providing additional funding. The exercise price
will be determined in accordance with the option exercise price formula
specified in the Company's articles of incorporation.
 
                                       40
<PAGE>   44
                           CLINICHEM DEVELOPMENT INC.
 
6.   INCOME TAXES
 
     The provision for income taxes consists of large corporation tax.
 
     Significant components of the Company's deferred tax assets as of December
31, 1998 are shown below. A valuation allowance has been recognized to fully
offset the deferred tax assets as of December 31, 1998 as it is more likely than
not that they will not be realized:
 
<TABLE>
<S>                                                             <C>
Deferred tax assets:
Operating loss carry-forwards...............................    $7,000,000
Valuation allowance.........................................    (7,000,000)
                                                                ----------
                                                                        --
                                                                ==========
</TABLE>
 
     The Company has accumulated non-capital losses for purposes of calculating
its Canadian income taxes, allowing it to reduce its taxable income in
subsequent years. These losses and temporary differences, the benefits of which
have not been recognized in the financial statements, will be recorded when they
are realized. They are summarized approximately as follows:
 
<TABLE>
<CAPTION>
MATURITY                                                          FEDERAL      PROVINCIAL
--------                                                        -----------    -----------
<S>                                                             <C>            <C>
2005........................................................    $11,285,000    $11,285,000
Losses arising from research and development which can be
  deferred over an indefinite period........................      7,105,000      7,950,000
                                                                -----------    -----------
                                                                $18,390,000    $19,235,000
                                                                ===========    ===========
</TABLE>
 
     In addition, the Company may take advantage of future tax benefits arising
from unused tax deductions recognized for accounting purposes but not deducted
for tax purposes, amounting to approximately $5,325,000.
 
7.   UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
 
     The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
entity, including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
 
                                       41
<PAGE>   45
CORPORATE INFORMATION


HEAD OFFICE                                  LISTINGS
                                             Montreal Exchange           BCC.A
CLINICHEM DEVELOPMENT INC.                   The Toronto Stock Exchange  BCC.A
275 Armand-Frappier Blvd.                    NASDAQ National Market      CCHE
Laval, Quebec H7V 4A7
Canada                                       INVESTOR RELATIONS CONTACT
Tel.: (450) 978-7727
Fax: (450) 978-7755                          CHRISTINE LENNON

                                             275 Armand-Frappier Blvd.
DIRECTORS                                    Laval, Quebec H7V 4A7
                                             Canada
FRANCESCO BELLINI, PH.D.                     Tel.: (450)978-7727
Chief Executive Officer                      Fax: (450) 978-7755
BioChem Pharma Inc.

ELIZABETH GREETHAM                           AUDITORS
President and Chairman of the Board
ACCL Financial Consultants Ltd.              ERNST & YOUNG LLP
                                             Montreal, Quebec
THE HONORABLE CELINE HERVIEUX-PAYETTE, P.C.  Canada
Counsel
Martineau Walker                             TRANSFER AGENT AND REGISTRAR

OFFICERS                                     GENERAL TRUST OF CANADA
                                             Montreal, Quebec
FRANCESCO BELLINI, PH.D.                     Canada
Chairman and President
                                             ANNUAL GENERAL MEETING
FREDERICK J. ANDREW                          Tuesday, June 15, 1999
Chief Financial Officer                      at 11:30 a.m.
                                             275 Armand-Frappier Blvd.
GUY LORD                                     Laval, Quebec H7V 4A7
Secretary                                    Canada

                                             INFORMATION AVAILABLE UPON REQUEST
                                             Additional copies of the 
                                             Annual Report
                                             Quarterly financial statements
                                             Management proxy circular



                                             [LOGO]
                                             (C) 1999 CliniChem Development Inc.
                                             - All rights reserved
                                             [LOGO] This report is 100%
                                                    recyclable.
<PAGE>   46
[LOGO]
275 Armand-Frappier Blvd.
Laval, Quebec H7V 4A7
Canada

Tel.: (450) 978-7727
Fax: (450) 978-7755                                           Printed in Canada