Exhibit 3

Æterna Zentaris Inc.

Consolidated Financial Statements December 31, 2005, 2004 and 2003(expressed in thousands of US dollars)

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LOGO

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| |  |                                                                                                                                                                                                            
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | PricewaterhouseCoopers LLP
Chartered AccountantsPlace de la Cité, Tour Cominar
2640 Laurier Boulevard, Suite 1700
Sainte-Foy, Quebec
Canada G1V 5C2
Telephone +1 (418) 522 7001
Facsimile +1 (418) 522 5663

Report of Independent Auditors

To the Shareholders of
Æterna Zentaris Inc.

We have audited the consolidated balance sheets ofÆterna Zentaris Inc.as at December 31, 2005 and
2004 and the consolidated statements of operations, deficit, other capital and cash flows for each of the years in the three-year period ended December 31, 2005. 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 audits.

We
conducted our audits in accordance with Canadian 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 consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2005 and 2004 and the results of its
operations and its cash flows for each of the years in the three-year period ended December 31, 2005 in accordance with Canadian generally accepted accounting principles.

LOGO

Chartered Accountants

Quebec,
Quebec, Canada
February 28, 2006

PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP and the other member firms of PricewaterhouseCoopers
International Limited, each of which is a separate and independent legal entity.

1

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ÆTERNA ZENTARIS INC.
Consolidated Balance Sheets(expressed in thousands of US dollars)

|                                                    |                | As at December 31, |       
|--------------------------------------------------- | -------------- | ------------------ | ------
|
|Assets                                              |                |                    |       
|Current assets                                      |                |                    |       
|Cash and cash equivalents                           |                | 27,267             |       
|Short-term investments (note 22)                    |                | 25,438             |       
|Accounts receivable                                 |                |                    |       
|                                                    | Trade          |                    | 61,385
|                                                    | Other (note 5) |                    | 3,846 
|Inventory (note 6)                                  |                | 37,258             |       
|Prepaid expenses                                    |                | 3,791              |       
|Future income tax assets (note 19)                  |                | 2,718              |       
|                                                    |                |                    |       
|                                                    |                | 161,703            |       
|Property, plant and equipment(notes 8 and 18)       |                | 19,916             |       
|Deferred charges and other long-term assets(note 7) |                | 4,355              |       
|Intangible assets(notes 9 and 18)                   |                | 109,380            |       
|Goodwill(note 10)                                   |                | 119,169            |       
|Future income tax assets(note 19)                   |                | 11,015             |       
|                                                    |                |                    |       
|                                                    |                | 425,538            |       
|                                                    |                |                    |       
|Liabilities                                         |                |                    |       
|Current liabilities                                 |                |                    |       
|Accounts payable and accrued liabilities (note 11)  |                | 57,958             |       
|Income taxes                                        |                | 3,453              |       
|Balances of purchase price (note 4)                 |                |                   |       
|Current portion of long-term debt                   |                | 790                |       
|                                                    |                |                    |       
|                                                    |                | 62,201             |       
|Deferred revenues                                   |                | 11,087             |       
|Convertible term loans(note 12)                     |                | 28,440             |       
|Long-term debt(note 13)                             |                | 107,303            |       
|Employee future benefits(note 14)                   |                | 7,661              |       
|Future income tax liabilities(note 19)              |                | 34,784             |       
|Non-controlling interest                            |                | 64,531             |       
|                                                    |                |                    |       
|                                                    |                | 316,007            |       
|                                                    |                |                    |       
|Shareholders' Equity                                |                |                    |       
|Share capital(note 15)                              |                | 130,344            |       
|Other capital                                       |                | 10,474             |       
|Deficit                                             |                | (43,224            | )     
|Cumulative translation adjustment                   |                | 11,937             |       
|                                                    |                |                    |       
|                                                    |                | 109,531            |       
|                                                    |                |                    |       
|                                                    |                | 425,538            |       
|                                                    |                |                    |       

Subsequent event(note 25)

The
accompanying notes are an integral part of these consolidated financial statements.

Approved by the Board of Directors

|(Signed) |  | LOGO        |  | Director |  | (Signed) |  | LOGO           |  | Director
|-------- |  | ----------- |  | -------- |  | -------- |  | -------------- |  | --------
|         |  | Éric Dupont |  |          |  |          |  | Gérard Limoges |  |         

2

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ÆTERNA ZENTARIS INC.
Consolidated Statements of Deficit(expressed in thousands of US dollars)

|                                 |  | Years Ended December 31,
|-------------------------------- |  | ------------------------
|
|Balance  Beginning of year      |  | 53,795                  
|Net loss (earnings) for the year |  | (10,571                 
|                                 |  |                         
|Balance  End of year            |  | 43,224                  
|                                 |  |                         

Consolidated Statements of Other Capital(expressed in thousands of US dollars)

|                                                              |  | Years Ended December 31,
|------------------------------------------------------------- |  | ------------------------
|
|Balance  Beginning of year                                   |  | 6,059                   
|Conversion option related to convertible term loans (note 12) |  | 2,129                   
|Stock-based compensation costs (note 15e)                     |  | 2,286                   
|Exercise of stock options (note 15c)                          |  |                        
|                                                              |  |                         
|Balance  End of year                                         |  | 10,474                  
|                                                              |  |                         

The
accompanying notes are an integral part of these consolidated financial statements.

3

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ÆTERNA ZENTARIS INC.
Consolidated Statements of Operations(expressed in thousands of US dollars, except share and per share data)

|                                                          |                                           | Years Ended December 31, |       
|--------------------------------------------------------- | ----------------------------------------- | ------------------------ | ------
|
|Revenues                                                  |                                           | 247,389                  |       
|                                                          |                                           |                          |       
|Operating expenses                                        |                                           |                          |       
|Cost of sales                                             |                                           | 156,365                  |       
|Selling, general and administrative                       |                                           | 42,037                   |       
|Research and development costs                            |                                           | 27,605                   |       
|Research and development tax credits and grants (note 18) |                                           | (633                     | )     
|Depreciation and amortization                             |                                           |                          |       
|                                                          | Property, plant and equipment             |                          | 2,349 
|                                                          | Intangible assets                         |                          | 5,254 
|                                                          |                                           |                          |       
|                                                          |                                           | 232,977                  |       
|                                                          |                                           |                          |       
|Earnings (loss) from operations                           |                                           | 14,412                   |       
|                                                          |                                           |                          |       
|Other revenues (expenses)                                 |                                           |                          |       
|Interest income                                           |                                           | 1,601                    |       
|Interest expense                                          |                                           |                          |       
|                                                          | Long-term debt and convertible term loans |                          | (9,217
|                                                          | Other                                     |                          | (568  
|Foreign exchange loss                                     |                                           | (263                     | )     
|                                                          |                                           |                          |       
|                                                          |                                           | (8,447                   | )     
|                                                          |                                           |                          |       
|Earnings (loss) before income taxes                       |                                           | 5,965                    |       
|Income tax expense(note 19)                               |                                           | (7,332                   | )     
|                                                          |                                           |                          |       
|Earnings (loss) before the following items                |                                           | (1,367                   | )     
|Gain (loss) on dilution of investments(note 4e and h)     |                                           | 19,002                   |       
|Non-controlling interest                                  |                                           | (7,064                   | )     
|                                                          |                                           |                          |       
|Net earnings (loss) for the year                          |                                           | 10,571                   |       
|                                                          |                                           |                          |       
|Net earnings (loss) per share                             |                                           |                          |       
|Basic                                                     |                                           | 0.23                     |       
|                                                          |                                           |                          |       
|Diluted                                                   |                                           | 0.22                     |       
|                                                          |                                           |                          |       
|Weighted average number of shares outstanding(note 21)    |                                           |                          |       
|Basic                                                     |                                           | 46,139,814               |       
|                                                          |                                           |                          |       
|Diluted                                                   |                                           | 46,426,682               |       
|                                                          |                                           |                          |       

The
accompanying notes are an integral part of these consolidated financial statements.

4

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ÆTERNA ZENTARIS INC.
Consolidated Statements of Cash Flows(expressed in thousands of US dollars)

|                                                                          |                                                                          | Years Ended December 31, |        
|------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------ | -------
|
|Cash flows from operating activities                                      |                                                                          |                          |        
|Net earnings (loss) for the year                                          |                                                                          | 10,571                   |        
|Items not affecting cash and cash equivalents                             |                                                                          |                          |        
|                                                                          | Depreciation and amortization                                            |                          | 7,603  
|                                                                          | Stock-based compensation costs                                           |                          | 2,940  
|                                                                          | Future income taxes                                                      |                          | 2,183  
|                                                                          | Loss (gain) on dilution of investments                                   |                          | (19,002
|                                                                          | Non-controlling interest                                                 |                          | 7,064  
|                                                                          | Employee future benefits                                                 |                          | 2,360  
|                                                                          | Deferred charges                                                         |                          | 3,188  
|                                                                          | Deferred revenues                                                        |                          | (10,215
|                                                                          | Accretion on convertible term loans                                      |                          | 4,479  
|                                                                          | Foreign exchange loss on long-term items denominated in foreign currency |                          | 479    
|Change in non-cash operating working capital items (note 17)              |                                                                          | 1,284                    |        
|                                                                          |                                                                          |                          |        
|                                                                          |                                                                          | 12,934                   |        
|                                                                          |                                                                          |                          |        
|Cash flows from financing activities                                      |                                                                          |                          |        
|Repayment of promissory note                                              |                                                                          |                         |        
|Net proceeds from the issuance of convertible term loans                  |                                                                          |                         |        
|Payments on balance of purchase price (note 4)                            |                                                                          | (4,309                   | )      
|Increase in long-term debt                                                |                                                                          | 147,297                  |        
|Repayment of long-term debt                                               |                                                                          | (92,061                  | )      
|Issuance of shares                                                        |                                                                          | 130                      |        
|Share issue expenses                                                      |                                                                          | (108                     | )      
|Issuance of shares by a subsidiary                                        |                                                                          | 37,976                   |        
|                                                                          |                                                                          |                          |        
|                                                                          |                                                                          | 88,925                   |        
|                                                                          |                                                                          |                          |        
|Cash flows from investing activities                                      |                                                                          |                          |        
|Purchase of short-term investments                                        |                                                                          | (28,903                  | )      
|Proceeds from the sale of short-term investments                          |                                                                          | 28,847                   |        
|Purchase of long-term investment                                          |                                                                          | (401                     | )      
|Business acquisitions, net of cash and cash equivalents acquired (note 4) |                                                                          | (92,641                  | )      
|Purchase of property, plant and equipment                                 |                                                                          | (1,746                   | )      
|Acquisition of amortizable intangible assets                              |                                                                          | (705                     | )      
|                                                                          |                                                                          |                          |        
|                                                                          |                                                                          | (95,549                  | )      
|                                                                          |                                                                          |                          |        
|Increase in cash and cash equivalents                                     |                                                                          | 6,310                    |        
|Effect of exchange rate changes on cash and cash equivalents              |                                                                          | (2,781                   | )      
|Cash and cash equivalents  Beginning of year                             |                                                                          | 23,738                   |        
|                                                                          |                                                                          |                          |        
|Cash and cash equivalents  End of year                                   |                                                                          | 27,267                   |        
|                                                                          |                                                                          |                          |        
|Additional information                                                    |                                                                          |                          |        
|Interest paid                                                             |                                                                          | 1,942                    |        
|Income taxes paid                                                         |                                                                          | 6,535                    |        

The
accompanying notes are an integral part of these consolidated financial statements.

5

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ÆTERNA ZENTARIS INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005, 2004 and 2003        (tabular amounts in thousands of US dollars,  except share/option and per
share/option data and as otherwise noted)

1      Incorporation and nature of activities



2      Summary of significant accounting policies



Percentage of interestSubsidiaries

2005

2004%

%Zentaris GmbH ("Zentaris")

100.00

100.00Echelon Biosciences Inc. ("Echelon")

100.00

Atrium Biotechnologies Inc. ("Atrium")(1)

48.46

61.12Pure Encapsulations, Inc.

100.00

100.00Unipex Finance S.A.S.

100.00

83.78Chimiray S.A.S.

100.00

100.00Unipex S.A.S.

100.00

100.00MultiChem Import Export (2005) Inc.

100.00

HVL Parent Incorporated ("Douglas Laboratories")

100.00








6

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7

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8

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Methods

Annual rates%Building

Straight-line

4 and 5Equipment

Declining balance and straight-line

20Office furniture

Declining balance and straight-line

10 and 20Computer equipment

Straight-line

25 and 331/3Automotive equipment

Straight-line

20Leasehold improvements

Straight-line

Remaining lease term




9

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10

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11

---





12

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3      New accounting standards



13

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4      Business acquisitions





14

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Echelon

MultiChem

Douglas Laboratories$

$

$AssetsCurrent assets

750

11,972

29,030Property, plant and equipment

445

70

3,787Intangible assetsCustomer and supplier relationships

909

4,976

8,000Patents and trademarks

100

1,631

39,800Technologies

1,364

6

Other long-term assets

111



3,679

18,655

80,617LiabilitiesCurrent liabilities

781

6,044

10,110Long-term liabilities

81



8,912Future income tax liabilities

832



16,8981,694

6,044

35,920Net identifiable assets acquired

1,985

12,611

44,697Goodwill

951

8,136

42,155Purchase price

2,936

20,747

86,852Less: Cash and cash equivalents acquired

162



3,182Shares issued

2,737



8,632Balance of purchase price



2,252

Acquisition costs unpaid





1,132Net cash used for the acquisition

37

18,495

73,906


15

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16

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$AssetsCurrent assets

4,740Property, plant and equipment

1,123Intangible assetsTrademarks

12,000Customer relationships

800Other

9418,757LiabilitiesCurrent liabilities

757Net identifiable assets acquired

18,000Goodwill

19,982Purchase price

37,982Less: Cash and cash equivalents acquired

1,076Balance of purchase price

2,444Net cash used for the acquisition

34,462




17

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18

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$AssetsCurrent assets

12,799Property, plant and equipment

281Intangible assets

3Future income tax assets

37813,461LiabilitiesCurrent liabilities

10,822Long-term liabilities

72511,547Net identifiable assets acquired

1,914Goodwill

11,395Purchase price

13,309Less: Cash and cash equivalents acquired

2,552Balance of purchase price

656Net cash used for the acquisition

10,101






19

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5      Other receivables

As at December 31,2005

2004$

$Interest

452

434Grants

1,415

1,261Research and development tax credits recoverable

670

1,597Commodity taxes

646

640Other

663

1,3223,846

5,254


6      Inventory

As at December 31,2005

2004$

$Raw materials

10,267

1,734Work in progress

1,653

678Finished goods

25,338

15,37637,258

17,788


7      Deferred charges and other long-term assets

As at December 31,2005

2004$

$Deferred financing fees and other deferred charges

2,291

1,352Long-term receivable



2,568Investments, at cost

2,064

1,7254,355

5,645


20

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8      Property, plant and equipment

As at December 31,2005

2004Cost

Accumulated depreciation

Cost

Accumulated depreciation$

$

$

$Land

405



377

Building

11,708

3,173

11,296

2,617Equipment

16,285

6,754

11,850

5,323Office furniture

1,169

679

1,185

698Computer equipment

1,354

1,117

1,965

1,550Automotive equipment

230

185

237

167Leasehold improvements

822

149



31,973

12,057

26,910

10,355Less:Accumulated depreciation

12,057



10,355Net amount

19,916



16,555


9      Intangible assets

As at December 31,2005

2004Cost

Accumulated depreciation

Cost

Accumulated depreciation$

$

$

$Finite useful livesPatents and trademarks

52,087

12,857

59,241

10,139Licenses and distribution agreements

865

257

1,001

225Customer and supplier relationships

14,985

598

800

67Technology and other

2,368

733

372

17970,305

14,445

61,414

10,610Less: Accumulated amortization

14,445



10,610Net amount

55,860



50,804Indefinite useful livesTrademarks

53,520



12,000109,380



62,804


21

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10    Goodwill



Biopharmaceutical

Active Ingredients & Specialty Chemicals

Health & Nutrition

Total$

$

$

$Balance as at December 31, 2003

8,943

37,047

1,202

47,192Acquisitions (note 4)



561

20,321

20,882Adjustments(1)



(194
)
1

(193
)Impact of foreign exchange rate

703

2,979

98

3,780Balance as at December 31, 2004

9,646

40,393

21,622

71,661Acquisitions (note 4)

951

10,074

42,155

53,180Adjustments(1)



(49
)
48

(1
)Impact of foreign exchange rate

(820
)
(4,915
)
64

(5,671
)Balance as at December 31, 2005

9,777

45,503

63,889

119,169




11    Accounts payable and accrued liabilities

As at December 31,2005

2004$

$Trade payable

36,951

23,992Interest on convertible term loans



2,096Advance payment related to a licensing agreement

728

832Salaries and employee benefits

5,682

1,848Deferred revenues

4,796

7,693Commodity taxes

1,489

1,442Other accrued liabilities

8,312

3,89457,958

41,797


22

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12    Convertible term loans

As at December 31,2005

2004$

$The liability portion of the convertible term loans, bearing interest at an annual rate of 12%, payable annually or at maturity at the Company's option for which moveable hypothecs on the assets of the Company, with the
exception of the building, equipment and shares of a subsidiary, have been given as collateral. An amount of accrued interest totalling $2,467,000 has been included as at December 31, 2005

28,440

20,707




13    Long-term debt

As at December 31,2005

2004$

$Æterna ZentarisLoan from the federal and provincial governments, (CAN$2,400 in 2005; CAN$3,200 in 2004) non-interest bearing, payable in five annual equal and consecutive instalments since July 2004

2,064

2,662Promissory note, bearing interest at a rate of 5.67%, payable in monthly instalments including capital and interest, collateralized by the laboratory equipment of a subsidiary, maturing in June 2008

81

(forward)

2,145

2,662


23

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As at December 31,2004

2003$

$(brought forward)

2,145

2,662Atrium and its subsidiariesRevolving credit facility *

94,300

Unsecured loan (CAN$13,407 as at December 2004 and 2005), bearing interest at a rate of 7%, principal payable in June 2008 and June 2009, interest payable on a monthly basis

11,528

11,154Unsecured bank loan (€3 as at December 31, 2005 and €15 as at December 31, 2004), bearing interest at a rate of 4.35%, payable in quarterly instalments including principal and interest,
maturing in January 2006

3

20Balance of purchase price (€43 as at December 31, 2005 and €116 as at December 31, 2004), non-interest bearing, payable in euros in monthly instalments, maturing in July 2006

51

157Note payable on vehicle, non-interest bearing, payable in monthly instalments, maturing in August 2007

18

Bank mortgage, bearing interest at a rate of 9%, payable in quarterly instalments including principal and interest, collateralized by a building and a plot of land, maturing in September 2014

48

Settled during 2005



28,851108,093

42,844Less: Current portion

790

10,094107,303

32,750






24

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14    Employee future benefits



Pension benefit plan

Other benefit pla2005

2004

2003

2005

2004

2003$

$

$

$

$

$Obligation  Beginning of year

5,844

4,743

3,391

398

393

439Current service cost

230

218

198

23

23

15Interest cost

274

259

205

19

21

26Actuarial loss (gain)

1,735

300

133

182

27

(97
)Benefits paid

(65
)
(60
)
(35
)
(43
)
(94
)
(74
)Effect of foreign currency exchange rate changes

(880
)
384

851

(56
)
28

84Obligation  End of year

7,138

5,844

4,743

523

398

393




Pension benefit plan

Other benefit planActuarial assumptions2005

2004

2003

2005

2004

2003%

%

%

%

%

%Discount rate

2.5 and 4.00

2.5 and 5.25

2.5 and 5.25

4.00

5.25

5.75Pension benefits increase

1.25

1.25

1.25

1.25

1.25

1.25Rate of compensation increase

0.5 to 3.75

0.5 to 3.75

0.5 to 3.75

2.75

2.75

2.75




25

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15    Share capital



As at December 31,2005

2004

2003Number

Amount

Number

Amount

Number

Amount$



$



$Multiple voting sharesBalance  Beginning of year









4,727,100

1,233Conversion of shares









(4,727,100
)
(1,233
)Balance  End of year











Common shares (formerly Subordinate voting shares)Balance  Beginning of year

45,670,909

127,585

45,330,992

126,326

35,961,927

100,446Conversion of shares









4,727,100

1,233Issued pursuant to the stock option plan

25,000

130

339,917

1,386

141,965

751Issued pursuant to the acquisition of Echelon

443,905

2,737







Issued pursuant to a bought deal









4,500,000

25,740Share issue expenses



(108
)


(127
)


(1,844
)Balance  End of year

46,139,814

130,344

45,670,909

127,585

45,330,992

126,326Total share capital

46,139,814

130,344

45,670,909

127,585

45,330,992

126,326


26

---





27

---





2005

2004

2003Number

Weighted average exercise price

Number

Weighted average exercise price

Number

Weighted average exercise price(CAN$)



(CAN$)



(CAN$)Balance  Beginning of year

3,480,592

6.58

3,197,435

6.02

2,949,872

6.96Granted

686,500

5.63

913,000

8.06

1,074,564

4.09Exercised

(25,000
)
6.31

(339,917
)
4.99

(141,965
)
7.25Expired

(65,000
)
8.34

(2,050
)
7.04

(172,285
)
5.74Forfeited

(233,500
)
10.31

(287,876
)
6.97

(512,751
)
7.07Balance  End of year

3,843,592

6.16

3,480,592

6.58

3,197,435

6.02Options exercisable  End of year

2,260,930

6.17

1,743,429

6.90

1,272,514

7.05




Options outstanding

Options currently exercisableExercise price (CAN$)

Number

Weighted average remaining contractual life

Weighted average exercise price

Number

Weighted average exercise price(CAN$)



(CAN$)3.75 to 5.00

952,093

7.70

3.92

620,424

3.905.01 to 7.00

1,377,166

8.16

5.71

714,166

5.817.01 to 10.90

1,514,333

6.54

7.97

926,340

7.963,843,592

7.41

6.16

2,260,930

6.17




28

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Years Ended December 31,2005

2004

2003Dividend yield

Nil

Nil

NilExpected volatility

62.1%

64.2%

64.3%Risk-free interest rate

3.92%

3.48%

3.96%Expected life (years)

5.80

4.30

3.92




Years Ended December 31,2005
$

2004
$

2003
$Pro forma net earnings (loss)

10,429

(4,542
)
(20,955
)Pro forma net earnings (loss) per shareBasic

0.23

(0.10
)
(0.49
)Diluted

0.22

(0.10
)
(0.49
)






29

---





2005

2004

2003Number

Weighted average exercise price (CAN$)

Number

Weighted average exercise price (CAN$)

Number

Weighted average exercise price (CAN$)Balance  Beginning of year

3,667,000

3.59

2,390,000

2.76

2,314,000

2.74Granted

5,000

10.58

2,031,000

4.21

120,000

3.07Exercised

(387,000
)
2.82

(580,000
)
2.60

(8,000
)
2.50Forfeited

(66,500
)
3.08

(174,000
)
2.81

(36,000
)
2.82Balance  End of year

3,218,500

3.70

3,667,000

3.59

2,390,000

2.76




Options outstanding

Options currently exercisableExercise price
(CAN$)

Number

Weighted average remaining contractual life

Weighted average exercise price
(CAN$)

Number

Weighted average exercise price
(CAN$)2.50

545,000

4.84

2.50

545,000

2.503.07

655,000

5.89

3.07

483,000

3.074.21

2,013,500

8.84

4.21

733,000

4.2110.58

5,000

9.55

10.58



3,218,500

7.57

3.70

1,761,000

3.37


30

---





Years Ended December 31,2005

2004

2003Dividend yield

Nil

Nil

NilExpected volatility

38.15%

Nil

NilRisk-free interest rate

3.37%

3.77%

3.96%Weighted average expected life (years)

3.34

4.56

5.00


16    Contingencies



17    Statements of cash flows

Years Ended December 31,2005
$

2004
$

2003
$Change in non-cash operating working capital itemsAccounts receivable

(2,996
)
(7,108
)
(765
)Inventory

(2,816
)
(1,290
)
2,618Prepaid expenses

(742
)
179

(681
)Accounts payable and accrued liabilities

9,160

(3,262
)
(2,772
)Income taxes

(1,322
)
2,989

(196
)1,284

(8,492
)
(1,796
)


31

---



18    Grants



19    Income taxes



Years Ended December 31,2005

2004

2003Combined federal and provincial statutory income tax rate


31.02%


31.02%


33.05%Income tax expense (recovery) based on statutory income tax rate

$
7,745

$
2,250

$
(4,373
)Manufacturing and processing tax credit








484Change in valuation allowance


5,547


2,544


7,533Accretion on convertible term loans


1,448


469


275Non-taxable gain on dilution


(6,142
)




Stock-based compensation costs


942


333


98Difference in statutory income tax rate of foreign subsidiaries


1,117


888


160Change in enacted rate


(2,780
)




243Additional tax deduction








(81
)Other


(545
)

(118
)

(107
)$
7,332

$
6,366

$
4,232


32

---



Years Ended December 31,2005

2004

2003Income tax expense is represented by:Current

$
5,149

$
10,526

$
2,753Future


2,183


(4,160
)

1,479$
7,332

$
6,366

$
4,232CurrentDomestic

$
190

$
399

$
610Foreign


4,959


10,127


2,143$
5,149

$
10,526

$
2,753FutureDomestic

$
665

$
162

$
1,043Foreign


1,518


(4,322
)

436$
2,183

$
(4,160
)
$
1,479$
7,332

$
6,366

$
4,232


33

---





As at December 31,2005
$

2004
$Future income tax assetsCurrentDeferred revenues

1,913

3,058Provisions and accruals

431

Inventory

250

Acquisition costs



48Other

254

1442,848

3,250Long-termResearch and development costs

13,833

11,508Share issue expenses

1,353

597Operating losses carried forward

22,081

17,833Property, plant and equipment

1,319

762Intangible assets and goodwill

1,867

2,361Employee future benefits

1,232

604Deferred revenues

4,732

8,814Other

356

5246,773

42,531Valuation allowance

(35,719
)
(29,068
)11,054

13,46313,902

16,713Future income tax liabilitiesLong-termAccounts receivable

35

208Property, plant and equipment

838

168Deferred charges and other long-term assets

249

261Intangible assets

33,034

19,742Goodwill

789

Other

8

7834,953

20,457Future income tax liabilities, net

21,051

3,744


34

---





Canada

United StatesYear of expiry

Federal
$

Provincial
$

$2007

94



2008

13,801

10,198

2009

17,337

15,721

2010

17,463

17,142

2014

7,923

7,776

2015

4,560

4,411

2020 to 2025





93861,178

55,248

938




20    Segment information



35

---





Years Ended December 31,2005
$

2004
$

2003
$Canada

54,133

1,539

679United States

39,211

21,434

4,563EuropeSwitzerland

19,605

21,381

14,573France

105,523

103,528

72,101Other

23,658

26,137

21,019Asia

2,983

4,463

5,314Other

2,276

730

491247,389

179,212

118,740




Years Ended December 31,2005
$

2004
$Canada

28,606

14,299United States

132,522

35,077France

38,074

41,631Germany

49,263

60,013248,465

151,020




36

---





2005Biopharmaceutical
$

Active Ingredients & Specialty Chemicals
$

Health & Nutrition
$

Consolidated Adjustments
$

Total
$RevenuesSales and royalties

23,674

168,006

32,857

(678
)
223,859License fees

23,530







23,53047,204

168,006

32,857

(678
)
247,389Earnings (loss) from operations

(9,583
)
12,488

11,507



14,412Depreciation and amortization

6,371

791

441



7,603Capital expenditures

1,906

254

291



2,451Segment assets

133,963

120,789

164,097

(6,672
)
412,177


37

---



2004Biopharmaceutical
$

Active Ingredients & Specialty Chemicals
$

Health & Nutrition
$

Consolidated Adjustments
$

Total
$RevenuesSales and royalties

19,479

111,397

24,843



155,719License fees

23,493







23,49342,972

111,397

24,843



179,212Earnings (loss) from operations

(6,879
)
10,791

9,281



13,193Depreciation and amortization

6,136

443

318



6,897Capital expenditures

1,621

60

77



1,758Segment assets

151,830

87,842

44,480

(202
)
283,950


|
|

2003Biopharmaceutical
$

Active Ingredients & Specialty Chemicals
$

Health & Nutrition
$

Consolidated Adjustments
$

Total
$RevenuesSales and royalties

17,412

79,252

6,591



103,255License fees

15,485







15,48532,897

79,252

6,591



118,740Earnings (loss) from operations

(20,464
)
7,257

3,016



(10,191
)Depreciation and amortization

6,295

382

45



6,722Capital expenditures

1,229

35

36



1,300Segment assets

138,744

80,521

4,768

135

224,168




38

---





21    Earnings (loss) per share



2005
$

2004
$

2003
$Net earnings (loss)

10,571

(4,425
)
(20,084
)Impact of assumed conversion of dilutive stock options in a subsidiary

(552
)
(156
)
(27
)Net earnings (loss), adjusted for dilution effect

10,019

(4,581
)
(20,111
)


|
|

2005

2004

2003Basic weighted average number of shares outstanding

46,139,814

45,569,176

42,993,432Dilutive effect of stock options

286,868

417,453

118,953Diluted weighted average number of shares outstanding

46,426,682

45,986,629

43,112,385Items excluded from the calculation of diluted net earnings (loss)
per share because the exercise price was greater than the
average market price of the common shares or due to their
anti-dilutive effectStock options

2,169,697

1,563,259

1,281,183Common shares which would be issued following the conversion of the convertible term loans

6,043,564

5,396,040

3,712,871




39

---



22    Financial instruments



2005
$

2004
$Mutual fund units

1,501

1,664Discount notes and commercial paper, bearing interest at an effective annual rate of 2.98% in 2005 and ranging from 2.81% to 3.13% in 2004, maturing on different dates in February 2006, in 2005, and from
August 2005 to February 2006 in 2004

631

2,193Bonds, bearing interest at effective annual rates ranging from 2.0% to 4.33% in 2005 and from 2.0% to 4.79% in 2004, maturing on different dates from January 2006 to September 2007 in 2005 and from
January 2005 to April 2007 in 2004

23,306

20,73325,438

24,590




40

---







Cash and cash equivalents

Variable interest rateShort-term investments

Fixed interest rateAccounts receivable

Non-interest bearingUnused lines of credit

Variable interest rateAccounts payable and accrued liabilities

Non-interest bearingBalances of purchase price

Non-interest bearingConvertible term loans

As described in note 12Long-term debt

As described in note 13


23    Commitments and guarantee



41

---



24    Summary of differences between generally accepted accounting principles in Canada and in the United States



Years Ended December 31,2005
$

2004
$

2003
$Net earnings (loss) for the year under Canadian GAAP



10,571

(4,425
)
(20,084
)Accretion on convertible term loans

(c)

4,479

1,514

888In-process R&D

(a)





(18,768
)Amortization of in-process R&D

(a)

1,610

1,605

1,459Other

(d)

(32
)
(120
)
(37
)Income tax effects of the above adjustments



(658
)
(656
)
7,073Net earnings (loss) for the year under U.S. GAAP



15,970

(2,082
)
(29,469
)Other comprehensive lossForeign currency translation adjustments



(7,660
)
3,993

16,474Change in fair value of investments

(b)

(139
)
379

(488
)Interest rate swap, net of income taxes

(e)

(78
)


Comprehensive income (loss)



8,093

2,290

(13,483
)Net earnings (loss) per shareBasic



0.35

(0.05
)
(0.69
)Diluted



0.33

(0.05
)
(0.69
)Weighted average number of shares outstanding under U.S. GAAPBasic



46,139,814

45,569,176

42,993,432Diluted



46,426,682

45,986,629

43,112,385


42

---





Years Ended December 31,2005
$

2004
$Shareholders' equity in accordance with Canadian GAAP



109,531

100,076Adjustment of convertible term loans

(c)

(992
)
(2,588
)In-process R&D

(a)

(15,128
)
(19,025
)Other

(d)

346

422Deferred tax effect



6,040

7,77499,797

86,659




As at December 31,2005
$

2004
$Foreign currency translation adjustments

9,815

17,475Unrealized gains on investments

313

452Interest rate swap

(78
)
Accumulated other comprehensive income

10,050

17,927


43

---





|                                                      |  | Share Capital
$ |   | Deficit
$ |   | Other Capital
$ |   | Accumulated Other Comprehensive
Income
$ |   | Shareholders'
Equity
$ |  
|----------------------------------------------------- |  | --------------- | - | --------- | - | --------------- | - | ---------------------------------------- | - | ---------------------- | -
|Balance as at December 31, 2002                       |  | 101,085         |   | (32,534   | ) | 4,461           |   | (2,431                                   | ) | 70,581                 |  
|Net loss as per U.S. GAAP                             |  |                |   | (29,469   | ) |                |   |                                         |   | (29,469                | )
|Stock-based compensation costs                        |  |                |   |          |   | 383             |   |                                         |   | 383                    |  
|Variation in fair value of investments                |  |                |   |          |   |                |   | (488                                     | ) | (488                   | )
|Other                                                 |  |                |   | 1         |   |                |   |                                         |   | 1                      |  
|Exercise of stock options                             |  | 751             |   |          |   |                |   |                                         |   | 751                    |  
|Bought deal                                           |  | 25,740          |   |          |   |                |   |                                         |   | 25,740                 |  
|Share issue expenses                                  |  | (1,845          | ) |          |   |                |   |                                         |   | (1,845                 | )
|Foreign currency translation adjustments              |  |                |   |          |   |                |   | 16,474                                   |   | 16,474                 |  
|                                                      |  |                 |   |           |   |                 |   |                                          |   |                        |  
|Balance as at December 31, 2003                       |  | 125,731         |   | (62,002   | ) | 4,844           |   | 13,555                                   |   | 82,128                 |  
|Net loss as per U.S. GAAP                             |  |                |   | (2,082    | ) |                |   |                                         |   | (2,082                 | )
|Stock-based compensation costs                        |  |                |   |          |   | 1,085           |   |                                         |   | 1,085                  |  
|Variation in fair value of investments                |  |                |   |          |   |                |   | 379                                      |   | 379                    |  
|Exercise of stock options                             |  | 1,376           |   |          |   | (104            | ) |                                         |   | 1,272                  |  
|Share issue expenses                                  |  | (116            | ) |          |   |                |   |                                         |   | (116                   | )
|Foreign currency translation adjustments              |  |                |   |          |   |                |   | 3,993                                    |   | 3,993                  |  
|                                                      |  |                 |   |           |   |                 |   |                                          |   |                        |  
|Balance as at December 31, 2004                       |  | 126,991         |   | (64,084   | ) | 5,825           |   | 17,927                                   |   | 86,659                 |  
|Net earnings as per U.S. GAAP                         |  |                |   | 15,970    |   |                |   |                                         |   | 15,970                 |  
|Stock-based compensation costs                        |  |                |   |          |   | 2,286           |   |                                         |   | 2,286                  |  
|Variation in fair value of investments                |  |                |   |          |   |                |   | (139                                     | ) | (139                   | )
|Unrealized loss on interest rate swap                 |  |                |   |          |   |                |   | (78                                      | ) | (78                    | )
|Exercise of stock options                             |  | 130             |   |          |   |                |   |                                         |   | 130                    |  
|Issuance of shares pursuant to a business acquisition |  | 2,737           |   |          |   |                |   |                                         |   | 2,737                  |  
|Share issue expenses                                  |  | (108            | ) |          |   |                |   |                                         |   | (108                   | )
|Foreign currency translation adjustments              |  |                |   |          |   |                |   | (7,660                                   | ) | (7,660                 | )
|                                                      |  |                 |   |           |   |                 |   |                                          |   |                        |  
|Balance as at December 31, 2005                       |  | 129,750         |   | (48,114   | ) | 8,111           |   | 10,050                                   |   | 99,797                 |  
|                                                      |  |                 |   |           |   |                 |   |                                          |   |                        |  

44

---





As at December 31, 2005

As at December 31, 2004As
reported
$

U.S.
GAAP
$

As
reported
$

U.S.
GAAP
$Intangible assets

(a)

109,380

94,182

62,804

43,705Convertible term loans

(c)

28,440

29,432

20,707

23,295Future income tax liabilities

(a)

34,784

28,603

20,457

12,683






45

---







25    Subsequent event



46

---



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