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Merus Labs International Inc.

Annual Report 2014

For the Years Ended September 30, 2014 and 2013

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|MERUS LABS INTERNATIONAL INC.                 
|----------------------------------------------
|MANAGEMENTS DISCUSSION AND ANALYSIS          
|For the year ended September 30, 2014 and 2013

The following section of our annual report sets forth
Managements Discussion and Analysis of the financial performance and condition
of Merus Labs International Inc. (the Company or Merus) for the year ended
September 30, 2014 compared to the year ended September 30, 2013. The analysis
should be read in conjunction with the accompanying annual audited consolidated
financial statements (the Financial Statements) for the years ended September
30, 2014 and 2013 and the related notes thereto.

The date of this MD&A is December 18, 2014.

FORWARD-LOOKING STATEMENTS

This MD&A contains certain statements or disclosures that
may constitute forward-looking information or statements (collectively,
forward-looking information) under applicable securities laws. All statements
and disclosures, other than those of historical fact, which address activities,
events, outcomes, results or developments that management of the Company,
anticipates or expects may or will occur in the future (in whole or in part)
should be considered forward-looking information. In some cases, forward-looking
information can be identified by terms such as forecast, future, may,
will, expect, anticipate, believe, could, potential, enable,
plan, continue, contemplate, pro forma or other comparable terminology.
Forward-looking information presented in such statements or disclosures may,
among other things include:

| | the Companys expectations regarding sales from
      its existing products, including its sales forecasts;            
|- | -----------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                        
| | the Companys ability to acquire new products;                                                                         
|  |                                                                                                                        
| | the Companys expectations regarding it ability
      to raise capital, including its ability to secure the            
|  |                                                                                                                        
| | financing necessary to enable us to acquire new
      products;                                                        
|  |                                                                                                                        
| | the Companys expectations regarding sales from
      products that we acquire or license;                             
|  |                                                                                                                        
| | the Companys forecasts regarding its operating
      expenditures, including general and administrative expenses,     
|  |                                                                                                                        
| | the Companys expectations regarding the
      development of its target markets;                                      
|  |                                                                                                                        
| | the Companys expectations regarding government
      regulations of its products and any new products that we acquire;
|  |                                                                                                                        
| | the Companys expectations regarding currency
      exchange rates;                                                    
|  |                                                                                                                        
| | the Companys expectations regarding income
      taxes;                                                               
|  |                                                                                                                        
| | the Companys plans, objectives and targets for
      future revenue growth and operating performance;                 

2

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| | the Companys plans and objectives regarding
  new products that it may acquire; and
|- | ------------------------------------------------------------------------------------
|  |                                                                                     
| | the Companys forecast business results and
anticipated financial performance.      

The forward-looking information in statements or disclosures in
this MD&A is based (in whole or in part) upon factors which may cause actual
results, performance or achievements of the Company to differ materially from
those contemplated (whether expressly or by implication) in the forward-looking
information. Those factors are based on information currently available to the
Company, including information obtained from third-party industry analysts and
other third party sources. Actual results or outcomes may differ materially from
those predicted by such statements or disclosures. While the Company does not
know what impact any of those differences may have, their business, results of
operations, financial condition and credit stability may be materially adversely
affected. Factors that could cause actual results or outcomes to differ
materially from the results expressed or implied by forward-looking information
include, among other things:

| | the acceptance of the Companys products by regulatory
      and reimbursement agencies in various territories including Canada and
      Europe and inclusion on drug benefit formularies, hospital formularies and
      acceptance by pharmacies, physicians and patients in the marketplace;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                 
| | the Companys ability to successfully market
      and sell its products;                                                                                                                                                                                                                       
|  |                                                                                                                                                                                                                                                                                                 
| | the Companys ability to increase sales of its
      existing products;                                                                                                                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                 
| | the Companys ability to complete the Dacha
      financing acquisition transaction;                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                 
| | the Companys ability to acquire new products
      and, upon acquisition, to successfully market and sell new products that
      are acquired;                                                                                                                                                
|  |                                                                                                                                                                                                                                                                                                 
| | the Companys ability to achieve the financing
      necessary to complete the acquisitions to new products;                                                                                                                                                                                    
|  |                                                                                                                                                                                                                                                                                                 
| | unanticipated cash requirements to support
      current operations, to expand the Companys business or for capital
      expenditures;                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                 
| | the Companys ability to successfully challenge
      the Apotex notice of allegation with respect to the Companys Enablex
      product;                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                 
| | core patent protection for Merus initial
      portfolio has expired or will expire in the future, which could result in
      significant competition from generic products resulting in a significant
      reduction in sales;                                                              
|  |                                                                                                                                                                                                                                                                                                 
| | delays or setbacks with respect to governmental
      approvals, or manufacturing or commercial activities;                                                                                                                                                                                     
|  |                                                                                                                                                                                                                                                                                                 
| | the Company's ability to service existing debt;                                                                                                                                                                                                                                                 
|  |                                                                                                                                                                                                                                                                                                 
| | the timing and unpredictability of regulatory
      actions;                                                                                                                                                                                                                                    
|  |                                                                                                                                                                                                                                                                                                 
| | the patient health, legal, and commercial risks
      associated with patient adverse events or side effects resulting from the
      use of the Companys products;                                                                                                                            

3

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| | the ability to source, develop and
      commercialize new products effectively;                                                                                                                                                                                                                   
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                    
| | unanticipated cash requirements to support
      current operations, to expand its business or for capital expenditures;                                                                                                                                                                           
|  |                                                                                                                                                                                                                                                                                                    
| | the inability to adequately protect its key
      intellectual property rights;                                                                                                                                                                                                                    
|  |                                                                                                                                                                                                                                                                                                    
| | the inability to make royalty payments as they
      become due;                                                                                                                                                                                                                                   
|  |                                                                                                                                                                                                                                                                                                    
| | the loss of key management or scientific
      personnel;                                                                                                                                                                                                                                          
|  |                                                                                                                                                                                                                                                                                                    
| | the activities of its competitors and
      specifically the commercialization of innovative or generic products that
      compete in the same category as the Companys products;                                                                                                                
|  |                                                                                                                                                                                                                                                                                                    
| | regulatory, legal or other setbacks with
      respect to its operations or business;                                                                                                                                                                                                              
|  |                                                                                                                                                                                                                                                                                                    
| | market conditions in the capital markets and
      the biopharmaceutical industry that make raising capital or consummating
      acquisitions difficult, expensive or both;                                                                                                                       
|  |                                                                                                                                                                                                                                                                                                    
| | enactment of new government laws, regulations,
      court decisions, regulatory interpretations or other initiatives that are
      adverse to the Company or its interests;                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                    
| | the risk that the Company is not able to arrange
      sufficient, cost-effective financing to repay maturing debt and to fund
      expenditures, future operational activities and acquisitions, and other
      obligations; and                                                                
|  |                                                                                                                                                                                                                                                                                                    
| | the risks associated with legislative and regulatory
      developments that may affect costs, revenues, the speed and degree of
      competition entering the market, global capital markets activity and
      general economic conditions in geographic areas where the Company
      operates.

Investors should review the full discussions as to material
risks and uncertainties, and factors and assumptions used to develop
forward-looking statements, included in the Companys annual report on Form
20-F.

Various assumptions or factors are typically applied in drawing
conclusions or making the forecasts or projections set out in forward-looking
information. Those assumptions and factors are based on information currently
available to the Company, including information obtained from third-party
industry analysts and other third party sources. In some instances, material
assumptions and factors are presented or discussed elsewhere in this MD&A in
connection with the statements or disclosure containing the forward-looking
information. You are cautioned that the following list of material factors and
assumptions is not exhaustive. The factors and assumptions include, but are not
limited to:

| | no unforeseen changes in the legislative and
      operating framework for the business of the Company;                   
|- | --------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                           
| | a stable competitive environment; and                                                                                     
|  |                                                                                                                           
| | no significant event occurring outside the
      ordinary course of business such as a natural disaster or other calamity.

4

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The Company is not obligated to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by applicable laws. Because of the
risks, uncertainties and assumptions contained herein, security holders should
not place undue reliance on forward-looking statements or disclosures. The
foregoing statements expressly qualify any forward-looking information contained
herein.

The Company cautions you that the above list of risk factors is
not exhaustive. Other factors which could cause actual results, performance or
achievements of the Company to differ materially from those contemplated
(whether expressly or by implication) in the forward-looking statements or other
forward-looking information are disclosed in the Companys publicly filed
disclosure documents.

All financial information is prepared in accordance with IFRS
and is expressed in Canadian dollars.

CORPORATE HISTORY

The Company was originally formed on December 19, 2011 by the
amalgamation of Merus Labs International Inc. (Old Merus) and Envoy Capital
Group Inc. (Envoy) pursuant to an arrangement agreement dated November 10,
2011 pursuant to the Business Corporations Act(British Columbia). Envoy
was incorporated under the laws of the Province of British Columbia as
Potential Mines Ltd. in December 1973 and was continued under the laws of the
Province of Ontario in December 1997. At Envoys annual general meeting held on
March 30, 2007 the shareholders voted to amend Envoys articles of incorporation
by changing its name to Envoy Capital Group Inc. In connection with the
amalgamation of Envoy and Old Merus, Envoy continued from the jurisdiction of
the Province of Ontario to the Province of British Columbia on December 16,
2011.

Old Merus was incorporated under the laws of the Province of
British Columbia on November 9, 2009 under the name 0865346 B.C. Ltd. On January
22, 2010, Old Merus changed its name to Merus Labs International Inc. in
connection with a plan of arrangement with Range Gold Corp. and Merus Labs Inc.
(Merus Labs).

On October 1, 2012, the Company amalgamated with Merus Labs, a
wholly owned subsidiary of the Corporation continuing under the name Merus Labs
International Inc.

The Companys head office is located at Suite 2110, 100
Wellington St. West, P.O. Box 151, Toronto, Ontario M5K 1H1; and its telephone
number is 416-593-3725.

The common shares in the capital of the Company (the Common
Shares) are publicly traded on the Toronto Stock Exchange (TSX) under the
symbol MSL and on NASDAQ under the symbol MSLI.

CORPORATE STRATEGY

Merus is a specialty pharmaceutical company that acquires
prescription medicines in the following categories:

| |  | On patent but at maturity stage of product life
      cycle                   
| | - | ------------------------------------------------------------------------------
| |  | Branded generics                                                              
| |  | Under promoted products                                                       
| |  | Niche market pharmaceuticals                                                  
| |  | Products with annual sales below the critical
      threshold for large pharma

5

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Once a product is acquired, our experienced team implements a
focused sales and marketing plan to promote the product with the goal of
increasing sales and market share.

The Merus corporate growth strategy is driven by a product
acquisition plan which employs an opportunistic approach to source product
acquisition candidates. This approach allows Merus to source pharmaceutical
products across broad therapeutic classes which provides access to acquisition
targets not available to other players and creates a diversified strategy.
Although Merus has a broad therapeutic focus, opportunities will be pursued if
the application of a dedicated small scale sales force can deliver incremental
product sales growth. The geographic focus is Canada and Europe.

The Merus corporate strategy results in a diversified product
portfolio approach. To manage such a product portfolio, a low cost operating
model has been implemented in which there is a light infrastructure footprint.
Merus has partnered with third party contract manufacturing and regulatory
service providers to leverage their expertise but still maintain maximum
flexibility for Merus.

Business Model for Acquisition of Diversified Legacy
Products

Merus believes that it has a unique strategy in seeking to
acquire legacy products primarily for the purpose of generating a stream of
stable revenues and cash flow. Merus believes that this strategy will provide it
with the flexibility to consider a broad range of acquisition targets from a
variety of therapeutic areas. Therefore, the potential number of product
acquisition candidates may be much larger for Merus than for its competitors.
Management believes that its approach to product acquisition and its return
objectives provide Merus with a competitive advantage in acquiring products as
Merus can purchase diversified bundles of products from a single vendor. In
contrast, Merus competitors, such as niche pharmaceutical companies, are more
likely to focus on individual product acquisition within the same therapeutic
area. As a result, certain vendors may view Merus as a preferred purchasing
candidate.

Predictable Cost Structure

Merus plan is to establish a predictable cost structure by
relying on a small employee base and outsourcing more of the operational
functions associated with its business, including warehousing, distribution,
customer service, invoicing, collections, regulatory affairs, medical and drug
information, human resources and informational technology. Wherever possible,
Merus achieves cost controls by entering into contractual supply and/or service
agreements that dictate fixed or percentage fixed costs with annual adjustments
for inflation. In the case of its manufacturing supply agreements, its cost of
goods will be based on a fixed, per unit cost with annual inflationary
adjustments. Management believes the predictability, flexibility and efficiency
gained by contracting with established, experienced service organizations will
assist Merus in maintaining its margins and maximizing distributable cash.

Partnership with Leading Service Providers

Related to the above, Merus will enter into outsourcing
relationships with leading providers of pharmaceutical contract services for
many of the operational functions associated with its business and intend to
pursue this strategy in the future.

Competitors of Merus

Competitors in the pharmaceutical market range from large
multinational pharmaceutical development corporations to small, single product
companies that may limit their activities to a particular therapeutic area,
region or territory. Competition also comes from generic companies, which
develop and commercialize formulations that are identical to marketed brands.
Merus expects to compete with a variety of drug companies. With respect to its acquisition
strategy, Merus expects to compete principally with other pharmaceutical
companies who seek to acquire mature pharmaceutical products as part of their
growth strategy. These companies, however, typically focus on under-promoted
products in specific therapeutic niches that offer growth potential through
synergistic sales and marketing efforts. In addition, since Merus is not focused
on specific therapeutic classes, it will have the ability to purchase
diversified products and product bundles.

6

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OVERVIEW

During the last twelve months ended September 30, 2014 and up
to the date of this MD&A, the Company announced the following:

| | November 17, 2014 - Merus Announces Normal
      Course Issuer Bid                                                                     
|- | ---------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                        
| | September 23, 2014 - Merus Announces Management
      and Board Changes                                                                
|  |                                                                                                                                        
| | September 8, 2014 - Merus Announces Acquisition
      of Sintrom                                                                       
|  |                                                                                                                                        
| | August 14, 2014 - Merus Announces Completion of
      $7 Million Financing Transaction with Dacha Strategic Metals                     
|  |                                                                                                                                        
| | August 7, 2014  Merus Signs Product
      Acquisition Letter of Intent                                                                
|  |                                                                                                                                        
| | July 17, 2014 - Merus Announces Conversion of
      $10 Million Convertible Debentures                                                 
|  |                                                                                                                                        
| | July 11, 2014 - Merus Announces Closing of $10
      Million Preferred Share Financing                                                 
|  |                                                                                                                                        
| | July 4, 2014 - Merus Signs Definitive
      Acquisition Agreement with Dacha Strategic Metals                                          
|  |                                                                                                                                        
| | June 19, 2014 - Merus Announces Closing of
      $31.3 Million Bought Deal Financing, Including Exercise of Over-Allotment
      Option
|  |                                                                                                                                        
| | June 12, 2014 - Merus Announces Increase to
      Previously Announced Financing                                                       
|  |                                                                                                                                        
| | June 11, 2014 - Merus Announces $22.1 Million
      Bought Deal Financing                                                              
|  |                                                                                                                                        
| | June 10, 2014 - Merus Announces Aggregate $21
      Million Financing Transactions                                                     
|  |                                                                                                                                        
| | June 3, 2014 - Merus Notified of a Canadian
      ANDS Filing                                                                          
|  |                                                                                                                                        
| | May 27, 2014 - Merus Announces Board
      Appointment                                                                                 
|  |                                                                                                                                        
| | April 23, 2014 - Merus Names Barry Fishman as
      Senior Advisor                                                                     
|  |                                                                                                                                        
| | March 31, 2014 - Merus Announces Closing of
      Full Over-Allotment Option                                                           
|  |                                                                                                                                        
| | March 25, 2014 - Merus Completes $20 Million
      Bought Deal Financing                                                               
|  |                                                                                                                                        
| | March 13, 2014 - Merus Announces $20 Million
      Bought Deal Financing                                                               

7

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| | October 1, 2013 - Merus Regains Compliance With
      NASDAQ
|- | ------------------------------------------------------------

OVERALL PERFORMANCE

For the year ended September 30, 2014, the Company incurred a
net loss of $8,061,698 compared to a net loss of $3,102,129 for the year ended
September 30, 2013. For the year ended September 30, 2014,
EBITDA1 was $13,143,414, compared to $15,547,484 for the prior
year. Adjusted EBITDA, which adds back non-cash share based compensation
expense, foreign exchange, investment expenses and acquisition costs, was
$13,344,775, compared to $19,365,502 for the prior year comparative period. As
at September 30, 2014, the Company had an accumulated deficit of $61,033,735.

Cash provided by continuing operations of the Company was
$12,762,554 for the year ended September 30, 2014, compared to cash provided by
continuing operations of $11,464,696, for the year ended September 30, 2013.
Cash provided by discontinued operations of the Company for the same periods
were $nil and $1,512,137, respectively.

Operating risks include but are not limited to: the Companys
ability to attract and retain key personnel, effectively manage growth, and
smoothly integrate newly acquired pharmaceutical products and businesses; impact
of new or existing generic and innovative competing products, regulatory issues
and risk that the Company may not be able to adequately protect the intellectual
property surrounding its products, conflicts of interest among the Companys
directors, officers, promoters and members of management; unanticipated
expenses; changes in business strategy; impact of any negative publicity;
general political and economic conditions; and acts of god and other
unforeseeable events, natural or human-caused. Financial risks include but are
not limited to the availability of capital to finance the Companys activities.

The Company cannot anticipate or prevent all of the potential
risks to its success, nor predict the impact of any such risk. To the extent
possible, management implements strategies aimed at reducing or mitigating risks
and uncertainties associated with its business.

1EBITDA  Non-IFRS Financial Measures

The term EBITDA does not have any standardized meaning under
IFRS and therefore may not be comparable to similar measures presented by other
companies. The Company defines EBITDA as earnings before interest expense,
taxes, depreciation and amortization (including impairment charges). Adjusted
EBITDA is the same measure with additional adjustments for non-cash stock based
compensation), foreign exchange gains or losses, investment income or expense,
and acquisition costs. The Company believes EBITDA to be an important
measurement that allows it to assess the operating performance of its ongoing
business on a consistent basis without the impact of amortization and impairment
expenses, debt service obligations and other non-operating items. The Company
excludes amortization and impairment expenses because their level depends
substantially on non-operating factors such as the historical cost of intangible
assets. The Company's method for calculating EBITDA may differ from that used by
other issuers and, accordingly, this measure may not be comparable to EBITDA
used by other issuers.

8

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|                                                 |   | Fiscal 2014 |   |   | Fiscal 2013 |   |   | Fiscal 2012 |  
|------------------------------------------------ | - | ----------- | - | - | ----------- | - | - | ----------- | -
|                                                 |   |             |   |   |             |   |   |             |  
|Loss from continuing
      operations            | $ | (8,061,698  | ) | $ | (1,729,823  | ) | $ | (20,939,992 | )
|                                                 |   |             |   |   |             |   |   |             |  
|Interest expense                                 |   | 3,468,940   |   |   | 5,462,466   |   |   | 1,466,151   |  
|Income tax expense (recovery)                    |   | 536,600     |   |   | 557,518     |   |   | (1,608,758  | )
|Depreciation                                     |   | 3,547       |   |   | 2,826       |   |   | 5,015       |  
|Amortization                                     |   | 12,983,584  |   |   | 11,254,497  |   |   | 3,855,604   |  
|Impairment charges                               |   | 4,212,441   |   |   | -           |   |   | 22,208,721  |  
|                                                 |   |             |   |   |             |   |   |             |  
|EBITDA                                           | $ | 13,143,414  |   | $ | 15,547,484  |   | $ | 4,986,741   |  
|                                                 |   |             |   |   |             |   |   |             |  
|plus:                                            |   |             |   |   |             |   |   |             |  
|Non-cash stock based compensation                |   | 1,251,584   |   |   | 993,049     |   |   | 2,214,421   |  
|Investment expense
      (income) and impairment |   | 131,663     |   |   | 1,216,406   |   |   | (467,001    | )
|Foreign exchange losses (gains)                  |   | (1,181,886  | ) |   | 1,608,563   |   |   | (1,825,206  | )
|Acquisition costs                                |   | -           |   |   | -           |   |   | 518,819     |  
|                                                 |   |             |   |   |             |   |   |             |  
|Adjusted EBITDA                                  | $ | 13,344,775  |   | $ | 19,365,502  |   | $ | 5,427,774   |  

9

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SELECTED ANNUAL FINANCIAL INFORMATION

Fiscal 2014
    
    
    Fiscal 2013
    
    
    Fiscal 2012Revenue
    $
    26.2
      million
    
    $
    28.4 million
    
    $
    9.3 millionGross margin
    $
    21.7
      million
    
    $
    25.9 million
    
    $
    8.4 millionNet (loss) income:From continuing
      operations
    
    **($8.1**
    
    
    ($1.7) million
    
    
    ($20.9) millionFrom
      discontinued operations
    
    -
    
    
    ($1.4) million
    
    $
    0.2 millionTotal
    
    **($8.1) million**
    
    
    ($3.1) million
    
    
    ($20.7) million(Loss) earnings per shareTotalBasic
    
    ($0.15
    )
    
    ($0.09
    )
    
    ($0.90
    )Diluted
    
    ($0.15
    )
    
    ($0.09
    )
    
    ($0.90
    )From
      continuing operationsBasic
    
    ($0.15
    )
    
    ($0.05
    )
    
    ($0.91
    )Diluted
    
    ($0.15
    )
    
    ($0.05
    )
    
    ($0.91
    )From
      discontinued operationsBasic
    
    -
    
    
    ($0.04
    )
    $
    0.01Diluted
    
    -
    
    
    ($0.04
    )
    $
    0.01


|As at:                                      |   | Sep 30, 2014        |  |   | Sep 30, 2013 |  |   | Sep 30, 2012 | 
|------------------------------------------- | - | ------------------- |  | - | ------------ |  | - | ------------ | 
|                                            |   |                     |  |   |              |  |   |              | 
|Total assets                                | $ | 198.2
      million |  | $ | 87.0 million |  | $ | 92.4 million | 
|                                            |   |                     |  |   |              |  |   |              | 
|Total long-term financial
      liabilities | $ | 62.7
      million  |  | $ | 30.0 million |  | $ | 22.2 million | 
|                                            |   |                     |  |   |              |  |   |              | 
|Cash dividends
      declared               | $ | nil                 |  | $ | nil          |  | $ | nil          | 

10

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PRODUCT SUMMARY

The Company currently has products in the area of
urology/women's health, anticoagulants and anti-infectives.

Urology / Women's Health

Over Active Bladder

Overactive bladder occurs when a large muscle in the bladder
known as the detrusor contracts more often than normal. This causes a person to
feel a sudden and sometimes overwhelming urge to urinate even when the bladder
isnt full. Urgency, incontinence, and urinary frequency can also be caused by
urinary-tract infections, kidney stones, prostate infection or enlargement, or
medicine taken to treat other conditions such as high blood pressure. Though not
life-threatening, overactive bladder is inconvenient, can be embarrassing, and
can markedly reduce quality of life.

According to an article published in the Reviews of Urology by
the Department of Urology, New York University School of Medicine, in women,
moderate and severe bother have a prevalence ranging from about 3% to 17%.
Severe incontinence has a low prevalence in young women, but rapidly increases
at ages 70 through 80. In men, the prevalence of incontinence is much lower than
in women, about 3% to 11% overall, with urge incontinence accounting for 40% to
80% of all male patients. Incontinence in men also increases with age, but
severe incontinence in 70- to 80-year-old men is about half of that in women.

Decision Resources, an advisory firm for pharmaceutical and
healthcare issues, finds that although more than 50 percent of people with
overactive bladder in the worlds major pharmaceutical markets are undiagnosed,
the sizeable prevalent population fuels significant sales for the indication. As
a result, the overactive bladder drug market will increase from approximately $3
billion in 2009 to nearly $4 billion in 2019 in the United States, France,
Germany, Italy, Spain, United Kingdom and Japan.

EmselexÂ®/EnablexÂ®

In 2003, Novartis Pharma AG (Novartis) acquired the
EmselexÂ®/EnablexÂ® (darifenacin) product from Pfizer Inc. and the product was
approved for sale in Europe and the United States in 2004. As the global sales
of EmselexÂ®/EnablexÂ® were below the critical sales threshold for Novartis, the
company decided to reduce its marketing and sales efforts in the majority of
territories where the product was marketed. In 2010, Novartis divested the
product rights for the United States to Warner Chilcott Plc. A key patent
protecting EmselexÂ®/EnablexÂ® expires in August 2016, however, the Company also has
a Supplementary Protection Certificate ("SPC") which is expected to provide an
additional barrier to generic entrants until November 2019.

In July 2012, the Company acquired from Novartis, the Canadian
and European rights (excluding France, Spain and Italy) to manufacture, market,
and sell the branded prescription medicine product EmselexÂ®/EnablexÂ® (darifenacin)
extended release tablets. Darifenacin is a muscarinic antagonist indicated for
the treatment of overactive bladder with symptoms of urge urinary incontinence,
urgency and frequency. The products specific mechanism of action is the
blocking of the M3 muscarinic receptor, which is primarily responsible for
bladder muscle contractions. As overactive bladder is a chronic condition,
EmselexÂ®/EnablexÂ® is prescribed as a medication to be taken once daily and the
extended release tablet format is produced in 7.5mg and 15mg dosage
strengths.

11

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As Merus has acquired the product rights in a number of
European countries in which the product was not being actively marketed, we have
entered into promotion and distribution agreements with local marketing and
sales organizations with the goal of incrementally increasing sales in those
regions.

During the transition of operations from Novartis, the Company
entered into promotion and/or distribution agreements with selected partners in
certain countries for the EmselexÂ®/EnablexÂ® product. The partner companies and
corresponding territories are as follows:

| | POA Pharma Scandinavia AB (Nordic countries
      defined collectively as Denmark, Norway, Sweden, Finland, and Iceland);
|- | -------------------------------------------------------------------------------------------------------------------------
| | Proximum d.o.o (Croatia);                                                                                                
| | SPCare Lda (Portugal);                                                                                                   
| | NorrizonRx Sales and Marketing Group Inc.
      (Canada; promotion only)                                                 
| | Proksimum Pharma d.o.o. (Slovenia);                                                                                      
| | Merz Pharma (Schweiz) AG (Switzerland);                                                                                  
| | Arriani Pharmaceuticals SA (Greece;
      distribution only);                                                            
| | Vivax Pharmaceuticals s.r.o (Slovakia);                                                                                  
| | Eurocept B.V (Belgium); and                                                                                              
| | Ashfield In2Focus Limited (United Kingdom;
      promotion only).                                                        

Under the terms of the agreements, the partner companies have
been granted exclusive rights to distribute, market, and sell EmselexÂ®/EnablexÂ® in
their respective territories. Other than Switzerland and Canada, the territories
covered by these distribution and promotion agreements did not have any
substantial marketing and sales resources devoted to the product in recent
years. Merus has entered into these promotion and distribution agreements with
partner companies that have a wealth of knowledge and expertise in their local
markets. EmselexÂ®/EnablexÂ® is a major growth driver for the Company and these
collaborations will enable Merus to broaden its reach in countries which were
previously underserved in terms of marketing and sales efforts.

During fiscal 2013, Merus also entered into an agreement with a
European contract manufacturing group to manufacture EmselexÂ®/EnablexÂ® for sale
and distribution in Europe and Canada. The operational phase of the
manufacturing tech transfer began in May 2013. During the operational transition
period Novartis will continue to manage the manufacturing of
EmselexÂ®/EnablexÂ®.

Anticoagulants

Anticoagulants prevent stroke and systemic embolism in patients
with Atrial Fibrillation. Atrial Fibrillation (AF) is the most common cardiac
arrhythmia (heart rhythm disorder) and is associated with palpitations, chest
pain, or congestive heart failure. Embolism refers to where a clot exists and
breaks off and flows into the blood stream later clogging an artitery.
Antigoagulants treat and prevent deep vein thrombosis (DVT) and pulmonary
embolism (PE) and also prevent venous thromboembolic events (VTE) in patients
who have undergone hip or knee replacement surgery.

| | Atrial Fibrillation: AF affects 12% of the population
      and likely to increase in the next 50 years. Prevalence of AF increases
      with age, from 0.5% at age 40-50, to 515% at age 80. Over 6 million
      Europeans suffer arrhythmia with prevalence estimated to double in the
      next 50 years
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                 
| | VTE: Approximately 1.1 million venous
      thromboembolic events occur each year across the EU encompassing: DVT
      events - 61% of total and PE events - 39% of total                                                                                                                                      

12

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When patients have AF the hearts two upper chambers (atria)
begin to quiver instead of beating effectively. As a result, blood isnt pumped
completely out of the atria and begins to pool and clot. The clot later leaves
the heart via blood flow to the brain where it can lodge in a brain artery
causing a stroke. It is estimated that 15% of strokes occur with patients with
AF.

Global Industry Analysts Inc., one of the worlds largest
market research publishers, projected that the global anticoagulants market will
surpass $11.2Bn in the coming year, driven by an aging global population, rising
incidence of cardiovascular diseases, cancers, and acute hip and knee
complications, as well as emergence of innovative therapeutics targeting new and
previously targeted clotting factors.

Anticoagulants are a rapidly evolving market for both legacy
and emerging treatment regimes. Dominated by just two therapy classes  vitamin
K antagonist and heparin injectables; the anticoagulants industry has come a
long way since the 1990s, when advancements in thrombotic disease detection and
increased physician awareness were major drivers for market growth. Market
growth is currently led by the arrival of novel therapeutics as well as
favorable demographic tailwinds. The United States and Europe dominate the
global anticoagulants market, which is expected to grow dramatically as advanced
therapeutics present brighter prospects for coagulation as well as patient
management. While novel drugs are likely to impact the market sometime in near
future, factors that already influence market prospects include increasing use
of low molecular weight heparins, patient population (Baby Boomers reaching age
of retirement), and additional indications for existing drugs. Future impact of
anticoagulants is expected to mainly result from enormous patient potential.
Among these, an aging population at growing risk of venous and arterial problems
and patients on long-term anticoagulation would be the major influencers.
Currently, the global anticoagulants market is led by vitamin K antagonist
(VKA), unfractionated heparin and low molecular weight heparins (heparins). The
injectable anticoagulants market has maintained a steady pace over the years
with more number of patients receiving anticoagulation with one or more of the
injectable therapies. From 2008 to Sept 2013 total European VKA sales have grown
from $188MM to $225MM with Warfarin and Acenocoumarol as the only molecules
representing annual growth in each respective year.

Sintrom®

In September 2014, the Company acquired from Novartis, in
certain European countries, the rights to manufacture, market, and sell the
branded prescription medicine product Sintrom® (acenocoumarol). Acenocoumarol is
an anticoagulant indicated for the treatment and prevention of thromboembolic
diseases. Sintrom® has been available in Europe for over 50 years and in calendar
year 2013 the product had net sales of approximately US$28 million in the
territories acquired.

Sintrom, is an anti-coagulant drug prescribed by physicians for
the treatment and the prevention of clotting disorders like thromboembolism
diseases, which obstruct the normal flow of blood in the blood vessels and can
create serious health problems in the process. Sintrom may also be referred to
as a blood thinner. Sintrom does not have the capacity to dissolve clots that
have already formed in the blood vessels but rather is used as a preventative
treatment. It functions as a vitamin K antagonist and the active ingredient is
Acenocoumarol. Sintrom is sold as an oral tablet in 1mg and 2mg doses.
Typically, adults are advised to take between 1 and 10 milligrams of the
medication every day, depending on their blood test results.

Sintrom was approved in Europe in the early 1950s and its
patent expired in 1964. As a result, the product has not only been on the
European market for over five decades but also faced generic competition over
the same period. It is important to note that the product is not subject to
intense competition from generics given the legacy nature of the product
(effective and well known), its low price and strong market share. These key competitive features make
the product uneconomical for new generic entries.

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VKAs represent a fraction of the price of NOACs. Within the
VKA European market, Sintrom is priced in the mid-tier with the generic version
of the drug representing the lowest price at almost half of Sintrom. It is
important to note that generic versions of Sintrom are only available in four
European countries; Netherlands, Poland, Romania and Hungary. From a competition
perspective, the threat of generics remains low for several reasons: 1) Sintrom
along with other VKAs are legacy drugs and are priced to compete with generics
providing an economic barrier; 2) Europe is highly fragmented with multiple
local registration requirements for generics providing a political barrier; and
3) Sintrom has an established brand in these market and has increased sales in
some countries despite presence of a generic.

Sintroms key competition in the Vitamin K antagonist (VKA)
segment of the anticoagulant business is Warfarin and Marcoumar. Warfarin holds
the largest market share and is sold in several different countries under
different brand names. Warfarin is the chemical name for Coumadin and is
manufactured as a generic by several different manufactures including Barr,
Sandoz, Merck, Taro, and others. Warfarin is a direct competitor of Sintrom, but
not a generic substitute because although similar, it is not the same molecule.
The major difference between the above noted products is biological half-life (T
or biological half-life is the time required for a organism to eliminate
one-half of a substance which has been introduced into it). The key benefit of
Sintrom is because it has a shorter biological half-life, doctors are able to
adjust dosages in the short term and can more readily apply an antidote. Both
Warfarin and Marcoumar have a longer life and thus provide more constant long
term plasma levels.

New Oral Anti-Coagulants (NOACs) such as Pradaxa (Boehringer
Ingelheim), Xarelto (Bayer) and Eliquis (Apixaban) have obtained EMA approval in
2011/2012 with patent expiry in 2020/2023. These products are the next
generation of anti-coagulants and have many benefits over legacy
anti-coagulants such as VKAs and as a result many international guidelines
recommend NOAC as the preferred option. However, VKAs in some countries are
still the preferred option due to local guidelines, broad physician experience,
and low price (NOAC's can be up to 50 times more expensive). NOACs are superior
to VKAs in terms of safety, efficacy and therapeutic window and for this reason
have received much attention since their introduction. However, these drugs
exhibit one key issue  in emergency bleeds or surgery, physicians are unable to
medically administer an antidote unlike VKAs. Furthermore, given NOACs do not
require the same level of monitoring, VKAs provide physicians with greater
oversight over patient progress prompting emergency avoidance. Lastly, doctors
have been using VKAs for decades and as a result are comfortable with dosing,
monitoring procedures and reversals vs NOACs.

Sintrom will be sold predominantly through distributors with
whom Merus already has established relationships. Sintrom will be sold by the
distributors to wholesalers and pharmacy networks.

Sintrom will continue to be manufactured by Novartis and its
contract organizations for a period of time in order to allow Merus to
transition the product manufacturing to a contract manufacturer and obtain the
related approvals. The transition to a third party manufacturer is expected to
provide additional cost savings. Given the legacy nature of the drug and the
relatively straight forward production process, sourcing a contract manufacturer
is not expected to be an issue. The Company may leverage the relationships
established for third-party manufacturing and related consulting for Enablex
when it was acquired from Novartis.

The Company funded the Sintrom® acquisition with cash on hand
(from operations and equity financings), the issuance of preferred shares, and a
debt facility provided to Merus by a syndicate of lenders which also refinanced
the Companys existing debt. Pursuant to the acquisition, Merus in-licensed the Sintrom®  trademark,
certain related intellectual property, and acquired other information and
materials required to continue commercializing the brand in the territories
acquired.

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Anti-infectives

The global market for anti-infective drugs, which mainly
includes antibacterials, antivirals, antifungals, and vaccines, is projected to
exceed $103 billion by the year 2015, according to a published report.
Antibacterials represent the largest segment of the anti-infectives market
globally. The competitive landscape remains highly fragmented, however Merck and
GSK are market leaders in the category.

Vancocin

In May 2011, Old Merus acquired Vancocin (vancomycin
hydrochloride) capsules from Iroko International LP. a subsidiary of Iroko
Pharmaceuticals, LLC. According to IMS Canada, Vancocin® 125mg and 250mg capsules
had combined total sales of approximately $7.8 million in 2010.

Vancomycin was first isolated by Eli Lilly. The original
indication for vancomycin was for the treatment of penicillin-resistant
staphylococcus aureus. One advantage that was quickly apparent is that
staphylococci did not develop significant resistance despite serial passage in
culture media containing vancomycin. The rapid development of penicillin
resistance by staphylococci led to the compounds being fast-tracked for approval
by the US Food and Drug Administration (FDA). Eli Lilly first marketed
vancomycin hydrochloride under the trade name Vancocin. Vancocin is a powerful
antibiotic used to treat a life-threatening disease resulting from the infection
of Clostridium Difficile (C. Difficile).

C. Difficile is on the increase with higher mortality and
severity. Due to the nature of the disease, intravenous (systemic) solutions are
regarded as ineffective. To be effective against C. Difficile, drugs must act
locally on the flora of the gastro intestinal track. Intravenous solutions by
definition do not act locally.

Clinical Practice Guidelines (Clinical Practice Guidelines for
Clostridium difficile Infection in Adults: 2010 Update by the Society for
Healthcare Epidemiology of America (SHEA) and the Infectious Diseases Society of
America (IDSA)) state that oral Vancocin should be used as first line therapy in
severe cases of C. Difficile. The guidelines state that vancomycin is the drug
of choice for an initial episode of severe C. Difficile. The dosage is 125 mg
orally four times per day for 1014 days. Vancomycin administered orally (and
per rectum, if ileus is present) is the regimen of choice for the treatment of
severe, complicated C. Difficile.

Product Divestiture - Factive

FACTIVE® (Gemifloxacin Mesylate tablets) is the only
FDA-approved quinolone with 5-day oral dosing indicated for the treatment of
both acute bacterial exacerbation of chronic bronchitis and mild to moderate
community-acquired pneumonia. The Company had acquired the rights from
Cornerstone Therapeutics Inc. (Cornerstone) in March 2012.

On August 26, 2013, Merus divested the North American product
rights for FACTIVE®, which comprised the license to the FACTIVE® trademark and
patent, inventory on hand, and certain related intellectual property and other
information and materials required to continue marketing the brand in the North
American market. Despite acquiring the product for a relatively low valuation,
the inherent challenges and need for additional investment led management to the
decision to divest the product.

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Changes in the Competitive Landscape

Vancocin

In December 2011, Health Canada granted a notice of compliance
(NOC) to Pharmaceutical Partners of Canada Inc. (PPC), which grants PPC the
authority to market their generic version of Vancocin capsules in the Canadian
market. In July 2012, PPC confirmed its intentions to market a generic
vancomycin capsule product and in November 2012 gained reimbursement listing
status in a number of provinces. The entry of this generic product as well as
subsequent generic entrants has had a material adverse effect on the sales of
Merus branded Vancocin capsules and other existing and future market entrants
may also have a material adverse effect on sales.

In June 2012, Optimer Pharmaceuticals, Inc. (Optimer)
received approval from Health Canada for its product DIFICID®. DIFICID® is another
method for the treatment of Clostridium Difficile (C. Difficile) infection.
Optimer asserts that DIFICID® has a lower recurrence rate than Vancocin®. However,
DIFICID® is currently being sold in Canada at a much higher price than that of
Oral Vancocin. If Optimer is able to demonstrate that DIFICID® is preferable to
Vancocin®, the business of Merus would be adversely affected.

Enablex

In June 2014, Merus received notification from Apotex Inc.
(Apotex) that it has filed with Health Canada an Abbreviated New Drug
Submission (ANDS) seeking market approval for a generic version of Enablex®
(darifenacin hydrobromide tablets) for the Canadian marketplace. In connection
with this filing, we received Notices of Allegation (NOAs) from Apotex against
our Enablex® patents listed on the Canadian patent register which expire in
August of 2016 and beyond. The NOAs were issued under the Canada Patented
Medicines (Notice of Compliance) Regulations (the Regulations). Enablex® is
currently protected in Canada by three issued patents listed on the Canadian
patent register. Merus intends to vigorously defend the Enablex® intellectual
property rights and pursue all available legal and regulatory pathways in
defense of the product. Under the Regulations, Merus is entitled to apply to
Federal Court for an order preventing Health Canada from granting market
authorization to Apotex in respect of the ANDS until after the expiration of the
applicable patents. If the Federal Court were to decide in favour of Merus in
such an action, Health Canada would be prohibited from granting market
authorization to Apotex until Merus patents listed on the patent register
expire. If Apotex is successful in obtaining a Notice of Compliance from Health
Canada prior to the anticipated expiry of our patents, then we may experience
generic competition for our Enablex® product earlier than originally anticipated
with the result that our revenues from our Enablex® product may be less than
anticipated due to a combination of (i) decreased pricing, and (ii) reduced
market share resulting from generic competition.

During the last year, the Company was informed by the German
Federal Joint Committee (G-BA), responsible for directives on drug reimbursement
policy, that in Germany there is a plan to introduce a single reimbursement
class for all anticholinergic-based OAB products in the market. This new
classification would effectively set a maximum reimbursable price for public
payors. The Committee has invited Merus to provide a rationale for Enablex
(Darifenacin) being excluded from the class, which the Company has done. The
process of assessing arguments for exclusion from the class, the determination
of a reimbursement price for the class, and that price becoming effective could
take up to a year or more. If Darifenacin is not excluded from the class and is
subject to a maximum reimbursement price, there may be a material adverse effect
on sales.

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Arbitration Proceeding

The Company has received notice of a request for arbitration
from the original owner of the Companys former Factive® product. The request for
arbitration is based on the original license agreement entered into by the
original owner and Cornerstone Therapeutics, Inc. (now Chiesi USA, Inc.). The
request for arbitration names the Company as a respondent together with
Cornerstone and Vansen Pharma, Inc. The request for arbitration includes the
allegation that Cornerstone did not have the legal right to transfer the Factive®
product to the Company. The original owner is seeking an award for damages
relating to an alleged breach of contract, as well of disgorgement of revenues
and other benefits derived by the Company from sales of Factive®. The Company
denies any liability to the original owner.

RESULTS OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 2014
AND 2013

For the year ended September 30, 2014, the Company incurred a
net loss of $8,061,698 ($0.15 per share), compared to a net loss of $3,102,129
($0.09 per share) for the prior year. EBITDA for the year ended September 30,
2014 was $13,143,414, compared to EBITDA for the prior year of $15,547,484.
Adjusted EBITDA, which adds back non-cash stock based compensation, foreign
exchange, investment expenses and acquisition costs, was $13,344,775 for the
year ended September 30, 2014, compared to $19,365,502 for the prior year.
Included in the current year results is an impairment charge related to the
Vancocin product rights. Please note that the results below relate to continuing
operations, unless otherwise noted.

Revenues and Gross Margin

Revenues were $26,151,440 for the year ended September 30, 2014
compared to revenues of $28,385,968 for the year ended September 30, 2013. All
revenues in fiscal 2013 were attributable to sales of Vancocin and Enablex.
Sales attributed to Factive during fiscal 2013 are reflected under income from
discontinued operations.

Gross margin for the year ended September 30, 2014 was
$21,657,671 (83%) compared to gross margin of $25,934,777 (91%) for the year
ended September 30, 2013. The lower margin as a percentage of revenue in the
current year is primarily a result of recording Enablex sales on a gross basis
for all of fiscal 2014 whereas Enablex revenues were reported partially on a net
basis in fiscal 2013, as discussed below.

Revenues attributable to Enablex for the year ended September
30, 2014 were $20,699,916. Revenues from Enablex for the prior year ended
September 30, 2013, recorded partially on a net basis, were $22,234,391.Until the beginning of the third quarter of 2013, the Company recorded
revenues in the statements of operations relating to Enablex on a net basis
whereby revenues net of cost of goods and marketing and selling expenses are
recorded due to a period of transition under the Novartis Acquisition Agreement
whereby Novartis continued to provide certain sales and distribution functions
while the parties worked through the process of transferring the necessary
marketing authorizations. The Company has now transferred all marketing
authorizations in the territories in which it operates. Until the marketing
authorizations transferred, the Company was reporting revenues from Enablex on a
net basis, equal to the net compensation it received from Novartis. Had the
Company reported Enablex on a gross basis for the entire of fiscal 2013,
revenues for the year ended September 30, 2013 for Enablex would have been
$26,494,618 and cost of goods sold and sales and marketing expenses would have
been higher by $3,471,668 and $788,559, respectively. EBITDA would be
unchanged.

Enablex revenue for fiscal 2014 was impacted quite
significantly by changes in supply chain inventory levels and the timing of
orders from customers. At the end of fiscal 2013, two large customers placed
higher than usual orders to stock up with new product after the transfer of the
marketing authorizations.

17

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This resulted in higher than expected revenue in the fourth
quarter of fiscal 2013 and lower than expected revenue in the first quarter of
fiscal 2014. In addition, due to the expiration of a significant marketing and
promotion agreement in Germany at the end of 2014, there were lower than
expected orders in the fourth quarter of fiscal 2014 as the marketing partner
reduced its stocks in anticipation of the agreement termination. As the Company
typically records revenue as goods are delivered to the customer (i.e.
wholesalers, distributors), timing of orders directly affects revenue
recognition. Since in-market sales have remained constant, management is
confident that the revenue fluctuations are not indicative of a change in demand
for the product.

Revenues attributable to Vancocin were $4,444,081 for the year
ended September 30, 2014, compared to $6,151,577 for the year ended September
30, 2013. The decrease in revenue from this product in the current fiscal year
was primarily due to the entry of a second generic Vancomycin which began to
impact the market during the third quarter of fiscal 2014. The Company is
evaluating its strategy to maintain market share and maximize returns.

The Company acquired Sintrom effective September 8, 2014, and
as such, recorded the net revenue from this product from the date of acquisition
through September 30, 2014. Sintrom net revenue from the date of acquisition to
September 30, 2014 was $1,007,443. Similar to the arrangement with Enablex
between Merus and Novartis as discussed above, revenues for Sintrom have been
recorded on a net basis during the year-ended September 30, 2014. Had the
Company reported revenues for Sintrom on a gross basis for fiscal year 2014,
revenues would have been $1,965,995 and cost of goods sold would have been
higher by $958,552. EBITDA would be unchanged.

Sales and Marketing Expense

The Company incurred sales and marketing expenses of $2,933,340
for the year ended September 30, 2014, compared to $1,165,353 for the year ended
September 30, 2013. Had sales and marketing expenses not been netted against
revenue for the year ended September 30, 2013, total marketing expenses would
have been reported as $1,953,512. The increase in these costs in the current
year is due to increased investment in marketing and promotion for Enablex,
specifically in territories not previously addressed such as the UK.

General and Administrative Expense

General and administrative expenses for the year ended
September 30, 2014 were $6,631,140, compared to $6,396,971 for the year ended
September 30, 2013. Excluding the impact of non-cash share based compensation,
general and administrative expenses in the current year decreased by $24,366
compared to the previous year. The nominal decrease is due to higher operational
expenses as a result of the operations of Enablex being transferred to Merus and
the strengthening of the Euro and US dollar against the Canadian dollar, offset
by the lack of one-time cost associated with the transfer marketing
authorizations in the prior year and the optimization of certain costs in the
current year.

Amortization of Intangible Assets and Impairment Charge

The year ended September 30, 2014 included amortization expense
of $12,983,584, compared to $11,254,497 for the year ended September 30, 2013.
The increase in amortization is partly due to amortization for a partial month
of Sintrom, as well as higher foreign exchange rates in 2014.

An impairment charge of $4,212,441 was recognized for the year
ended September 30, 2014 in relation to the Companys Vancocin product rights.
The impairment charge is related to increased competition due to the entry of
second generic during the third quarter of the fiscal year and the approval of a
third generic vancomycin expected to enter during fiscal year 2015.
Management assessed the recoverable amount of the Vancocin cash-generating unit
(CGU) to be less than its carrying amount based on a discounted cash flow
analysis. Management determined no evidence of impairment existed for its other
CGU's at September 30, 2014.

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Interest Expense, Investment Income, and Foreign Exchange
Gains and Losses

Interest expense of $3,468,940 was incurred during the year
ended September 30, 2014, compared to $5,462,466 for the year ended September
30, 2013. The lower interest charges are primarily related to the fact that the
Company refinanced its debt near the end of fiscal 2013, resulting in a
considerably lower rate, as well as a lower overall principal amount as a result
of repayments on the debt during fiscal 2014. Investment expense for the year
ended September 30, 2104 was $131,663, related to the write-down of the loan
receivable and share compensation received from Vansen on the sale of Factive.
Management had previously recorded the loan and shares at a discounted value and
given the deterioration of conditions, have determined it should be fully
impaired. During the year ended September 30, 2013, the Company recognized
impairment charges of $1,262,000 on a privately held investment. The impairment
charges were based on new information regarding the financial condition of the
respective investee company. The private company investment was a legacy
investment made prior to the Company's amalgamation with Old Merus and is not a
component of the Companys core business.

Foreign exchange gains of $1,181,886 were recorded in the year
ended September 30, 2014, primarily in relation to US dollar conversions at
favourable rates in anticipation of the acquisition of Sintrom. Foreign currency
movements in general were more favourable to the Company in the current fiscal
year as compared to the prior year. Foreign exchange losses of $1,608,563 were
recorded in the year ended September 30, 2013 related primarily to US
denominated debt incurred in connection with the acquisition of Enablex.

Discontinued Operations

Discontinued operations in fiscal 2013 were attributable to
operations of Factive. Loss from discontinued operations was $1,372,306 for the
year ended September 30, 2013 which included a loss on disposal of discontinued
operations, net of income taxes, of $522,271 in fiscal 2013 which was
attributable to the sale of Factive rights and inventory.

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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2014 AND SEPTEMBER 30, 2013

For the three month period ended September 30, 2014 and 2013,
the Company incurred a net loss of $4,549,086 ($0.06 per share) and net earnings
of $516,470 ($0.02 per share), respectively. Excluding the impairment charge
recorded in the period, the net loss for the fourth quarter was $336,645. EBITDA
for the three month period ended September 30, 2014 was $4,780,915, compared to
EBITDA for the prior year period of $5,612,068.

Revenues and Gross Margin

Revenues and gross margins for the three months ended September
30, 2014 were $6,019,024 and $5,086,834 respectively, compared to $9,133,536 and
$7,620,403 for the same period in 2013. Gross margins increased from 83% in the
last quarter of fiscal 2013 to 85% in the current period, primarily due to
additional revenue from Sintrom, which was recorded on a net basis.

The decrease in revenue is due to multiple factors, the most
significant of which is the transition to the second phase of the Enablex
operational transfer whereby in the 2013 fourth quarter, the Company experienced
higher than normal orders as several customers ordered large quantities of
product. Conversely, in the current year fourth quarter, orders were lower than
expected due to the expiration of a significant marketing agreement in Germany,
our largest market. The Company considers these to be anomalies in ordering
patterns and not indicative of an underlying issue with the product, as
in-market sales have remained relatively constant over the past 12 months.

Vancocin revenues for the three months ended September 30, 2014
were $882,204, compared to $1,358,062 for the same period in 2013. The decrease
in revenue from this product in the current fiscal year was primarily due to the
entry of a second generic vancomycin which began to have an impact on sales of
the Company's branded product during the latter half of fiscal 2014.

Sales and Marketing Expense

The Company incurred sales and marketing expenses of $614,698
for the three months ended September 30, 2014, compared to $566,480 for the
three months ended September 30, 2013. Had sales and marketing expenses not been
netted against revenue for the three months ended September 30, 2013, total
marketing expenses would have been reported as $575,755. The increase in these
costs in the current year is due to increased investment in marketing and
promotion for Enablex, specifically in territories not previously addressed such
as the UK.

General and Administrative Expense

General and administrative expenses for the three months ended
September 30, 2014 were $1,198,346, compared to $1,763,193 for the three months
ended September 30, 2013. Excluding the impact of non-cash share based
compensation, general and administrative expenses in the current year decreased
by $580,162 compared to the previous year. The decrease in general and
administrative expenses were primarily related to the capitalization of certain
costs related to the manufacturing technology transfer for Enablex. The Company
also incurred higher than normal legal and professional fees in the three months
ended September 30, 2013 in connection with financing and other corporate
initiatives.

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Amortization of Intangible Assets and Impairment Charge

The three month period ended September 30, 2014 included
amortization expense of $3,792,420 related to Sintrom and Vancocin product
rights and Enablex product rights and patents. During the three month period
ended September 30, 2013, the Company recorded amortization of $2,913,171 for
the comparative period. Amortization expense was higher in the current period
due to the inclusion of Sintrom, which the Company did not own in the prior
year, and the strengthening of the Euro against the Canadian dollar.

For the three months ended September 30, 2014, the Company
recognized impairment charges of $4,412,441, relating to Vancocin product
rights. There was no impairment charge for the three months ended September 30,
2013.

Interest Expense and Foreign Exchange Gains

Interest expense for the three months ended September 30, 2014
was $1,192,304 compared to $1,957,430 in the prior year period. The lower
interest expense was due to a lower average principal balance outstanding in the
last quarter of fiscal 2014 compared to 2013, as well as a lower average
interest rate for the current period. The Company refinanced its long-term debt
in the fourth quarter of 2013 which significantly reduced interest expenses
going forward.

Foreign exchange gains of $1,630,839 were recorded in the three
months ended September 30, 2014, compared to gains of $285,907 in the same
period last year. The current year gains were mainly attributable to
appreciation in the US dollars held for the Company's Sintrom acquisition,
whereas in the prior year, gains were mainly in relation to US dollar
denominated debt incurred in connection with the acquisition of Enablex. The
Company took advantage of a strengthening of the Canadian dollar to lock in
gains in both periods.

Income Taxes

Income tax expense for the three months ended September 30,
2014 was $132,482 compared to an income tax expense of $224,126 in the prior
year comparative period. The higher prior year amount was primarily related to a
one-time true-up for taxes in the European entities.

Discontinued Operations

The Company sold the product rights to Factive in the fourth
quarter of fiscal 2013, thus results from this line of business are presented as
discontinued operations. Losses from discontinued operations for the three
months ended September 30, 2013 was $569,626, primarily as a result from a loss
on disposition of the asset.

RESULTS OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 2013
AND 2012

For the year ended September 30, 2013, the Company incurred a
net loss of $3,102,129 ($0.09 per share), compared to a net loss of $20,720,548
($0.90 per share) for the year ended September 30, 2012. EBITDA for the year
ended September 30, 2013 was $15,547,484, compared to EBITDA for the prior year
of $4,986,741. Prior year figures reflect operations of Enablex from the date of
acquisition (July 11, 2012) as the product was acquired in the fourth quarter of
fiscal 2012. In addition, the Company recognized impairment charges of
$22,208,721 in fiscal 2012, primarily relating to goodwill generated on the
amalgamation with Old Merus. Please note that the results below relate to
continuing operations, unless otherwise noted.

21

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Revenues and Gross Margin

Revenues were $28,385,968 for the year ended September 30, 2013
compared to revenues of $9,257,843 for the year ended September 30, 2012. All
revenues in fiscal 2012 were attributable to sales of Vancocin and Enablex.
Sales attributed to Factive during fiscal 2013 and fiscal 2012 are reflected
under income from discontinued operations.

Gross margin for the year ended September 30, 2013 was
$25,934,777 (91%) compared to gross margin of $8,390,720 (91%) for the year
ended September 30, 2012. The Company expected that gross margin as a percentage
of revenues would decline in 2013 as the Company continued the shift to
reporting revenues from Enablex on a gross basis, rather than on a net basis, as
discussed below.

Revenues attributable to Enablex for the year ended September
30, 2013, recorded partially on a net basis, were $22,234,391, after deducting
costs of goods sold and marketing costs. Revenues from Enablex for the prior
year ended September 30, 2012, which reflected revenues from the date of
acquisition (July 11, 2012) through September 30, 2012 calculated entirely on a
net basis, were $2,351,911.Until the beginning of the third quarter of
2013, the Company recorded revenues in the statements of operations relating to
Enablex on a net basis whereby revenues net of cost of goods and marketing and
selling expenses are recorded due to a period of transition under the Novartis
Acquisition Agreement whereby Novartis continued to provide certain sales and
distribution functions while the parties worked through the process of
transferring the necessary marketing authorizations. Beginning in the third
quarter of fiscal 2013, revenues and costs of goods, along with marketing
expenses, were reported on a gross basis within the financial statements. Had
the Company reported Enablex on a gross basis for the entire year, revenues for
the year ended September 30, 2013 for in-market net sales for Enablex would have
been $26,494,618 and cost of goods sold and sales and marketing expenses would
have been higher by $3,471,668 and $788,559, respectively. EBITDA would have
been unchanged.

Revenues attributable to Vancocin were $6,151,577 for the year
ended September 30, 2013, compared to $6,905,932 for the year ended September
30, 2012. For the comparative year ended September 30, 2012, net sales on a
pro-forma basis, which reflect the net sales of Vancocin if the Company had
acquired Old Merus as of October 1, 2011, were $9,389,108. The decrease in
revenue from this product in the current fiscal year was primarily due to the
entry of a generic Vancomycin which received reimbursement status in several
provinces during the Company's fiscal 2013 first quarter.

Sales and Marketing Expense

The Company incurred sales and marketing expenses of $1,165,353
for the year ended September 30, 2013, compared to $281,272 for the year ended
September 30, 2012. The increase in sales and marketing costs in fiscal 2013 was
due to expenses for Enablex which are now being incurred directly rather than
netted against revenue, as was the case while the Company completed its
transition stage during which Novartis was manufacturing, distributing, and
promoting the product.

General and Administrative Expense

General and administrative expenses for the year ended
September 30, 2013 were $6,396,971, compared to $4,896,095 for the year ended
September 30, 2012. Excluding the impact of non-cash share based compensation,
general and administrative expenses in fiscal 2013 increased by $2,722,248
compared to the previous year. This was due primarily to an increase in general
and administrative expenses from active operations as a specialty pharmaceutical
company as well as increased costs associated with a full year of operations of
Enablex in fiscal 2013. The addition of this product in late fiscal 2012 led to
additional overhead expenses relating to establishing operations in Europe.

22

---

Acquisition costs of $nil were incurred for the year ended
September 30, 2013 and $518,819 for the year ended September 30, 2012. The costs
in fiscal 2012 related primarily to the amalgamation of Old Merus and Envoy.
While acquisition costs related to the amalgamation are not expected to recur,
there may be acquisition costs going forward related to the acquisition of new
products and revenue streams.

Amortization of Intangible Assets and Impairment Charge

The year ended September 30, 2013 included amortization expense
of $11,254,497 related to Vancocin product rights and Enablex product rights and
patents. During the year ended September 30, 2012, the Company owned Enablex for
less than three months and Vancocin for approximately nine months, resulting in
lower amortization of just $3,855,604 for the fiscal 2012 period.

An impairment charge of $22,208,721 was recognized for the year
ended September 30, 2012 in relation to the Companys Vancocin and wound care
products and associated goodwill. $5,532,624 of the charge related to the
Vancocin and wound care product intangible assets. In connection with the
impairment of the Vancocin product rights, management also tested the Companys
goodwill for impairment. The recoverable amount of the cash-generating unit
(CGU) to which goodwill had been allocated was assessed to be less than its
carrying amount. Based on this analysis, the carrying amount of goodwill was
reduced to its recoverable amount through recognition of an impairment charge of
$16,676,097 against the goodwill. Management determined no evidence of
additional impairment existed at September 30, 2013.

Interest Expense, Investment Income, and Foreign Exchange
Gains and Losses

Interest expense of $5,462,466 was incurred during the year
ended September 30, 2013, primarily as a result of the credit facility entered
into with PDL BioPharma, Inc. in connection with the acquisition of Enablex,
which was not in place for most of the comparative period, resulting in a lower
amount of $1,466,151 of interest expense for fiscal 2012. As the underlying debt
was refinanced late in fiscal 2013, management expects these costs to be
considerably lower going forward.

During the year ended September 30, 2013, the Company
recognized impairment charges of $1,262,000 on its privately held investment.
The impairment charges were based on new information regarding the financial
condition of the respective investee company. The private company investment is
a legacy investment made prior to the Company's amalgamation with Old Merus and
is not a component of the Companys core business.

Foreign exchange losses of $1,608,563 were recorded in the year
ended September 30, 2013 primarily in relation to US dollar denominated debt
incurred in connection with the acquisition of Enablex. The Company had a higher
amount of US dollar denominated debt during most of the year ended September 30,
2012, and a strengthening of the Canadian dollar late in fiscal 2012 contributed
to a gain on foreign exchange of $1,825,206 for that period.

Discontinued Operations

Discontinued operations in fiscal 2013 and 2012 were
attributable to operations of Factive. Loss from discontinued operations was
$850,035 for the year ended September 30, 2013 compared to income of $219,444
for the prior year. The Company recorded a loss on disposal of discontinued
operations, net of income taxes, of $522,271 in fiscal 2013 which was
attributable to the sale of Factive rights and inventory.

23

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SUMMARY OF QUARTERLY RESULTS

Prior period financial results

The Company divested of its Factive product in fiscal 2013 and,
as such, results of this business have been reflected as discontinued
operations.

Seasonality

Merus Vancocin® and Enablex product lines are generally not
susceptible to fluctuations as a result of seasonal variations. Historic
revenues have not indicated that either product will have seasonal variations
which would materially impact revenue.

|                                           |   | **Q4 2014**         |   |   | Q3 2014         |   |   | Q2 2014         |   |   | Q1 2014         |  
|------------------------------------------ | - | ------------------- | - | - | --------------- | - | - | --------------- | - | - | --------------- | -
|                                           |   |                     |   |   |                 |   |   |                 |   |   |                 |  
|Revenues                                   | $ | 6.02 million        |   | $ | 7.18 million    |   | $ | 6.69 million    |   | $ | 6.26 million    |  
|Gross margin                               | $ | 5.09 million        |   | $ | 5.82 million    |   | $ | 5.48 million    |   | $ | 5.27 million    |  
|                                           |   |                     |   |   |                 |   |   |                 |   |   |                 |  
|Net loss:                                  |   |                     |   |   |                 |   |   |                 |   |   |                 |  
|From continuing operations                 |   | ($4.55)
    million |   |   | ($0.17) million |   |   | ($1.45) million |   |   | ($1.89) million |  
|Including discontinued
      operations    |   | ($4.55) million     |   |   | ($0.17) million |   |   | ($1.45) million |   |   | ($1.89) million |  
|Net loss per
      share:                  |   |                     |   |   |                 |   |   |                 |   |   |                 |  
|From continuing
      operations:          |   |                     |   |   |                 |   |   |                 |   |   |                 |  
|Basic                                      |   | ($0.06              | ) |   | ($0.00          | ) |   | ($0.04          | ) |   | ($0.05          | )
|Diluted                                    |   | ($0.06              | ) |   | ($0.00          | ) |   | ($0.04          | ) |   | ($0.05          | )
|*Including discontinued*
      operations: |   |                     |   |   |                 |   |   |                 |   |   |                 |  
|Basic                                      |   | ($0.06              | ) |   | ($0.00          | ) |   | ($0.04          | ) |   | ($0.05          | )
|Diluted                                    |   | ($0.06              | ) |   | ($0.00          | ) |   | ($0.04          | ) |   | ($0.05          | )
|                                           |   |                     |   |   |                 |   |   |                 |   |   |                 |  
|EBITDA1                                    | $ | 4.78 million        |   | $ | 3.76 million    |   | $ | 2.52 million    |   | $ | 2.07 million    |  

1EBITDA  Non-IFRS Financial Measures -
see definition under "Overall Performance"

24

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|                                           |   | Q4 2013         |   |   | Q3 2013         |   |   | Q2 2013         |   |   | Q1 2013      | 
|------------------------------------------ | - | --------------- | - | - | --------------- | - | - | --------------- | - | - | ------------ | 
|                                           |   |                 |   |   |                 |   |   |                 |   |   |              | 
|Revenues                                   | $ | 9.13 million    |   | $ | 7.51 million    |   | $ | 5.46 million    |   | $ | 6.28 million | 
|Gross margin                               | $ | 7.62 million    |   | $ | 7.07 million    |   | $ | 5.20 million    |   | $ | 6.05 million | 
|                                           |   |                 |   |   |                 |   |   |                 |   |   |              | 
|Net income (loss):                         |   |                 |   |   |                 |   |   |                 |   |   |              | 
|From continuing
      operations           | $ | 0.51 million    |   |   | ($0.11) million |   |   | ($2.26) million |   | $ | 0.13 million | 
|Including discontinued operations          |   | ($0.05) million |   |   | ($1.05) million |   |   | ($2.30) million |   | $ | 0.30 million | 
|Net income (loss) per
      share:         |   |                 |   |   |                 |   |   |                 |   |   |              | 
|From continuing
      operations:          |   |                 |   |   |                 |   |   |                 |   |   |              | 
|Basic                                      | $ | 0.02            |   |   | ($0.00          | ) |   | ($0.07          | ) | $ | 0.00         | 
|Diluted                                    | $ | 0.02            |   |   | ($0.00          | ) |   | ($0.07          | ) | $ | 0.00         | 
|*Including discontinued*
      operations: |   |                 |   |   |                 |   |   |                 |   |   |              | 
|Basic                                      |   | ($0.00          | ) |   | ($0.03          | ) |   | ($0.07          | ) | $ | 0.01         | 
|Diluted                                    |   | ($0.00          | ) |   | ($0.03          | ) |   | ($0.07          | ) | $ | 0.01         | 
|                                           |   |                 |   |   |                 |   |   |                 |   |   |              | 
|EBITDA                                     | $ | 5.61 million    |   | $ | 3.86 million    |   | $ | 1.84 million    |   | $ | 4.23 million | 

LIQUIDITY AND CAPITAL RESOURCES

The Company currently manages its capital structure and makes
adjustments to it, based on cash resources expected to be available to the
Company, in order to support its future business plans. As at September 30,
2014, excluding provisions and obligations related to long term debt the Company
had working capital of $16,274,224 compared to $11,928,225 at September 30,
2013. The increase in working capital was due to cash generated from operations,
as well as the cash raised during several financings in fiscal 2014, offset by
scheduled repayments against the credit facility.

The Companys plan of operations in the next twelve months is
to satisfy short-term debt obligations, while strategically looking for new
acquisitions. The Company completed four financings during the past fiscal year,
including two bought deal prospectus offerings, a preferred share financing and
an acquisition involving cash. The Company used the majority of these funds,
along with additional debt financing primarily for its acquisition of Sintrom in
September 2014. The Company may raise additional financing, if required, to
pursue the acquisition of other pharmaceutical products. Management reviews the
capital management approach on an ongoing basis and believes that this approach
is reasonable given the current state of financial markets. In the case of
uncertainty over the ability to raise funds in current or future economic
conditions, the Company would manage capital by minimizing ongoing expenses.

Cash provided by continuing operations of the Company was
$12,762,554 for the year ended September 30, 2014, compared to $11,464,696 for
the year ended September 30, 2013. The increase in cash from operations in the
current period is primarily a result of optimizing working capital and reduced
interest expense.

25

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Cash provided by financing activities for the year ended
September 30, 2014 was $108,807,923, consisting of approximately $61 million in
net proceeds from equity financings, along with approximately $48 million of new
debt. In the prior year period, cash used by financing activities was
$10,472,891, most of which related to scheduled repayments on the credit
facility, offset by a $4 million private placement.

Cash used by investing activities was $115,296,277 for the year
ended September 30, 2014 compared to $2,117,506 provided by investing activities
in the prior year. Cash used during the current period related primarily to the
acquisition of Sintrom. Cash provided by investing activities in the prior year
was related to proceeds received on the sale of Factive.

Bought deal equity financings

On March 25, 2014, the Company closed a prospectus offering of
11,765,000 shares at a price of $1.70 per share for gross proceeds of
$20,000,500. Additionally, on March 31, 2014, the underwriters exercised their
over-allotment option on the offering, resulting in an additional issuance of
1,764,750 shares for gross proceeds of $3,000,075. Proceeds were used for future
acquisitions and general corporate purposes. Costs of the offering were
approximately $1,416,000.

On June 19, 2014, the Company closed a prospectus offering of
18,400,000 shares, including the underwriter over-allotment option, at a price
of $1.70 per share for gross proceeds of $31,280,000. Proceeds were used for
acquisitions and general corporate purposes. Costs of the offering were
approximately $2,017,000.

Preferred Shares

On July 11, 2014, the Company completed the private placement
issuance of $10 million of Series A convertible preferred shares (Series A
Preferred Shares) to a large Canadian institutional investor. In aggregate, the
Company issued 10,000 Series A Preferred Shares at a price of $1,000 per share
for total gross proceeds of $10 million. The $10 million Series A Preferred
Shares will pay a dividend of 8% per annum, subject to adjustment if the Company
does not redeem after October 31, 2019. At any time at the option of the holder,
the Series A Preferred Shares may be converted into the Company's common shares
at a conversion price of $2.20 per share, provided that accrued but unpaid
dividends may be paid at cash or by the issuance of additional shares at the
option of the holder. Any additional shares issued on account of accrued but
unpaid dividends will be issued at a conversion price that is equal to the
greater of (i) $2.20 per share, and (ii) the market value of the Companys
common shares at the time of the conversion. The Series A Preferred Shares are
redeemable at the option of the Company at any time after October 31, 2019. The
Series A Preferred Shares are also redeemable by the Company at any time in the
event of a change of control subject to payment of a change of control
premium.

Conversion of Convertible Debentures

On July 17, 2014, the Company exercised its right to convert
the $10 million unsecured convertible debentures issued to a large Canadian
institutional investor in September 2013 into common shares of the Company. The
Company exercised its right based on the closing price of the Companys common
shares having equaled or exceeded $2.30 per share for the 20 consecutive trading
days ended July 14, 2014. The principal value of the debentures were convertible
at a fixed price of $1.50 per share, with accrued interest convertible at the
weighted average price for the 5 days prior to conversion. In aggregate, the
Company issued 6,677,918 common shares to convert the outstanding $10 million
principal amount plus accrued but unpaid interest.

26

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Financing Acquisition Transaction

On August 14, 2014, the Company completed a definitive
acquisition agreement with Dacha Strategic Metals Inc. ("Dacha") (TSXV:DSM)
pursuant to which Dacha finalized its previously announced aggregate investment
of at least $11 million in Merus. Dacha purchased $5 million of Merus Shares at
a price of $1.70 per share as part of the Merus bought deal financing completed
on June 19, 2014. The acquisition agreement provided that Dacha convert its
liquid assets into cash and cash equivalents and contribute the proceeds to a
new subsidiary. The subsidiary was to consist of only cash and no other assets
or liabilities when acquired by Merus. The purchase price was equal to the total
value of the cash held by the newly incorporated subsidiary, being $6,975,001
and was paid for by the issuance to Dacha of the Company's common shares valued
at $1.70 per share, subject to certain purchase price adjustments.

COMMITMENTS

|(a) | Operating lease commitments
|--- | ---------------------------

The Company has entered into operating lease agreements for
office premises and equipment with minimum annual lease payments to expiry as
follows:

| |                  |   | September 30, 2014 | 
| | ---------------- | - | ------------------ | 
| | Less than 1 year | $ | 114,295            | 
| | 1 to 2 years     |   | 105,576            | 
| | 2 to 3 years     |   | 105,576            | 
| | 3 to 4 years     |   | 26,394             | 
| | 4 to 5 years     |   | -                  | 
| | Thereafter       |   | -                  | 
| | Total            | $ | 351,841            | 

|(b) | Liability settlement
|--- | --------------------

The table below analyzes the Companys non-derivative financial
liabilities into relevant maturity groupings based on the remaining period at
the statement of financial position date to the contractual maturity date. The
amounts disclosed in the table are the contractual undiscounted cash flows and
do not include capitalized transaction costs.

|At September 30, 2014                    |   | Total      |  |   | 1 year     |  |   | 2 years    |  |   | 3 years    |  |   | Thereafter | 
|---------------------------------------- | - | ---------- |  | - | ---------- |  | - | ---------- |  | - | ---------- |  | - | ---------- | 
|Debt                                     | $ | 80,000,000 |  | $ | 16,000,000 |  | $ | 16,000,000 |  | $ | 16,000,000 |  | $ | 32,000,000 | 
|Accounts payable and accrued liabilities |   | 4,169,095  |  |   | 4,169,095  |  |   | -          |  |   | -          |  |   | -          | 
|Income taxes payable                     |   | 997,102    |  |   | 997,102    |  |   | -          |  |   | -          |  |   | -          | 
|Total                                    | $ | 85,166,197 |  | $ | 21,166,197 |  | $ | 16,000,000 |  | $ | 16,000,000 |  | $ | 32,000,000 | 

OFF BALANCE SHEET ARRANGEMENTS

The Company has no off balance sheet arrangements.

27

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RELATED PARTY TRANSACTIONS

At September 30, 2014, there were no amounts owing to or from
related parties. The remuneration of directors and other members of key
management personnel are as follows:

|                         |   | Year ended September 30 | 
|------------------------ | - | ----------------------- | 
|                         |   | 2014                    | 
|                         |   |                         | 
|Salaries                 | $ | 1,440,910               | 
|Share based compensation |   | 1,251,584               | 
|                         | $ | 2,692,494               | 

CHANGES IN CRITICAL ACCOUNTING POLICIES AND
ESTIMATES

Accounting policies

The following are the changes in the Companys critical
accounting policies during the year:

Revenue recognition and estimated product returns

Revenue from product sales, including shipments to
distributors, is recognized when the Company has transferred to the customer the
significant risks and benefits of ownership or future obligations with respect
to the product, it is probable that the economic benefits associated with the
transaction will flow to the Company and the amount of revenue can be measured
reliably. Revenue from product sales is recognized net of estimated sales
discounts, credits, returns, rebates and allowances.

In connection with its acquisition of Sintrom, the Company
entered into a transition services and supply agreement with the vendor
(Novartis Pharma AG, or Novartis) to facilitate the seamless and efficient
transfer of the product to the Company. The agreement required that Novartis
continue to manufacture, distribute, and promote the product until the Company
obtained the necessary marketing authorizations to allow it to take over these
functions as principal. Novartis provided the Company with a monthly
reconciliation of revenues, cost of goods, and marketing and selling expenses
for which the Company then billed Novartis for the net amount receivable. The
Company relied on the financial information provided by Novartis to estimate the
amounts due under this agreement. Based on the terms of this arrangement and the
guidance per IAS 18 regarding agency relationships, for the period of this
arrangement the Company recorded revenues relating to Sintrom on a net basis in
the statement of operations, net of cost of goods and marketing and selling
expenses.

The Company also entered into a transition services and supply
agreement with Novartis, as described above, in connection with its acquisition
of Enablex. During April and May 2013, substantially all marketing
authorizations for Enablex were transferred and the Company began selling
directly to third parties, incurred the inventory and credit risk and took over
all other responsibilities for purchase and sale of the product. As a result,
management determined the Company was acting as the principal in the sales of
Enablex as opposed to an agent. As such, revenues for sales of Enablex made by
the Company acting as principal were accounted for on a gross basis, in the same
manner as its other products as described above.

The Companys return policy is limited to damaged or expired
product. The return allowance is determined based on analysis of the historical
rate of returns and current market conditions, which is applied directly against
sales.

28

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Critical judgements

The following are the critical judgements, apart from those
involving estimations (see below), that have been made in the process of
applying the Company's accounting policies and that have the most significant
effect on the amounts recognised in the consolidated financial statements.

Acquisition accounting

Management exercised judgement in determining that the product
acquisitions of Sintrom and Enablex were asset acquisitions, and that the
acquisition of Factive was a business combination accounted for under the
acquisition method of accounting. Management considered the guidance and
definitions per IFRS 3 in making these determinations. These transactions have
been recorded in the consolidated financial statements based on managements
assessment of fair value for the acquired assets and liabilities.

Functional currency

Management has exercised judgement in selecting the functional
currency of each of the entities that it consolidates based on the primary
economic environment in which the entity operates and in reference to the
various indicators as provided by IAS 21  The effects of changes in foreign
exchange rates. The consolidated financial statements of the Company are
presented in Canadian dollars (CAD), which is the parent Companys functional
and presentation currency.

Use of estimates

In preparation of the Companys consolidated financial
statements in accordance with IFRS, management is required to make estimates and
assumptions that affect the reported amount of assets, liabilities, and the
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates used in the Companys
consolidated financial statements and such differences could be material.
Significant estimates include:

| | the allowance for inventory obsolescence;                                                                  
|- | -----------------------------------------------------------------------------------------------------------
| | estimate for product returns;                                                                              
| | allocation of the purchase price and estimates
      of fair value for the acquired assets and liabilities;
| | the estimated useful lives of property and
      equipment and intangible assets;                          
| | impairment of financial and non-financial
      assets;                                                    
| | the valuation of deferred tax assets and
      liabilities;                                                
| | the valuation of warrants and share-based
      compensation expense; and                                  
| | the valuation of the equity component of
      convertible debt                                            
| | the valuation of non-cash consideration
      received on the sale of Factive                              

Significant estimates

The following are the key assumptions concerning the future,
and other key sources of estimation uncertainty at the end of the reporting
period, that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial year:

29

---

|(i) | Inventory obsolescence
|--- | ----------------------

The Company reviews the net realizable value of its inventory.
The Company has determined that there are adequate sales to support the carrying
amount for all other inventory as at September 30, 2014. In addition, management
reviews specific product and industry experience with returns in assessing if a
write-down is required.

|(ii) | Estimated product returns
|---- | -------------------------

Revenue from product sales is recognized net of estimated sales
discounts, credits, returns, rebates and allowances. The Companys return policy
is limited to damaged or expired product. The return allowance is determined
based on an analysis of the historical rate of returns, industry return data,
and current market conditions, which is applied directly against sales.

|(iii) | Allocation of the purchase price and estimates of fair
      value for the acquired assets and liabilities
|----- | ----------------------------------------------------------------------------------------------------------

The Company as part of its business combinations and product
acquisitions performs a preliminary assessment of the fair value of all assets
and liabilities acquired based on all current available information. As part of
the measurement period to finalize the purchase price allocation, management
updates the estimated fair values as information becomes available, support from
third party market data becomes available, and where necessary, third party
independent valuations are obtained. Management is ultimately responsible for
concluding on the allocation of purchase price and estimates of fair value for
the acquired assets and liabilities.

|(iv) | Impairment of financial and non-financial
  assets
|---- | --------------------------------------------------

Financial Assets

The Company assesses at each balance sheet date whether there
is objective evidence that a financial asset or group of financial assets is
impaired.

If there is objective evidence that an impairment loss has
occurred on an unquoted or not actively traded equity instrument that is not
carried at fair value (because its fair value cannot be reliably measured), the
amount of the loss is measured as the difference between the assets carrying
amount and the present value of estimated future cash flows discounted at the
current market rate of return for a similar financial asset and is recognized in
profit or loss for the period. Reversals of impairment losses on assets carried
at cost are not permitted.

For financial assets carried at amortized cost, the amount of
the loss is measured as the difference between the assets carrying amount and
the present value of estimated future cash flows (excluding future credit losses
that have not been incurred) discounted at the financial assets original
effective interest rate (i.e. the effective interest rate computed at initial
recognition).

Objective evidence of impairment of financial assets carried at
amortized cost exists if the counterparty is experiencing significant financial
difficulty, there is a breach of contract, concessions are granted to the
counterparty that would not normally be granted, or it is probable the
counterparty will enter into bankruptcy or a financial reorganization.

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Non-Financial Assets

Determining whether goodwill is impaired requires an estimation
of the recoverable amount of the cash generating units (CGUs) or groups of
CGUs to which goodwill has been allocated. The determination of recoverable
amount requires the Company to estimate the future cash flows expected to arise
from these CGUs and a suitable discount rate in order to calculate the
recoverable amount of the CGUs. If the recoverable amount of the CGUs is less
than its carrying amount, an impairment loss is recorded. The Company currently
has no goodwill.

At the end of each reporting period, the Company reviews
property, plant and equipment and intangible assets for indicators of
impairment. If any such indication exists, the recoverable amount of the asset
is estimated in order to determine the extent of the impairment loss, if any.
Where it is not possible to estimate the recoverable amount of an individual
asset, the assets are then grouped together into a CGU and a recoverable amount
is estimated for that CGU.

During the fourth quarter of 2014, the Companys Vancocin and
Enablex intangible assets exhibited indicators of impairment, requiring the
Company to assess these intangible assets for impairment. The Company carried
out a review of the recoverable amount of the assets of each of its cash
generating units (CGUs), which are defined at the product line level (Vancocin
and Enablex). The carrying values of the CGUs at the impairment evaluation date
of September 30, 2014 are included below:

|                   |   | Enablex    |  |   | Vancocin  | 
|------------------ | - | ---------- |  | - | --------- | 
|September 30, 2014 | $ | 56,351,000 |  | $ | 9,507,000 | 

The recoverable amount was calculated based on the CGUs fair
value less costs to sell, determined using a discounted cash flow model. The
assumptions in the discounted cash flow model that have the greatest estimation
uncertainty include forecasted revenue and the discount rate which was based on
the factors specific to each CGU, including risks inherent in the discounted
cash flow models. The rates applied were as follows:

Vancocin
    13%Enablex
    15%


As a result of the review, the Company concluded that an
impairment loss of approximately $4,212,000 was required for Vancocin, but no
impairment loss was required for Enablex.

(v)      Useful lives of property,
equipment and intangible assets

The Company reviews the estimated useful lives of property,
equipment and intangible assets at the end of each year, with the effect of any
changes in estimates being accounted for on a prospective basis. Depreciation on
property, equipment, and intangible assets is calculated using the straight-line
method to allocate their cost to their residual values over their estimated
useful lives, as follows:


    Furniture, fittings and equipment
    3
       5 years
    Leasehold improvements
    Over the term of the lease
    Product rights
    2
       10 years
    Product patents
    Remaining economic life of patent
    Manufacturing equipment
    5
       10 years


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|During the year ended September 30, 2014, the useful
      lives were considered reasonable.                                                                                                                                                                                                                                                                                                                                               
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(vi)                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                           
|The Company estimates the probability that taxable
      profits will be available against deductible temporary differences can be
      utilized and thus give rise to deferred tax assets. The Company has
      reviewed the expected profitability and determined that no deferred tax
      asset should be recognized at this time.                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(vii)                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                           
|The Company estimates the fair value of warrants and
      share options issued for employment services based on the Black Scholes
      option-pricing model for warrants and share options with a service
      condition. These methods of valuation were applied to the equity
      transactions during the year.                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(viii)                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                           
|The Company estimates the fair value of convertible debt
      by first estimating the liability component of the instrument based on a
      discounted cash flow model. The fair value of the equity component of the
      instrument is then determined as the difference between the fair value of
      the liability component and the fair value of the instrument at inception.                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(ix)                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Proceeds from the sale of Factive (note 20) consisted of
      non-cash consideration of convertible debentures and shares. Management
      was required to make significant estimates in order to determine the fair
      value of the non-cash consideration at the transaction date due to the
      limited objective information available at that date. The significant
      estimates included in the calculation are as follows:

| |  | Management estimated the likelihood of repayment of the
      convertible debenture based on working capital levels and short-term
      commitments and determined there was significant uncertainty of collection                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                            
| |  | Management estimated the net realizable value of the
      shares received based on the limited trading history and determined that
      given the large number of shares and low trading volumes, there was
      significant uncertainty as to whether the shares could be sold on a timely
      basis.

DISCLOSURE CONTROLS AND PROCEDURES

Disclosure controls and procedures form a framework designed to
provide reasonable assurance that information disclosed publicly fairly presents
in all material respects the financial condition, results of operations and cash
flows of the Company for the periods presented in this MD&A. The Company's
disclosure controls and procedures framework includes processes designed to
ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to management by others within those
entities to allow timely decisions regarding required disclosure.

The Companys management, with the participation of its CEO and
CFO is responsible for establishing and maintaining adequate internal control
over financial reporting. The Companys internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with IFRS.

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As at September 30, 2014, management evaluated the design and
operating effectiveness of the Companys internal controls over financial
reporting and concluded as at September 30, 2014, the Companys internal
controls over financial reporting were operating effectively.

There were no material changes made to the Companys internal
controls over financial reporting during the year ended September 30, 2014 that
have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. In addition, management
assessed disclosure controls and procedures to be effective as of September 30,
2014.

DISCLOSURE OF OUTSTANDING SHARE DATA

Common Shares

The Companys authorized share capital consists of an unlimited
number of common shares without par value. As at December 18, 2014, the Company
had 81,245,724 common shares issued and outstanding.

Preference Shares

The Company is authorized to issue an unlimited number of
preferred shares without par value. The preferred shares may be issued in series
on such terms as determined by the directors of the Company in accordance with
the special rights and restrictions as set out in the Articles of the Company.
As of December 18, 2014, the Company had 10,000 Series A Preferred Shares issued
and outstanding, each with a liquidation value of $1,000, for a total value of
$10,000,000. The Series A Preferred Shares pay a dividend of 8% per annum,
subject to adjustment if the Company does not redeem these Preferred Shares
after October 31, 2019. At any time at the option of the holder, the Series A
Preferred Shares may be converted into the Companys common shares at a
conversion price of $2.20 per share. The Series A Preferred Shares are
redeemable at the option of the Company at any time after October 31, 2019. The
Series A Preferred Shares are also redeemable by the Company at any time in the
event of a change of control subject to payment of a change of control
premium.

Stock Options

The Company has 3,456,667 stock options outstanding as at
December 18, 2014.

Share Purchase Warrants

The Company has 2,295,950 share purchase warrants outstanding
as at December 18, 2014.

ADDITIONAL INFORMATION

Additional information about the Company is available on SEDAR
at http://www.sedar.com.

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