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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 20-F

[   ] Registration statement pursuant to Section 12(b)
or 12(g) of the Securities Exchange Act of 1934

OR

[X] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the fiscal year ended September 30, 2013

OR

[   ] Transition report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 OR

[   ] Shell company report pursuant to Section 13 or
15 (d) of the Securities Exchange Act of 1934

Date of event requiring this shell company report_____________

Commission file number 000-30082

MERUS LABS INTERNATIONAL
INC.(Exact name of Registrant as specified in its
charter)

__________________________________________________(Translation
of Registrants name into English)

British Columbia, Canada(Jurisdiction
of incorporation or organization)

100 Wellington St. West, Ste. 2110, Toronto, Ontario,
Canada M5K 1H1(Address of principal executive offices)

Andrew Patient, Tel. 416-593-3725 Fax
416-593-4434,100 Wellington St. West, Ste. 2110, P.O. Box 151,
Toronto Ontario, Canada M5K 1H1(Name, Telephone, Email
and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section
12(b) of the Act: None Securities registered or to be registered pursuant to
Section 12(g) of the Act:

COMMON SHARES(Title of Class)
The Nasdaq Capital Market(Name of each exchange on
which registered)

Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act.

NONE(Title of Class)

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Indicate the number of outstanding shares of each of the
issuers classes of capital or common stock as of the close of the period
covered by the annual report: As at September 30, 2013, there were
38,391,512 commonshares outstanding.

Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act. [ 
 ] YES     [X] NO

If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934.  [X]
YES     [   ] NO

Note  Checking the box above will not relieve any registrant
required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] YES   
 [   ] NO

Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted (Not applicable) pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post
such files). [   ] YES     [   ] NO

Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, or a non accelerated filer:

|Large accelerated filer [   ] | Accelerated filer [   ] | Non-accelerated filer [X]
|----------------------------- | ----------------------- | -------------------------

Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:

|U.S. GAAP [   ] | International Financial Reporting
      Standards as issued by the International Accounting Standards Board [X] | Other [   ]
|--------------- | --------------------------------------------------------------------------------------------------------------- | -----------

If Other has been checked in response to the previous
question, indicate by check mark which financial statement item the registrant
has elected to follow. [   ] Item 17    
[   ] Item 18

If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).  [   ] YES     [X] NO

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. [   ]
YES     [   ] NO

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TABLE OF CONTENTS

|PART
      I                                                                                      | 7 
|------------------------------------------------------------------------------------------------- | --
|                                                                                                  |   
|ITEM
      1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                               | 7 
|                                                                                                  |   
|ITEM
      2: OFFER STATISTICS AND EXPECTED TIMETABLE                                             | 7 
|                                                                                                  |   
|ITEM
      3: KEY INFORMATION                                                                     | 7 
|                                                                                                  |   
|ITEM
      4: INFORMATION ON THE COMPANY                                                          | 17
|                                                                                                  |   
|ITEM
      4A: UNRESOLVED STAFF COMMENTS                                                          | 26
|                                                                                                  |   
|ITEM
      5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                        | 26
|                                                                                                  |   
|ITEM
      6: DIRECTORS AND SENIOR MANAGEMENT AND EMPLOYEES                                       | 40
|                                                                                                  |   
|ITEM
      7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                                   | 51
|                                                                                                  |   
|ITEM
      8: FINANCIAL INFORMATION                                                               | 52
|                                                                                                  |   
|ITEM
      9: THE OFFER AND LISTING                                                               | 53
|                                                                                                  |   
|ITEM
      10: ADDITIONAL INFORMATION                                                             | 55
|                                                                                                  |   
|ITEM
      11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                         | 69
|                                                                                                  |   
|ITEM
      12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                             | 70
|                                                                                                  |   
|PART
      II                                                                                     | 70
|                                                                                                  |   
|ITEM
      13: DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES                                   | 70
|                                                                                                  |   
|ITEM
      14: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS | 70
|                                                                                                  |   
|ITEM
      15: CONTROLS AND PROCEDURES                                                            | 70
|                                                                                                  |   
|ITEM
      16A: AUDIT COMMITTEE FINANCIAL EXPERT                                                  | 72
|                                                                                                  |   
|ITEM
      16B: CODE OF BUSINESS CONDUCT                                                          | 72
|                                                                                                  |   
|ITEM
      16C: PRINCIPAL ACCOUNTANT FEES AND SERVICES                                            | 73
|                                                                                                  |   
|ITEM
      16D: EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                        | 73
|                                                                                                  |   
|ITEM
      16E: PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASER             | 73
|                                                                                                  |   
|ITEM
      16F: CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT.                                     | 73
|                                                                                                  |   
|ITEM
      16G. CORPORATE GOVERNANCE.                                                             | 74
|                                                                                                  |   
|ITEM
      16H. MINE SAFETY DISCLOSURE.                                                           | 74
|                                                                                                  |   
|PART
      III                                                                                    | 75
|                                                                                                  |   
|ITEM
      17: FINANCIAL STATEMENTS                                                               | 75
|                                                                                                  |   
|ITEM
      18: FINANCIAL STATEMENTS                                                               | 75
|                                                                                                  |   
|ITEM
      19: EXHIBITS                                                                           | 75

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Merus Labs International Inc. (Merus, the
Company we, us, or our) was formed on
December 19, 2011 by the amalgamation of Merus Labs International Inc. and Envoy
Capital Group Inc. (Envoy). Results prior to December 19, 2011 reflect
the operations of our former business as Envoy.

All information contained in this Annual Report is as of
November 30, 2013, unless otherwise indicated. All references to Common Shares
are to the common shares of Merus.

About Forward-Looking Information

This Annual Report and the documents incorporated by reference
herein contain 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 our company, as applicable,
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: sources of income; forecasts of sales and associated
expenditures, including general and administrative expenses, and the sources of
the financing thereof; expectations regarding the ability to raise capital;
movements in currency exchange rates; anticipated income taxes; our business
outlook; plans and objectives of management for future operations; forecast
business results; and anticipated financial performance.

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 our 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 Annual
Report 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 our company;
- a stable competitive environment; and
- no significant event occurring outside the ordinary course of business such
  as a natural disaster or other calamity.

The forward-looking information in statements or disclosures in
this Annual Report is based (in whole or in part) upon factors which may cause
actual results, performance or achievements of our 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 our 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
we do 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;
- delays or setbacks with respect to governmental approvals, or manufacturing
  or commercial activities;

4

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- 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;
- 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;
- 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;
- 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.

We are 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 securities 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 reader is further cautioned that the preparation of
financial statements in accordance with International Financial Reporting
Standards as issuable by the International Accounting Standards Board (IFRS)
requires management to make certain judgments and estimates that affect the
reported amounts of assets, liabilities, revenues and expenses. These estimates
may change, having either a negative or positive effect on net earnings as
further information becomes available, and as the economic environment changes.

We caution you that the above list of risk factors is not
exhaustive. Other factors which could cause actual results, performance or
achievements of our company as applicable, to differ materially from those
contemplated (whether expressly or by implication) in the forward-looking
statements or other forward-looking information are disclosed in our publicly filed disclosure documents, including those
disclosed under Risk Factors in this Annual Report on Form 20-F (the
Annual Report).

5

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Currency

We present our consolidated financial statements in Canadian
dollars. In this Annual Report, except where otherwise indicated, all dollar
amounts are expressed in Canadian dollars. References to $ are to Canadian
dollars, references to U.S.$ are to United States dollars. See Selected
Financial Data in Item 3 of this Form 20-F.

6

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PART I

Item 1: Identity of Directors, Senior Management and
Advisers

Not applicable.

Item 2: Offer Statistics and Expected
Timetable

Not applicable.

Item 3: Key Information

A. Selected Financial Data

The following tables sets forth selected financial data for our
company for the fiscal years indicated below and should be read in conjunction
with the more detailed audited consolidated financial statements and the related
notes thereto (the Consolidated Financial Statements) appearing under Item 17
in this Form 20-F and the discussion under Item 5 Operating and Financial
Review and Prospects herein. The selected consolidated financial data does not
include statements of operations data or balance sheet data of any acquired
operations prior to their respective acquisition effective dates. Our historical
results are not necessarily indicative of the results that may be expected for
any future period. The Consolidated Financial Statements have been prepared by
management in accordance with IFRS for fiscal years 2013, 2012 and 2011.

Fiscal Years Ended September
      30
    
    2013
    
    
    2012
    
    
    2011(all amounts in thousands
      except per share data)Revenue
    $
    28,386
    
    $
    9,258
    
    $
    -Loss From Continuing
      Operations
    
    (1,730
    )
    
    (20,940
    )
    
    (6,795
    )(Loss) Earnings From
      Discontinued Operations
    
    (1,372
    )
    
    219
    
    
    (766
    )Loss From Continuing
      Operations Basic Earnings Per Share
    
    (0.05
    )
    
    (0.91
    )
    
    (0.85
    )Loss From Continuing
      Operations Diluted Earnings Per Share
    
    (0.05
    )
    
    (0.91
    )
    
    (0.85
    )


7

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Net Loss
    
    (3,102
    )
    
    (20,721
    )
    
    (7,561
    )Net Loss Per Share Basic
    
    (0.09
    )
    
    (0.90
    )
    
    (0.94
    )Net Loss Per Share Diluted
    
    (0.09
    )
    
    (0.90
    )
    
    (0.94
    )


As at September30
    
    2013
    
    
    2012
    
    
    2011(all amounts in thousands)Current Assets
    $
    16,700
    
    $
    13,060
    
    $
    9,891Total Assets
    
    87,040
    
    
    92,379
    
    
    11,019Total Debt(1)
    
    38,066
    
    
    54,087
    
    
    -Shareholders Equity
    
    43,919
    
    
    35,264
    
    
    10,333Deficit
    
    (52,972
    )
    
    (49,870
    )
    
    (29,149
    )


1Total debt includes
both the current and long term portion of debt.

We have never paid any dividends on our Common Shares and do
not anticipate that it will pay any cash dividends on our Common Shares in the
foreseeable future. Any decision to pay dividends in the future will be at the
discretion of our board of directors, after taking into account such factors as
our financial condition, operating results, current and anticipated cash needs
and plans for expansion.

Exchange Rates:

On December 6, 2013 the noon buying rate for Canadian dollars
as certified for customs purposes by the Federal Reserve was $1.00 U.S. to
$1.0663. The following table sets forth for the periods indicated certain
information regarding the exchange rates of Canadian dollars into U.S. currency.
The rate of exchange means the noon buying rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the Federal
Reserve.

Fiscal Year Ended September 30,2013
    
    
    2012
    
    
    2011Average (1)
    
    1.0199
    
    
    1.0029
    
    
    0.9872


|1. | The Average rate means the average rates each period,
      calculated by using the average of the exchange rates on the last day of
      each month during the fiscal period.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

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For the Month EndedNovember
    October
    September
    August
    July
    June2013
    2013
    2013
    2013
    2013
    2013High
    $1.0597
    $1.0454
    $1.0532
    $1.0554
    $1.0578
    $1.0532Low
    $1.0414
    $1.0282
    $1.0237
    $1.0297
    $1.0259
  $1.0170


B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

Our business, financial condition and results of operations
could be materially adversely affected by any of the following risks. In
addition, risk and uncertainties not currently known to us or that we currently
deem to be immaterial may also materially and adversely affect its business.

Risk Factors Associated with the our Business

We may not be able to implement our strategy to grow our
business and expand our revenues.

We have historically increased sales and net income through
strategic acquisitions, licensing and related internal growth initiatives
intended to develop marketing opportunities with respect to acquired product
lines. Our strategy is focused on increasing sales and enhancing our competitive
standing and enabling us to promote and sell new products through existing and
new marketing and distribution channels. Since we engage in limited proprietary
research activity with respect to product development, we rely heavily on
purchasing product lines from other companies. Other companies, many of which
have substantially greater financial, marketing and sales resources than us, may
compete for the acquisition of products. We may not be able to acquire rights to
additional products on acceptable terms, if at all, or be able to obtain future
financing for acquisition on acceptable terms, if at all. The inability to
effect acquisitions of additional branded products could limit the overall
growth of our business. Furthermore, even if we are able to obtain rights to
pharmaceutical products, we may not generate sales sufficient to create a profit
or otherwise avoid a loss. For example, the marketing strategy, distribution
channels and levels of competition with respect to acquired products may be
different than those of our current products, limiting our ability to compete
favourably in those product categories.

If we are not able to acquire the license rights to new
products, we may not be able to execute our business strategy and generate
revenues as planned.

We depend on acquisition of rights to products from other
companies as the primary source for new products. Risks in acquiring new
products include: (a) the ability to locate new products that are attractive and
complement our business, and (b) the price to acquire or obtain the license for
these products may be too costly to justify the acquisition. We also face
competition from other pharmaceutical companies in acquiring rights to products,
which makes it more difficult to find attractive products on acceptable
terms.

The pharmaceutical industry is highly competitive and is
subject to rapid and significant technological change, which could render our
technologies and products obsolete or uncompetitive.

Our products will face competition from new pharmaceutical and
biotech products that treat some of the same diseases and conditions as our
products. Many of our competitors have greater financial resources and selling
and marketing capabilities. We will face further competition from
drug development companies that focus their efforts on developing and marketing
products that are similar in nature to our products, but that in some instances
offer improvements over our products, such as less frequent dosing, more
pleasant taste, new dosage formats and other novel approaches to improve
existing products. Our competitors may succeed in developing technologies and
products that are more effective or less expensive to use than any that we may
license or acquire. These developments could render our products obsolete or
uncompetitive, which would have a material adverse effect on our business,
financial condition and operating results.

9

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Core patent protection for our 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.

The core patents protecting our Vancocin® products expired on
July 13, 2010 and the core patents protecting our ENABLEX products expire in
August 2016, which could result in significant competition from generic products
and could result in a significant reduction in sales. In such situations, in
order to continue to obtain commercial benefits from our products, we will rely
on product manufacturing trade secrets, know-how and related non-patent
intellectual property. The effect of this patent expiration depends, among other
things, upon the nature of the market and the position of our products in the
market from time to time, the growth of the market, the complexities and
economics of manufacture of a competitive product and regulatory approval
requirements of generic drug laws. In the event that competition develops from
generic products, this competition could have a material adverse effect on our
business, financial condition and operating results. The entrance into the
market of a generic pharmaceutical product may erode the branded products
market share which may have a material adverse effect on our business, financial
condition and results of operations. 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 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.

We may not be able to protect and maintain our intellectual
property and licensing arrangements which could impact our ability to compete
effectively in our targeted markets.

Our success will depend in part on our ability to protect and
maintain intellectual property rights and licensing arrangements for our
products. No assurance can be given that the licenses or rights used by our
company will not be challenged, invalidated, infringed or circumvented, or that
the rights granted thereunder will provide competitive advantages to our
company. Any loss of intellectual property protection is likely to adversely
affect our operating results. Our commercial success will also depend in part on
us not infringing patents or proprietary rights of others and not breaching the
licenses granted to us. There can be no assurance that we will be able to obtain
a license to any third party technology that it may be required to conduct our
business or that such technology can be licensed at a reasonable cost. There is
no certainty that we will not be challenged by our partners for non-compliance
with our existing or future licensing arrangements. Consequently, there may be a
risk that licensing arrangements are withdrawn with no compensation or penalties
to us.

We may be subject to product liability claims, which can be
expensive, difficult to defend and may result in large judgments or settlements.

The administration of drugs to humans, whether in clinical
trials or after marketing clearance is obtained, can result in product liability
claims. Product liability claims can be expensive, difficult to defend and may
result in large judgments or settlements against our company. In addition, third
party collaborators and licensees may not protect us from product liability
claims.

We will maintain product liability insurance in connection with
the marketing of our products. Merus may not be able to obtain or maintain
adequate protection against potential liabilities arising from product sales. If
Merus is unable to obtain sufficient levels of insurance at acceptable cost or
otherwise protect against potential product liability claims Merus will be
exposed to product liability claims. A successful product liability claim in
excess of its insurance coverage could harm its financial condition, results of
operations and prevent or interfere with its product commercialization efforts.
In addition, any successful claim may prevent Merus from obtaining adequate
product liability insurance in the future on commercially desirable
terms. Even if a claim is not successful, defending such a claim may be
time-consuming and expensive and would result in Merus needing to divert
resources which could otherwise be used in developing its business.

10

---

Unexpected products safety or efficacy concerns may arise
and result in unanticipated costs associated with product liability defence
claims and potential reduction in revenues.

Unexpected safety or efficacy concerns can arise with respect
to marketed products, whether or not scientifically justified, leading to
product recalls, withdrawals or declining sales, as well as product liability,
consumer fraud and/or other claims. This could have a material adverse effect on
our business, financial results and operating results.

Uncertainty can arise regarding the applicability of our
proprietary information which could result in unanticipated competition.

We will rely on trade secrets, know-how and other proprietary
information as well as requiring employees, suppliers and other third-party
service providers to sign confidentiality agreements. However, these
confidentiality agreements may be breached, and we may not have adequate
remedies for such breaches. Others may independently develop substantially
equivalent proprietary information without infringing upon any proprietary
technology. Third parties may otherwise gain access to our proprietary
information and adopt it in a competitive manner. If a third party obtains our
proprietary information and adopts it in a competitive manner, it may have a
material effect on our business, financial condition and operating results.

We have significant liabilities which require us to generate
significant cash flows from operations in order to make mandated payments of
principal and interest

We have incurred significant liabilities in connection with the
acquisition of our current product line. Our ability to repay these liabilities
will be contingent upon our success in achieving sufficient revenues from these
products to be able to make payments of principal and interest against this debt
when due and payable. There is no assurance that we will be able to secure
future additional financing to repay our current debt facility or our
outstanding convertible debentures should cash flows from operations be
insufficient to repay these liabilities. Our inability to repay outstanding debt
when due would have a material adverse impact on our business.

We may not be able to secure additional financing which may
impair our ability to complete future acquisitions or refinance current
liabilities.

There can be no assurance that we will be able to raise the
additional funding that we need to carry out our business objectives. The
development of our business depends upon prevailing capital market conditions,
our business performance and our ability to obtain financing through joint
ventures, debt financing, equity financing or other means. There is no assurance
that we will be successful in obtaining required financing as and when needed or
at all. If additional financing is raised by the issuance of shares from
treasury, control of our company may change and shareholders may suffer
additional dilution.

We may not be able to implement our business strategy which
may impair our ability to generate future revenues.

The growth and expansion of our business is heavily dependent
upon the successful implementation of our business strategy. There can be no
assurance that we will be successful in the implementation of our business
strategy.

We may not be able to continue to meet certain covenants
under its existing credit facilities and our inability to meet these covenants
could result in acceleration of our long term liabilities.

Our credit facilities require us to maintain specified
collateral coverage ratios and satisfy financial covenants. There can be no
assurance that we will be able to continue to meet certain covenants under its
existing credit facilities. A failure to meet such covenants could result in our
lenders seeking to enforce their security under such credit facilities. This may
negatively affect our financial condition, business and operating results. Our
credit facility also contains restrictive covenants that, among other things,
limit our ability and the ability of our subsidiaries to:

11

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- incur additional indebtedness;
- repurchase certain indebtedness;
- pay dividends, redeem stock or make other distributions;
- make investments;
- create certain liens;
- transfer or sell assets;
- merge, consolidate or sell all or substantially all of our assets;
- create restrictions on the ability of our restricted subsidiaries to make
  payments to us; and
- enter into certain transactions with our affiliates.

The restrictions in our credit facilities governing our other
indebtedness may prevent it from taking actions that we believe would be in the
best interest of our business and may make it difficult for us to execute our
business strategy successfully or effectively compete with companies that are
not similarly restricted. We may also incur future debt obligations that might
subject us to additional restrictive covenants that could affect our financial
and operational flexibility. We may be unable to refinance our indebtedness, at
maturity or otherwise, on terms acceptable to us, or at all.

Our ability to comply with the covenants and restrictions
contained in our credit facilities may be affected by economic, financial and
industry conditions beyond our control including credit or capital market
disruptions. The breach of any of these covenants or restrictions could result
in a default that would permit the lenders to declare all amounts outstanding to
be due and payable, together with accrued and unpaid interest. If we are unable
to repay the indebtedness, the lenders could proceed against the collateral
securing the indebtedness. This could have serious consequences to our financial
position and results of operations and could cause us to become bankrupt or
insolvent.

We rely on third parties to undertake promotion and
distribution of our products in certain markets and their inability to
successfully market our products may impact on our ability to generate revenues
in these markets.

We have entered into promotion and distribution agreements with
selected partners in certain European countries for our Enablex product. We will
rely on these partners to undertake marketing and sales efforts in countries for
which promotion and distribution rights have beene granted. There is no
assurance that our partners will effectively be able to achieve significant
sales of products in their respective territories and their inability to do so
may impact adversely on our revenues and our results of operations.

We rely on third parties to manufacture our products and the
inability of these third parties to manufacture our products in accordance with
our requirements may impact on our ability to generate revenues.

We do not have the internal capability to manufacture
pharmaceutical products and rely on third parties to manufacture our products.
We cannot be certain that manufacturing sources will continue to be available or
that we will be able to continue to outsource the manufacturing of our products
on reasonable or acceptable terms. In addition, outsourcing manufacturing
exposes us to a number of risks which are outside our control, including: our
suppliers may fail to comply with government mandated current good manufacturing
practices which include quality control and quality assurance requirements, and
the corresponding maintenance of records and documentation and manufacture of
products according to the specifications contained in the applicable regulatory
file resulting in mandated production halts or limitations; or our suppliers may
experience manufacturing quality, control or yield issues which would require
the supplier to halt or limit production of our products.

If we encounter delays or difficulties with contract
manufacturers, packagers or distributors, sales of our products could be
delayed. If we change the source or location of supply or modify the
manufacturing process, regulatory authorities will require us to demonstrate
that the product produced by the new source or from the modified process is
equivalent to the product used in any clinical trials that were conducted. If we
are unable to demonstrate this equivalence, we will be unable to manufacture
products from the new source or location of supply, or use the modified process.
We may incur substantial expenses in order to ensure equivalence. This may
negatively affect its business, financial condition and operating results.

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If our supply of finished products is interrupted, our
ability to maintain inventory levels could suffer and future revenues could be
delayed.

Supply interruptions may occur and our inventory of finished
products may not always be adequate to satisfy demand. Numerous factors could
cause interruptions in the supply of our finished products, including failure to
have a third party supply chain validated in a timely manner, shortages in raw
material and packaging components required by our manufacturers, changes in our
sources for manufacturing or packaging, our failure to timely locate and obtain
replacement manufacturers as needed and conditions affecting the cost and
availability of raw materials. There can be no assurances that our other
products will not be interrupted in the future. This may have an adverse effect
on our business, financial results and operations.

We will rely on third parties to perform distribution,
logistics, regulatory and sales services for our products and their inability to
perform these services in accordance with our requirements could cause our
business to suffer.

We will rely on third parties to provide distribution,
logistics, regulatory and sales services including warehousing of finished
product, accounts receivable management, billing, collection and record keeping.
If the third parties cease to be able to provide us with these services, or do
not provide these services in a timely or professional manner we may not be able
to successfully manage the product revenues or integrate new products into its
business, which may result in decreases in sales. Additionally, any delay or
interruption in the process or in payment could result in a delay delivering
product to our customers, which could have a material effect on our business,
financial condition and operating results.

The publication of negative results of studies or clinical
trials may adversely impact market demand for our products.

From time-to-time, studies or clinical trials on various
aspects of pharmaceutical products are conducted by academics or others,
including government agencies. The results of these studies or trials, when
published, may have a dramatic effect on the market for the pharmaceutical
product that is the subject of the study. The publication of negative results of
studies or clinical trials related to our products or the therapeutic areas in
which our products compete could adversely affect our sales, the prescription
trends for our products and the reputation of our products. In the event of the
publication of negative results of studies or clinical trials related to our
products or the therapeutic areas in which Merus products compete, Merus
business, financial condition, and operating results could be materially
adversely affected.

We must successfully integrate any products that we acquired
or will acquire in the future in order that we can generate anticipated revenues
from these products.

We will pursue additional products that could complement or
expand our business. However, there can be no assurance that we will be able to
identify appropriate acquisition candidates in the future. If an acquisition
candidate is identified, there can be no assurance that we will be able to
successfully negotiate the terms of any such acquisition, finance such
acquisition or integrate such acquired product or business into its existing
products and business. Furthermore, the negotiation of potential acquisitions
and integration of acquired product lines could divert managements time and
resources, and require significant resources to consummate. If we consummate one
or more significant acquisitions through the issuance of Common Shares, our
shareholders could suffer significant dilution of their ownership interests.

Our inability to attract and retain key managerial personnel
may adversely impact our ability to carry out our business operations and
strategies as planned.

We are highly dependent on qualified managerial personnel. Our
anticipated growth will require additional expertise and the addition of new
qualified personnel. There is intense competition for qualified personnel in the
pharmaceutical field. Therefore, we may not be able to attract and retain the
qualified personnel necessary for the development of our business. The loss of
the services of existing personnel, as well as the failure to recruit additional
key managerial personnel in a timely manner, would harm its business development
programs, and our ability to manage day-to-day operations, attract collaboration
partners, attract and retain other employees and generate revenues. We may not
maintain key person life insurance on any of its employees.

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Increases in sales may attract generic competition which
could impact on the prices that we are able to charge for our products.

If sales of any of our products that no longer enjoy market
exclusivity or are not sufficiently protected by associated intellectual
property were to increase substantially, competitors may be more likely to
develop generic formulations that compete directly with our products. Increased
generic competition would have a material adverse effect on our business and
financial results.

Our business is subject to limitations imposed by government
regulation which may increase our costs of regulatory compliance as well as
impact adversely on our ability to market and sell our products.

In both domestic and foreign markets, the formulation,
manufacturing, packaging, labelling, handling, distribution, importation,
exportation, licensing, sale and storage of our products are affected by
extensive laws, governmental regulations, administrative determinations, court
decisions and similar constraints which are beyond our control. Such laws,
regulations and other constraints may exist at all levels of government. There
can be no assurance that we will be in compliance with all of these laws,
regulations and other constraints. Failure to comply with these laws,
regulations and other constraints or new laws, regulations or constraints could
lead to the imposition of significant penalties or claims and could negatively
impact our business. In addition, the adoption of new laws, regulations or other
constraints or changes in the interpretations of such requirements may result in
significant compliance costs or lead us to discontinue product sales and may
have an adverse effect on the marketing of our products, resulting in
significant loss of sales.

In the United States, the FDA perceives any written or verbal
statement used to promote or sell a product that associates an unapproved
nutrient with a disease (whether written by us, the content of a testimonial
endorsement or contained within a scientific publication) to be evidence of
intent to sell an unapproved new drug. If any such evidence is found with
respect to our products, the FDA may take adverse action against us, ranging
from a warning letter necessitating cessation of use of the statement to
injunctions against product sale, seizures of products promoted with the
statements, and civil and criminal prosecution of our executives. Such actions
could have a detrimental effect on sales.

Our policies regarding returns, allowances and chargebacks
may reduce revenues in future fiscal periods.

We cannot ensure that our estimated reserves are adequate or
that actual product returns, allowances and chargebacks will not exceed the
estimates, which could have a material adverse effect on our results of
operations, financial condition, and cash flows

We may be subject to the risks of foreign exchange rate
fluctuation which could result in foreign exchange losses.

We may be exposed to fluctuations of the Canadian dollar
against certain other currencies because we publishes our financial statements
in Canadian dollars, while a portion of our assets, liabilities, revenues and
costs are or will be denominated in other currencies, such as the euro and the
U.S. dollar. Exchange rates for currencies of the countries in which we operate
may fluctuate in relation to the Canadian dollar, and such fluctuations,
especially as between the Canadian dollar, U.S. dollar and the euro, may have a
material adverse effect on its earnings or assets when translating foreign
currency into Canadian dollars. In order to mitigate the risk, we have used, in
the past, forward contracts and other derivative instruments to reduce our
exposure to foreign currency risk and may or may not do so in the future.
Dependent on the nature, amount and timing of foreign currency receipts and
payments, we may from time-to-time enter into foreign currency contracts.
Accordingly, we may experience economic loss and a negative impact on earnings
solely as a result of foreign exchange rate fluctuations, which include foreign
currency devaluations against the Canadian dollar. We do not typically carry
currency convertibility risk insurance.

Market rate fluctuations could adversely affect our results
of operations.

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We may be subject to market risk through the risk of loss of
value in our portfolios resulting from changes in interest rates, foreign
exchange rates, credit spreads, and equity prices. we are required to mark to
market our held-for-trading investments at the end of each reporting period.
This process could result in significant write-downs of our investments over one
or more reporting periods, particularly during periods of overall market
instability, which could have a significant unfavourable effect on our financial
position.

We may be unsuccessful in evaluating material risks involved
in completed and future investments which could impact our ability to realize
the expected benefits from future investments and acquisitions.

We will regularly review investment opportunities and as part
of the review, conduct business, legal and financial due diligence with the goal
of identifying and evaluating material risks involved in any particular
transaction. Despite our efforts, we may be unsuccessful in ascertaining or
evaluating all such risks. As a result, we may not realize the intended
advantages of any given investment and may not identify all of the risks
relating to the investment. If we fail to realize the expected benefits from one
or more investments, or do not identify all of the risks associated with a
particular investment, our business, results of operations and financial
condition could be adversely affected.

Merus may be subject to certain regulations that could
restrict Merus activities and abilities to generate revenues as planned.

From time-to-time, governments, government agencies and
industry self- regulatory bodies in Canada, the United States, the European
Union and other countries in which we will operate have adopted statutes,
regulations and rulings that directly or indirectly affect the activities of our
company and our future clients. These regulations could adversely impact on our
ability to execute our business strategy and generate revenues as planned.

Our inability to maintain effective internal controls over
financial reporting could increase the risk of an error in our financial
statements.

Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, is responsible for establishing and
maintaining adequate internal control over financial reporting. Our 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. Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives due to its inherent limitations. Internal control
over financial reporting is a process that involves human diligence and
compliance and is therefore subject to error, collusion, or improper override.
Because of such limitations, there is a risk that material misstatements may not
be prevented or detected on a timely basis, and although it is possible to
incorporate into the financial reporting process safeguards to reduce this risk,
they cannot be guaranteed to entirely eliminate it. If we fail to maintain
effective internal control over financial reporting, then there is an increased
risk of an error in our financial statements that could result in us being
required to restate previously issued financial statements at a later date.

Risks Relating to our Common Shares

There are unexercised share purchase warrants and stock
options outstanding. If these are exercised, the investors interest in our
Common Shares will be diluted.

As of November 30, 2013, there were 38,391,512 Common Shares
issued. If all of the share purchase warrants and options that were issued and
outstanding as of that date were to be exercised, including warrants and options
that are not yet exercisable, Merus would be required to issue up to an
additional 4,760,950 Common Shares, or approximately 12% of Merus issued and
outstanding Common Shares as of November 30, 2013. In addition, if the option to
convert the outstanding convertible debentures was exercised, we would be
required to issue an additional 6,666,666 shares or approximately 17% of our
issued and outstanding Common Shares. These issuances would substantially
decrease the proportionate ownership and voting power of all other stockholders.
This dilution could cause the price of our Common Shares to decline and it could
result in the creation of new control persons. In addition, our stockholders
could suffer dilution in the net book value per share.

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A decline in the price of the Common Shares could affect our
ability to raise further working capital and adversely impact our ability to
continue operations.

A prolonged decline in the price of the Common Shares could
result in a reduction in the liquidity of our Common Shares and a reduction in
our ability to raise capital. Because a significant portion of our operations
have been and will be financed through the sale of equity securities, a decline
in the price of our Common Shares could be especially detrimental to our
liquidity and our operations. Such reductions may force us to reallocate funds
from other planned uses and may have a significant negative effect on our
business plan and operations, including its ability to acquire new products and
continue its current operations. If our stock price declines, we can offer no
assurance that we will be able to raise additional capital on acceptable terms
or generate funds from operations sufficient to meet our obligations. If we are
unable to raise sufficient capital in the future, we may not have the resources
to continue our normal operations.

Because we can issue additional Common Shares, holders of
our Common Shares may incur immediate dilution and may experience further
dilution.

We are authorized to issue an unlimited number of Common
Shares, of which 38,391,512 shares were issued and outstanding as of November
30, 2013 and an unlimited number of Preferred Shares, of which none were issued
and outstanding as of November 30, 2013. Our board of directors has the
authority to cause us to issue additional Common Shares without the consent of
any of our stockholders. Consequently, the stockholders may experience more
dilution in their ownership of the Common Shares in the future.

Because it is unlikely that we will pay dividends in the
foreseeable future, stockholders may only benefit from owning Common Shares if
the value of the Common Shares appreciates.

We have never paid dividends on our Common Shares and we do not
intend to do so in the foreseeable future. We intend to retain any future
earnings to finance our growth. Accordingly, any potential investor who
anticipates the need for current dividends from his or her investment should not
purchase Common Shares.

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Item 4: Information on the Company

A. History and Development of the Company

Name

Our legal and commercial name is Merus Labs International
Inc.

Principal Office

Our head office is 100 Wellington St. West, Suite 2110,
Toronto, Canada M5K 1H1. We may be reached by telephone at (416) 593-3725 or
facsimile at (416) 593-4434. Our website is www.meruslabs.com. Information
contained on our website does not constitute a part of this Annual Report.

Corporate Information

On December 19, 2011, our company was formed through the
amalgamation of Envoy Capital Group Inc. (Envoy) with Merus Labs
International Inc. (Old Merus). On October 1, 2012, we amalgamated with
our wholly owned subsidiary, Merus Labs Inc. and continued under the name Merus
Labs International Inc.

Old Merus was incorporated under the laws of the Province of
British Columbia on November 2, 2009 as a numbered company, 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.

Envoy was incorporated under the laws of the Province of
British Columbia, Canada in December 1973 and was continued under the laws of
the Province of Ontario, Canada in December 1997. Envoy was engaged in the
business of a merchant banking organization focused on providing financial
services as well as equity and debt capital to small and mid-cap companies from
2006 through to 2011. Envoy was continued to the Province of British Columbia in
connection with the amalgamation with Old Merus.

We have the following wholly owned subsidiaries: Merus Labs
Luxco S.a.r.L., governed by the laws of Luxembourg; Merus Labs Netherlands B.V.,
governed by the laws of Netherlands; ECG Holdings Inc., governed by the laws of
Delaware, US; and Orbis Pharma Inc., governed by the laws of Ontario.

Our Common Shares are publicly traded on the Toronto Stock
Exchange (TSX) under the symbol MSL and on NASDAQ under the symbol
MSLI.

Important Events

On May 13, 2011, Merus Labs Inc. (Merus Labs), at that time a
subsidiary of Old Merus, acquired all right, title and interest in and to the
pharmaceutical product Vancocin® (vancomycin hydrochloride) capsules
(Vancocin®), including the right to manufacture, market and sell Vancocin® in
Canada, from Iroko International LP, a subsidiary of Iroko Pharmaceuticals, LLC
(Iroko). Merus Labs acquired Vancocin® for total consideration of
approximately US$20 million. Vancocin® capsules are indicated for the treatment
of:

- Enterocolitiscaused by Staphylococcus aureus (including
  methicillin-resistant strains); and
- Antibiotic-associated pseudomembranous colitiscaused by Clostridium
  difficile.

On September 30, 2011, Envoy announced that it had completed
the divestiture of its wholly-owned subsidiary, Watt International Inc. The sale
of Watt International completed the plan to restructure the business through
divestiture of all non-merchant banking assets.

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On March 7, 2012, we completed the acquisition of the North
American product rights for FACTIVE® (Gemifloxacin Mesylate) tablets from
Cornerstone Therapeutics Inc. (Cornerstone) for total consideration of
$4.0 million paid in full on closing. FACTIVE® is a 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. Factive has not been commercialized in Canada. Pursuant to the
acquisition, we acquired 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. We subsequently entered into a sales and promotion agreement
for FACTIVE® with Vansen Pharma Inc. to market the product in the United States.

On May 29, 2012, we announced the closing of a short form
prospectus financing of 5,556,000 Common Shares at a price of CAD$1.80 per
Common Share for gross proceeds of CAD$10,000,800.

On July 11, 2012, we acquired the Canadian and European rights
(excluding France, Spain and Italy) to manufacture, market, and sell the branded
prescription medicine product Emselex®/Enablex® (darifenacin) extended release
tablets. The acquisition was completed pursuant to an asset purchase agreement
dated July 11, 2012 between Merus Labs Luxco SARL, one of our wholly owned
subsidiaries, and Novartis Pharma AG (the Novartis Acquisition
Agreement). Under the Novartis Acquisition Agreement, we acquired a fully
paid-up license for the Emselex®/Enablex® (darifenacin)for the
territories of Canada and Europe (exclusive of France, Spain and Italy) for a
purchase price of US$63 million. We have paid the purchase price in full by way
of a $35 million up-front cash payment and a $20 million vendor take back note
issued in favour of Novartis which matured on July 11, 2013 (the Novartis
VTB Note). Pursuant to the acquisition, we acquired the license to the
Emselex®/Enablex® trademark and patent, certain related intellectual property,
and other information and materials required to continue marketing the brand in
the territories acquired.

We funded the Emselex®/Enablex® acquisition with cash on hand
and a debt facility provided to us by PDL BioPharma, Inc., a company supporting
the healthcare industry with creative financing solutions (PDL
BioPharma). A credit facility of up to US$55 million was provided by PDL
BioPharma. US$35 million of this amount was drawn down upon acquisition of the
asset with a further US$20 million guaranteed through a letter of credit
facility. We paid the balance of the purchase price from cash on hand, of which,
US$4 million had been paid as a deposit at June 30, 2012. The PDL BioPharma loan
bore interest at 13.5% per annum, with monthly interest payments and periodic
principal repayments until maturity on March 31, 2015. We used the unpaid
balance of the credit facility to repay the $20 million Novartis VTB Note at
maturity in July 2013. The full amount owing under the PDL BioPharma credit
facility was repaid in full upon completion of the refinancing described below.

On June 7, 2013, we completed a private placement of 7,678,034
shares at a price of $0.60 per share for gross proceeds of $4,606,820. Proceeds
were used for debt repayment and general corporate purposes.

On August 26, 2013, we sold the North American rights to
FACTIVE® to Okana Ventures Inc. [OTC BB: OKNV] for gross proceeds of
approximately US$3.4 million. Pursuant to the definitive agreements, we divested
the license to the FACTIVE® trademark and patent, inventory on hand, various
contingent liabilities, and certain related intellectual property and other
information and materials required to market the brand in the North American
market. The gross proceeds from the divestiture are comprised of a cash payment
of US$2.2 million paid on closing, a non-contingent deferred cash payment of
US$800,000 to be paid in quarterly instalments over the next 15 months, and 3
million shares of OKNV. We determined to sell our rights due to the inherent
challenges associated with the product and the need for additional investment.

On September 24, 2013, we entered into a new senior secured
debt facility with a syndicate of Canadian chartered banks. We used the proceeds
of the new facility, in combination with the convertible debenture described
below, to repay the Company's credit facility with PDL BioPharma at a lower rate
and extended term. The new facility matures September 30, 2016 and provides for
a $30 million term loan, currently at prime plus 3.0%, with monthly payments of
principal and interest. Principal payments are $700,000 per month for the first
24 months, increasing to $1,100,000 per month for the final 12 months. The
facility also provides for up to $2 million on a revolving line of credit, based
on eligible accounts receivable. In connection with this refinancing, the
Company issued convertible debentures with a principal value of $10,000,000 to
two investment funds. The debentures have a term of five years, maturing
September 20, 2018, with interest at 8.0%, payable quarterly. The principal
amount of the debentures are convertible at the option of the holder into common shares at a
fixed rate of $1.50 per common share, with an option for the Company to force
conversion if its common shares trade at, or above, $2.30 per share for 20
consecutive days. The facility is secured by all assets of the Company and
contains affirmative and negative covenants including compliance with laws and
restrictions on additional debt, as well as financial covenants such as debt to
earnings and fixed charge coverage ratios. The Company was in compliance with
all covenants of the senior secured facility as at September 30, 2013.

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B. Business Overview

During 2011, we made a decision to deploy our capital through
an amalgamation with Old Merus. We now operate as just one segment relating to
our specialty pharma business, under the name Merus Labs International Inc.

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; and
- products with annual sales below critical threshold for large pharma.

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. Our corporate growth strategy is driven by a
product acquisition plan which employs an opportunistic approach to source
product acquisition candidates. This approach allows us 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 we have 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 the United States, Canada, and
Europe. Our 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. We have
partnered with third party contract manufacturing and regulatory service
providers to leverage their expertise but still maintain maximum flexibility.

Superior Business Model for Acquisition of Diversified
Legacy Products

We believe that we have a unique strategy in seeking to acquire
legacy products primarily for the purpose of generating a stream of stable
revenues and cash flow. We believe that this strategy will provide us 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 us than for our competitors. Management
believes that our approach to product acquisition and our return objectives
provide us with a competitive advantage in acquiring products as we can often
purchase diversified bundles of products from a single vendor. In contrast, our
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 us as a preferred purchasing candidate.

Predictable Cost Structure

Our plan 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, we
will achieve 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, our cost of
goods will be based on a fixed, per unit cost with annual inflationary
adjustments.

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Management believes the predictability, flexibility and
efficiency gained by contracting with established, experienced service
organizations will assist us in maintaining our margins and maximizing
distributable cash.

Partnership with Leading Service Providers

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

Intellectual Property

We will rely on a combination of regulatory and patent and
trademark rights to protect our investment in the products that we acquire. We
believe that trademark protection is an important part of establishing product
and brand recognition and that these rights are an important component of our
ability to be able to effectively market and sell the products that we acquire.
We will rely on patent protection for products that we acquire in order to
provide protection from generic pharmaceutical products during the remaining
life of patents that apply to the products that we acquire. A patent is the
grant of a property right which allows its holder to exclude others from, among
other things, selling the subject invention in, or importing such invention
into, the jurisdiction that granted the patent. In the U.S., Canada and the
European Union, patents expire 20 years from the date of application.

Our Competitors

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 or
region or territory. Competition also comes from generic companies, which
develop and commercialize formulations that are identical to marketed brands. We
expect to compete with a variety of drug companies. However, the initial
portfolio is comprised of products with several years of remaining patent life
or established brands.

With respect to its acquisition strategy, we expect 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. To our knowledge, few, if any, companies are currently seeking to
acquire legacy products solely for the purpose of generating a stream of
consistent cash flow. In addition, since we are not focused on specific
therapeutic classes, we will have the ability to purchase diversified products
and product bundles.

We face increased competition from manufacturers of generic
pharmaceutical products when patents covering certain of our currently marketed
products expire or are successfully challenged. Generic versions are generally
significantly less expensive than branded versions, and, where available, may be
required in preference to the branded version under third-party reimbursement
programs, or substituted by pharmacies. If competitors introduce new products,
delivery systems or processes with therapeutic or cost advantages, our products
can be subject to progressive price reductions or decreased volume of sales, or
both. Most products that we acquire must compete with other products already on
the market or products that are later developed by competitors. Manufacturers of
generic pharmaceuticals typically invest far less in research and development
than research-based pharmaceutical companies and therefore can price their
products significantly lower than branded products. Accordingly, when a branded
product loses its market exclusivity, it normally faces intense price
competition from generic forms of the product. Our Vancocin product faces
generic competition in Canada, as discussed below.

PRODUCT SUMMARY

We currently have products in the area of urology/women's
health and anti-infectives.

Urology / Women's Health

Over Active Bladder

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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.

Emselex®/Enablex®

In 2003, Novartis Pharma AG (Novartis) acquired the
Emselex®/Enablex® (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 Emselex®/Enablex® 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. The core patents
protecting the Emselex®/Enablex® (darifenacin) product expire in August 2016.

Acquisition of Emselex®/Enablex® (darifenacin) Product
Rights

In July 2012, we acquired from Novartis the Canadian and
European rights (excluding France, Spain and Italy) to manufacture, market, and
sell the branded prescription medicine product Emselex®/Enablex® (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,
Emselex®/Enablex® 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.

Transition Period under Novartis Acquisition Agreement

The acquisition of the license rights to Enablex were completed
pursuant to the Novartis Acquisition Agreement. As part of this agreement, we
entered into a transition services and supply agreement with Novartis to
facilitate the seamless and efficient transfer of the product to us. The
agreement required that Novartis continue to manufacture, distribute, and
promote the Enablex product in the licensed territories until we had obtained
the necessary marketing authorizations to allow us to take over these functions
as principal. During this transition period, Novartis provided us with a monthly
reconciliation of revenues, cost of goods, and marketing and selling expenses
for which we then billed Novartis for the net amount receivable. We 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 Enablex on a net basis in the statement of
operations, net of cost of goods and marketing and selling expenses. During
April and May 2013, substantially all marketing authorizations for Enablex were
transferred to us and we began selling directly to third parties and took over
all other responsibilities for purchase and sale of the product. As a result, we
determined we were 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, as opposed for on a net-basis.

21

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Promotion and Distribution Agreements

As we have acquired the product rights in a number of European
countries in which the product is not being actively marketed, we have partnered
with local marketing and sales organizations with the goal of incrementally
increasing sales in those regions.

In January 2013, the Company entered into promotion and
distribution agreements with selected partners in certain European countries for
the Emselex®/Enablex® 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), and SPCare Lda (Portugal). Under the terms of the agreements, the
partner companies have been granted exclusive rights to distribute, market, and
sell Emselex®/Enablex® in their respective territories. The general structure of
the arrangements are such that the partners contribute the local marketing and
sales resources in exchange for a portion of the incremental net sales generated
above the current annual baseline net sales. 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.

In February 2013, we entered into promotion and distribution
agreements with partners in Canada and Slovenia for the Company's
Emselex®/Enablex® product. The partner companies and corresponding territories
are as follows; NorrizonRx Sales and Marketing Group Inc. (Canada) and Proksimum
Pharma d.o.o. (Slovenia). Under the terms of the agreements, the partner
companies have been granted exclusive rights to market and sell
Emselex®/Enablex® in their respective territories.

On April 16, 2013, a wholly owned subsidiary of Merus received
approval from Health Canada with regards to the marketing authorization (NOC)
transfer of Emselex®/Enablex® from Novartis. Following this approval, we have
re-launched the Emselex®/Enablex® product in Canada and we are devoting
significant sales and marketing resources to the Canadian market.

On August 20, 2013, our wholly owned subsidiaries, Merus Labs
B.V and Merus Labs Luxco S.à R.L., entered into promotion and distribution
agreements with selected partners in certain European countries. The partner
companies and corresponding territories are as follows: Merz Pharma (Schweiz) AG
(Switzerland), Arriani Pharmaceuticals SA (Greece), Vivax Pharmaceuticals s.r.o
(Slovakia) and Eurocept B.V (Belgium). Under the terms of the agreements, our
partner companies have been granted exclusive rights to distribute, market, and
sell Emselex®/Enablex® in their respective territories. The general structure of
the arrangements are such that the partners contribute the local marketing and
sales resources in exchange for a portion of the incremental net sales generated
above the current annual baseline net sales. Other than Switzerland for which
Merz had a previous Emselex®/Enablex® marketing and sales arrangement with
Novartis, 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.

In September 2013, we, through our wholly owned subsidiary,
Merus Labs Luxco S.à R.L., entered into a contract sales agreement with Ashfield
In2Focus Limited to provide certain sales and promotion services for
Emselex®/Enablex® in the United Kingdom.

We have entered into these promotion and distribution
agreements with partner companies in order to access our partners knowledge and
expertise in their local markets. Our strategy is for Emselex®/Enablex® to
become a major growth driver for the Company and we believe these collaborations
will enable Merus to broaden its reach in countries which were previously
underserved in terms of marketing and sales efforts.

Contract Manufacturing

We have entered into an agreement with a European contract
manufacturing group to manufacture Emselex®/Enablex® 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 Emselex®/Enablex®. Once this operational
transition period is concluded, we will manage the manufacturing under the
contract manufacturing agreement.

22

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Customers

We have established a number of marketing and promotional
agreements in various countries throughout Europe. The counterparties to these
agreement effectively become our sole customers in that region. As such, we have
a limited number of customers, each with contractual arrangement and sales
incentives. In Canada, Enablex is sold through similar channels as our other
Canadian products, whereby a large majority of the sales are to large national
wholesalers.

Competitive Conditions

There are several other drugs in the over-active bladder market
which compete directly with Enablex. Each drug has a certain risk profile and
incompatibilities. We believe Enablex is a superior product which compares
favourably in certain key areas. The core patents protecting our Enablex®
products expire in August 2016, which could result in significant competition
from generic products. We plan to employ a host of strategies in order to stay
competitive in changing market conditions.

Anti-infective Franchise

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 newly published report.
Antibacterials represent the largest segment of the anti-infectives market
globally. The global anti-infective market is forecast to expand at a compound
annual growth rate of 5.7% between 2008 and 2013. The competitive landscape
remains highly fragmented, with market leaders Merck and GSK controlling a
combined market share of only 21.4% . Antibacterials accrued sales of $36.3
billion in 2007, accounting for 52.3% of total anti-infective market
revenues.

Vancocin

In May 2011, Old Merus acquired Vancocin (vancomycin
hydrochloride) capsules from Iroko. According to IMS Canada, Vancocin® 125mg and
250mg capsules had combined total sales of approximately $7.8 million in 2010.
The core patents protecting our Vancocin products expired on July 13, 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.

Changes in the Competitive Landscape

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 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.

23

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Also, the future of Vancocin may be affected by new therapies
such as DIFICID® (Fidaxomicin), a macrocyclic antibiotic, which may replace the
use of Vancocin. DIFICID®was found to be non-inferior to vancomycin against C
Difficile in a phase III non-inferiority study reported in the February 3, 2011
issue of the New England Journal of Medicine. However, DIFICID®is currently
being sold in Canada at a much higher price than that of Oral Vancocin®.

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®. If Optimer is able to demonstrate that DIFICID® is preferable to
Vancocin®, the business of Merus would be adversely affected.

Wound Care Franchise

In September 2010, Old Merus entered into a definitive
agreement with Innocoll Pharmaceuticals Limited (Innocoll) to license
in, on an exclusive basis, three advanced wound care products for the Canadian
market. As of the date of this MD&A, the Company has not launched any of its
wound care products and the Company has decided not to pursue this product line
due to a refocusing of management priorities.

Customers

Management expects that we will generally sell between 80% and
90% of our products directly to three major wholesalers in Canada and United
States: AmerisourceBergen, McKesson Corporation and Matrix, which does business
as Shoppers Drug Mart. Management believes that it is common practice in Canada
and the United States for pharmacies to have multiple wholesale sources. Other
direct buyers include additional smaller wholesalers and distributors, in
addition to certain pharmacy chains and food stores that warehouse the products
internally. Additional key customer groups include the following:

- Physicians and allied health professionals including nurses, physician
  assistants and pharmacists: While physicians and allied health
  professionals are not themselves direct buyers of our products, they are the
  key decision-makers in terms of recommending or prescribing our products to
  patients. These healthcare providers make prescribing decisions based on
  personal experience, influence of peers, medical/educational meetings/events,
  medical journals, and information obtained through various
  pharmaceutical-sponsored educational and promotional programs and sales
  representatives.
- Patients and their families/caregivers: In the United States,
  patients have to bear a greater share of the cost of healthcare. Therefore,
  the industry has increasingly turned to promotional and educational
  initiatives that directly target patients and their families. We will
  generally not engage in activities that directly target patients, except for
  the provision of various product and disease-specific patient education
  materials that may be passed along to patients by physicians.
- Third-party payors such as managed care organizations and group
  purchasing organizations: Third party payors, like certain insurance
  companies and employers, make purchasing and reimbursement decisions based on
  a number of health outcomes and economic variables. We will not attempt to
  influence the historical level of reimbursement for its products.
- State and federal government health agencies: Certain federal
  government agencies like the Department of Veteran Affairs, the Department of
  Defence, prison systems and Indian Health Services may purchase pharmaceutical
  products directly from us or provide third-party reimbursement to those that
  do purchase our products. In addition, Medicaid programs at the individual
  state level may also reimburse patients in the purchase of our products. The
  historical utilization/reimbursement activity of our products for these
  government agencies has been low and we anticipate this to continue. However,
the 2006 adoption of Part D prescription drug coverage for patients aged 65 and over may expand the potential market for certain legacy products.

24

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Government Regulation

Government authorities in the U.S., at the federal, state and
local level, in Canada and in other countries extensively regulate, among other
things, the research, development, testing, approval, manufacturing, labeling,
post-approval monitoring and reporting, packaging, promotion, storage,
advertising, distribution, marketing and export and import of pharmaceutical
products and medical devices. The process of obtaining regulatory approvals and
the subsequent compliance with applicable federal, state, local and foreign
statutes and regulations require the expenditure of substantial time and
financial resources. FDA approval must be obtained in the U.S., approval of
Health Canada must be obtained in Canada, EMA approval must be obtained for
countries that are part of the European Union and approval must be obtained from
comparable agencies in other countries prior to marketing or manufacturing new
pharmaceutical products or medical devices for use by humans. Regulation by
other federal agencies, such as the Drug Enforcement Administration (DEA), and
state and local authorities in the United States, and by comparable agencies in
certain foreign countries, is also required. The FTC, the FDA and state and
local authorities regulate the advertising of medical devices, prescription
drugs, over-the-counter drugs and cosmetics. The Federal Food, Drug and Cosmetic
Act, as amended (FDCA) and the regulations promulgated thereunder, and other
federal and state statutes and regulations, govern, among other things, the
testing, manufacture, safety, effectiveness, labeling, storage, record keeping,
approval, sale, distribution, advertising and promotion of our products. The FDA
requires a Boxed Warning (sometimes referred to as a Black Box Warning) for
products that have shown a significant risk of severe or life-threatening
adverse events and similar warnings are also required to be displayed on the
product in certain other jurisdictions.

Manufacturers of drug products and medical devices are required
to comply with manufacturing regulations, including current good manufacturing
regulations enforced by the FDA and Health Canada and similar regulations
enforced by regulatory agencies outside the U.S. and Canada. In addition, we are
subject to price control restrictions on our pharmaceutical products in many
countries in which we operate.

We are also subject to extensive U.S. federal and state health
care marketing and fraud and abuse regulations, such as the federal False Claims
Act, Federal and Provincial marketing regulation in Canada and similar
regulations in foreign countries in which we may conduct our business. The
federal False Claims Act imposes civil and criminal liability on individuals or
entities who submit (or cause the submission of) false or fraudulent claims for
payment to the government. If our operations are found to be in violation of any
of these laws, regulations, rules or policies or any other law or governmental
regulation, or if interpretations of the foregoing change, we may be subject to
civil and criminal penalties, damages, fines, exclusion from the Medicare and
Medicaid programs and the curtailment or restructuring of our operations.

**D.****Property, Plants and Equipment**

We currently have offices in Toronto, Montreal and Vancouver,
Canada, as well as in Luxembourg. The material terms of our leases are as
follows:

Our head offices consist of approximately 1,750 square feet
located at 100 Wellington St. West, Suite 2110, Toronto, Ontario. These premises
have been leased pursuant to a lease with a term that commenced on January 1,
2013 and expires December 31, 2017 at a current annual rent of $105,600.

Our Vancouver office is located at 470 Granville St., Ste. 504,
Vancouver, BC and our Montreal office is located at 100 Alexis-Nihon, Ste. 910,
Montreal, PQ H4M 2P5. The Montreal office consists of approximately 1,000 square
feet at a current annual rent of $27,240. The current lease expires August 31,
2014. The Vancouver office consists of approximately 1,000 square feet at a
current annual rent of $24,432, expiring June 2017, with an option to terminate
on 60 days notice after March 31, 2015.

The Luxembourg office consists of shared executive space in a
professional services facility. Monthly rent is approximately $1,600 and the
lease may be terminated upon 60 days notice.

25

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Item 4A: Unresolved Staff Comments

None.

Item 5: Operating and Financial Review and
Prospects

The following discussion should be read in conjunction
with, and is qualified in its entirety by, the Consolidated Financial Statements
of Merus and the Notes relating thereto, included as item 17 in this Form 20-F.
The information contained in this Item 5 refers to Financial Statements of
Merus, which are presented in Canadian dollars and are prepared in accordance
with International Financial Reporting Standards (IFRS) as issued by the
International Accounting Standards Board.

U.S. readers are cautioned that IFRS differs in certain
significant respects from U.S. GAAP. Historical results of operations,
percentage relationships and any trends that may be inferred therefrom are not
necessarily indicative of the operating results of any future period.

Presentation of Financial Information

We acquired Old Merus on December 19, 2011 pursuant to the
amalgamation of the Company and Old Merus to form a new amalgamated entity under
the name Merus Labs International Inc.. We have accounted for the amalgamation
as an acquisition of Old Merus using the acquisition method of accounting, with
the Company as the acquirer, and with the acquisition of the assets and
liabilities of Old Merus being recorded at fair value. The common shares that we
issued to complete the acquisition were valued using the market price at the
time of the amalgamation and the stock options and share purchase warrants
issued were valued using the Black-Scholes pricing model. Details as to the
purchase price allocation are provided in Note 3 to our audited financial
statements presented in Item 17 to this Form 20-F.

Based on this accounting, our results of operations for the
year ended September 30, 2012 include the operations of Old Merus from December
20, 2011, the first day following the amalgamation, to September 30, 2012. We
have presented pro-forma financial information showing our results of operations
for the year ended September 30, 2012 had the acquisition occurred as at October
1, 2011 in Note 3 to our audited financial statements presented in Item 17 to
this Form 20-F. This pro-forma financial information is presented for
information purposes only and does not purport to represent what our operating
results would have been had the acquisition occurred as at October 1, 2011 or to
project our results of operating for any future period.

A. Operating Results

Overview

We incurred a net loss of $3,102,129 for fiscal 2013 compared
to a net loss of $20,720,548 for fiscal 2012. The reduction to our net loss was
primarily attributable to increased revenues in fiscal 2013 over fiscal 2012 and
significant non-recurring impairment charges that were incurred in fiscal
2012.

For the year ended September 30, 2013, EBITDA1 was
$18,372,453, compared to $2,694,534 for the prior year. Adjusted
EBITDA1, which adds back non-cash share based compensation expense
and acquisition costs, was $19,365,502, compared to $5,427,774 for the prior
year comparative period. As at September 30, 2013, the Company had an
accumulated deficit of $52,972,037.

Cash provided by continuing operations of the Company was
$11,464,696 for the year ended September 30, 2013, compared to cash provided by
continuing operations of $640,506, for the year ended September 30, 2012. Cash
provided by (used in) discontinued operations of the Company for the same
periods were $1,512,137 and ($796,451), respectively.

26

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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, foreign exchange gains or losses and
unusual items; such as writedowns and gains or losses on intellectual property
and investments. 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 expenses, debt service
obligations and other non-operating items. The Company excludes amortization
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.

|                                                 |   | Fiscal 2013 |   |   | Fiscal 2012 |   |   | Fiscal 2011 |  
|------------------------------------------------ | - | ----------- | - | - | ----------- | - | - | ----------- | -
|                                                 |   |             |   |   |             |   |   |             |  
|Loss from continuing
      operations            | $ | (1,729,823  | ) | $ | (20,939,992 | ) | $ | (6,794,626  | )
|                                                 |   |             |   |   |             |   |   |             |  
|Amortization                                     |   | 11,254,497  |   |   | 3,855,604   |   |   | -           |  
|Depreciation                                     |   | 2,826       |   |   | 5,015       |   |   | 17,062      |  
|Interest expense                                 |   | 5,462,466   |   |   | 1,466,151   |   |   | 10,865      |  
|Income tax expense (recovery)                    |   | 557,518     |   |   | (1,608,758  | ) |   | -           |  
|Investment expense
      (income) and impairment |   | 1,216,406   |   |   | (467,001    | ) |   | (1,882,347  | )
|Foreign exchange losses (gains)                  |   | 1,608,563   |   |   | (1,825,206  | ) |   | -           |  
|Impairment charges                               |   | -           |   |   | 22,208,721  |   |   | -           |  
|Restructuring costs                              |   | -           |   |   | -           |   |   | 6,061,413   |  
|                                                 |   |             |   |   |             |   |   |             |  
|EBITDA                                           | $ | 18,372,453  |   | $ | 2,694,534   |   | $ | (2,587,633  | )
|plus:                                            |   |             |   |   |             |   |   |             |  
|Non-cash stock based compensation                |   | 993,049     |   |   | 2,214,421   |   |   | 938,176     |  
|Acquisition costs                                |   | -           |   |   | 518,819     |   |   | -           |  
|                                                 |   |             |   |   |             |   |   |             |  
|Adjusted EBITDA                                  | $ | 19,365,502  |   | $ | 5,427,774   |   | $ | (1,649,457  | )

27

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Selected Annual Information

|                                    | Fiscal 2013    | Fiscal 2012     | Fiscal 2011   
|----------------------------------- | -------------- | --------------- | --------------
|                                    |                |                 |               
|Revenue                             | $28.4 million  | $9.3 million    | $nil          
|                                    |                |                 |               
|Gross margin                        | $25.9 million  | $8.4 million    | $nil          
|                                    |                |                 |               
|Net (loss) earnings:                |                |                 |               
|From continuing operations          | ($1.7) million | ($20.9) million | ($6.8) million
|From
      discontinued operations  | ($1.4) million | $0.2 million    | ($0.8) million
|                                    |                |                 |               
|Total                               | ($3.1) million | ($20.7) million | ($7.6) million
|                                    |                |                 |               
|Net (loss) earnings per
      share |                |                 |               
|Total                               |                |                 |               
|Basic                               | ($0.09)        | ($0.90)         | ($0.94)       
|Diluted                             | ($0.09)        | ($0.90)         | ($0.94)       
|                                    |                |                 |               
|From continuing
      operations    |                |                 |               
|Basic                               | ($0.05)        | ($0.91)         | ($0.85)       
|Diluted                             | ($0.05)        | ($0.91)         | ($0.85)       
|                                    |                |                 |               
|From discontinued
      operations  |                |                 |               
|Basic                               | ($0.04)        | $0.01           | ($0.09)       
|Diluted                             | ($0.04)        | $0.01           | ($0.09)       

|As at:                                      | Sep 30, 2013  | Sep 30, 2012  | Sep 30, 2011 
|------------------------------------------- | ------------- | ------------- | -------------
|                                            |               |               |              
|Total assets                                | $87.0 million | $92.4 million | $11.0 million
|                                            |               |               |              
|Total long-term financial
      liabilities | $30.0 million | $22.2 million | $nil         
|                                            |               |               |              
|Cash dividends
      declared               | $nil          | $nil          | $nil         

28

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Results of Operations for the Year Ended September 30, 2013
and 2012

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 2013 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 expects that gross margin as a percentage
of revenues will decline in 2014 as the Company continues 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. The Company has now
transferred the majority of 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. Beginning in the third quarter, 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 be 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.

Operating Expenses

Operating expenses for the year ended September 30, 2013 were
$7,562,324, compared to $5,696,186 for the prior period ended September 30,
2012. Excluding the impact of non-cash share based compensation, operating
expenses in the current year increased by $3,087,510 compared to the same period
in 2012. This was due primarily to an increase in sales and marketing and
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. The addition of this product in late fiscal 2012 led to
additional overhead expenses relating to establishing operations in Europe, as
well as additional sales and marketing costs. This increase is offset by
acquisition costs of $518,819 related primarily to the amalgamation of Old Merus
and Envoy that were incurred during fiscal 2012. While acquisition costs related
to the amalgamation are not expected to recur, the Company anticipates there
will be additional acquisition costs going forward related to the acquisition of
new products and revenue streams.

Included in operating expenses, 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 the current year is 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.

29

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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 comparative 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
smaller 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.

30

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Results of Operations for the Year Ended September 30, 2012
and 2011

The Company had a net loss of $20,720,548 (or $0.90 basic loss
per share) for the year ended September 30, 2012 compared to a net loss of
$7,560,954 (or $0.94 basic loss per share) for the year ended September 30,
2011. As the Corporation completed its amalgamation on December 19, 2011,
results related to the pharmaceutical operations are included in the financial
results beginning December 20, 2011. Results prior to that date reflect the
operations of the Corporations former business as Envoy. As such, revenues
generated from its merchant banking business were reclassified as ancillary
income in the comparative periods, resulting in a nil gross margin for the year
ended September 30, 2011. In addition, certain one-time costs were incurred as
the Corporation restructured its management team. The Corporation incurred
approximately $6.1 million in restructuring costs relating to severance and
office closure. The Corporation also disposed of its former operating
subsidiary, Watt International Inc., at the end of fiscal 2011 and, as such,
results of this business have been reflected as discontinued operations.

Revenues and Gross Margin

Revenues for the year ended September 30, 2012 were $9,257,843
compared to nil for the year ended September 30, 2011. The nil revenues are a
result of reclassifying amounts to conform to the current presentation as a
pharmaceutical company as opposed to its former operations as a merchant bank.
If the Company had amalgamated with Old Merus on October 1, 2011 and owned
Vancocin during the full twelve month period, gross margin would have been
$10,567,694 (or 90%), consisting of net sales of Vancocin and revenue from
Enablex totalling $11,741,019 less cost of goods sold of $1,173,325. Sales of
Vancocin from October 1 through December 31, 2011 were strong given the outbreak
of C. Difficile throughout Canada during 2011 and as hospitals increased their
supply of Vancocin for the approaching winter flu season. The Company recorded
revenues relating to Enablex net of cost of goods and marketing and selling
expenses in a single line, revenues, in the statements of operations during the
period of transition from Novartis to Merus.

Operating Expenses

Operating expenses for the year ended September 30, 2012 were
$5,696,186 compared to $2,587,633 in 2011. This was due primarily to an increase
in general and administrative expenses from active operations as a specialty
pharmaceutical company and non-cash charges for share based compensation as a
result of the granting of equity compensation to the Companys management team.
In addition, the Company incurred sales and marketing expenses of $281,272
related to Vancocin. Sales and marketing costs for Enablex were netted against
revenue as the Company completed a transition stage whereby Novartis continued
to manufacture, distribute, and promote the product until the Company obtained
the necessary marketing authorizations to allow it to take over these functions
from a regulatory standpoint. .

Amortization of Intangible Assets and Impairment Charge

The 2012 period included amortization expense of $3,855,604
related to the licensing and distribution agreement, Vancocin product rights and
Enablex product rights and patent, all of which were not owned by the Company
during the 2011 period.

An impairment charge of $22,208,721 was recognized at September
30, 2012 in relation to the Companys Vancocin and wound care products and
associated goodwill, as discussed in the current year analysis.

Interest Expense and Foreign Exchange Gains

Interest expense of $1,466,151 was incurred during fiscal 2012
primarily as a result of the credit facility entered into with PDL BioPharma,
Inc. in connection with the acquisition of Enablex, which was not owned by the
Company during the 2011 period.

A foreign exchange gain of $1,825,206 was recorded primarily in
relation to US dollar denominated debt outstanding as at September 30, 2012 in
connection with the acquisition of Enablex, none of which was outstanding by the
Company during the 2011 period.

31

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Discontinued Operations

For the comparative period ended September 30, 2011, results
included the Companys former operating subsidiary, Watt International Inc.
(Watt). The Company made a decision to divest of its consumer and retail
branding unit in the third quarter of fiscal 2011. Thus, Watts results for
fiscal 2011 are presented as discontinued operations. During the year ended
September 30, 2011, the Company incurred a net loss from discontinued operations
of $766,328 related to its consumer and retail branding group.

32

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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 for Vancocin® have not indicated that such product will have seasonal
variations which would materially impact revenue.

Q4 2013
    Q3 2013
    Q2 2013
    Q1 2013Revenues
    $9.13 million
    $7.51 million
    $5.46 million
    $6.28 millionGross margin
    $7.62 million
    $7.07 million
    $5.20 million
    $6.05 millionNet earnings (loss):From continuing operations
    $0.51 million
    ($0.11) million
    ($2.26) million
    $0.13 millionIncluding discontinued operations
    ($0.05) million
    ($1.05) million
    ($2.30) million
    $0.30 millionNet earnings (loss) per share:From continuing operations:Basic
    $0.02
    ($0.00)
    ($0.07)
    $0.00Diluted
    $0.02
    ($0.00)
    ($0.07)
    $0.00Including discontinued
      operations:Basic
    ($0.00)
    ($0.03)
    ($0.07)
    $0.01Diluted
    ($0.00)
    ($0.03)
    ($0.07)
    $0.01EBITDA1
    $5.29 million
    $5.16 million
    $3.48 million
    $4.44 million


Q4 2012
    Q3 2012
    Q2 2012
    Q1 2012Revenues
    $4.40 million
    $2.34 million
    $2.21 million
    $0.31 millionGross margin
    $4.16 million
    $2.06 million
    $1.91 million
    $0.26 millionNet earnings (loss):From continuing operations
    ($20.91) million
    $0.33 million
    ($0.36) million
    ($0.29) millionIncluding discontinued Operations
    ($20.77) million
    $0.67 million
    ($0.36) million
    ($0.29) millionNet earnings (loss) per share:From continuing operations:Basic
    ($0.69)
    $0.01
    ($0.01)
    ($0.03)Diluted
    ($0.69)
    $0.01
    ($0.01)
    ($0.03)Including discontinued
      operations:Basic
    ($0.68)
    $0.03
    ($0.01)
    ($0.03)Diluted
    ($0.68)
    $0.03
    ($0.01)
    ($0.03)EBITDA1
    $2.63 million
    $0.94 million
    ($0.19) million
    ($0.69) million


(1) See definition of EBITDA above.

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Liquidity and Capital Resources

Cash and Working Capital

We currently manage our 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. We had cash and cash equivalents of
$8,084,367 and working capital of $3,621,264 as at September 30, 2013, compared
to cash and cash equivalents of $3,462,919 and a working capital deficit of
$21,508,320 as at September 30, 2012. The increase in cash and cash equivalents
was primarily due to cash generated from operations during 2013. The substantial
increase in our working capital was attributable to the refinancing of the PDL
BioPharma credit facility in September 2013 which was repaid in full using the
proceeds of the senior secured facility provided by a syndicate of Canadian
chartered banks and the convertible debenture financing.

Long-Term Debt

Our new debt facility matures September 30, 2016 and provides
for a $30 million term loan, currently at prime plus 3.0%, with monthly payments
of principal and interest. Principal payments are $700,000 per month for the
first 24 months, increasing to $1,100,000 per month for the final 12 months. The
facility also provides for up to $2 million on a revolving line of credit, based
on eligible accounts receivable.

In connection with the refinancing, we issued convertible
debentures with a principal value of $10,000,000 to two investment funds. The
debentures have a term of five years, maturing September 20, 2018, with interest
at 8.0%, payable quarterly.

Plan of Operations

Our plan of operations in the next twelve months is to satisfy
short-term debt obligations using cash generated from operations, while
strategically looking for new acquisitions. We 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. We currently do not have any arrangements in place for
additional financing should we determine to acquire any additional
pharmaceutical products. There is no assurance that such financing will be
available to us should we determine to acquire any additional pharmaceutical
products.

Cash Provided by Continuing Operations

Cash provided by continuing operations of the Company were
$11,464,696 for the year ended September 30, 2013, compared to $640,506 for the
year ended September 30, 2012. The increase in cash from operations in fiscal
2013 was primarily a result of a full year of operations of the Company's
largest product, Enablex, whereas in fiscal 2013, the product was only in the
Company portfolio for less than three months. The Company also incurred
considerably more one-time costs in the prior year period as it completed its
amalgamation late in the first quarter of fiscal 2012.

Cash Provided by (Used in) Financing Activities

Cash used in financing activities for the year ended September
30, 2013 was $10,472,891 and related mainly to repayments and refinancing of the
Company's long-term debt, offset by cash raised under a private placement. We
repaid long-term debt in the amount of $54,219,629 in fiscal 2013 that was
attributable to the PDL BioPharma credit facility using proceeds from our new
debt facility and the issuance of convertible debentures. In fiscal 2012, cash
provided by financing activities was $62,293,179, most of which related to the
original financing of the Enablex transaction in July 2012, but also included
two equity financings - a private placement completed concurrent with the
amalgamation as well as a prospectus offering in May 2012.

34

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Cash Provided by (Used in) Investing Activities

Cash provided by investing activities were $2,117,506 for the
year ended September 30, 2013 compared to cash outflows of $63,733,965 for the
comparative year. Cash provided during fiscal 2013 related primarily to proceeds
received on the sale of Factive. The majority of cash used during fiscal 2013
related to the acquisition of Enablex.

Transactions with Related Parties

At September 30, 2013, 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 | 
|------------------------ | - | ----------------------------- | 
|                         |   | 2013                          | 
|                         |   |                               | 
|Salaries                 | $ | 1,627,662                     | 
|Share based compensation |   | 993,049                       | 
|                         | $ | 2,620,711                     | 

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 Enablex, 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 Enablex on a net basis in
the statement of operations, net of cost of goods and marketing and selling
expenses. 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 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.

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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.

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 doubtful accounts;
    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:

(i)          
Allowance for doubtful accounts

The Company reviews its sales and accounts receivable aging and
determines the balance for the allowance for doubtful accounts. The Company has
minimal overdue accounts and has determined that no allowance for doubtful
accounts is required as at September 30, 2013.

(ii)        
 Inventory obsolescence

The Company reviews the net realizable value of its inventory.
The Company has recorded a write-down of $104,477 (2012: $21,000) relating to
inventory that the management has determined is no longer saleable as at
September 30, 2013. The Company has determined that there are adequate sales to
support the carrying amount for all other inventory as at September 30, 2013. In
addition, management reviews specific product and industry experience with
returns in assessing if a write-down is required.

36

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(iii)          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.

(iv)          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.

(v)          
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.

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.

During the second and third quarters of 2013, the Companys
market capitalization was less than the total net assets of the Company and as
such, the Company was required to assess its 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, Enablex and Factive). The carrying values of the CGUs at each
impairment evaluation date, as well as at September, 30, 2013 are included
below:

Enablex
    Vancocin
    FactiveMarch 31, 2013
    $60,930
    $11,148
    $3,294June 30, 2013
    61,479
    10,694
    3,082September 30, 2013
    60,093
    10,235
    N/A


37

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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
    20%Enablex
    20%Factive
    35%


As a result of the review, the Company concluded that an
impairment loss was not required in respect of the intangible assets.

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.

(vi)          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, based on estimates of
fair value and expected market data of future cash inflows on products sales of
acquired patents/product rights over the estimated period of benefit.

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

During the year ended September 30, 2013, the useful lives were
considered reasonable.

(vii)         Valuation
of deferred tax assets and liabilities

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.

(viii)        Valuation of
warrants and share-based compensation expense

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.

(ix)         
Valuation of the equity component of convertible debt

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 market value of the instrument as a whole.

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(x)          
Valuation of non-cash consideration received on the sale of Factive

Proceeds from the sale of Factive 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.

**C.**         
**Research and Development, Patents and Licenses, etc.**

Not applicable.

**D.**          **Trend Information**

We have disclosed above in Item 5.A trends that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to
investors. See also information on risks faced by the Company disclosed in Item
3.D  Risk Factors.

**E.**         
**Off-Balance Sheet Arrangements**

None.

**F.**         
**Commitments and Contractual Commitments**

Set out below is a summary of the amounts due and committed
under contractual cash obligations at September 30, 2013:

Total
    
    
    Due in
      year 1
    
    
    Due in
      year 2
    
    
    Due in
      year 3
    
    
    Due in
      year 4
    
    
    Due in
      year 5Long
      term debt
    $
    40,000,000
    
    $
    8,400,000
    
    $
    8,400,000
    
    $
    13,200,000
    
    $
    -
    
    $
    10,000,000Operating leases
    
    509,561
    
    
    143,750
    
    
    128,265
    
    
    105,576
    
    
    105,576
    
    $
    26,394Total contractual cash obligations
    $
    40,509,561
    
    $
    8,543,750
    
    $
    8,528,265
    
    $
    13,305,576
    
    $
    105,576
    
    $
    10,026,394


**G.**         
**Safe Harbor**

See Special Note Regarding Forward-Looking Statements in the
introduction to this Annual Report.

39

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Item 6: Directors and Senior Management and
Employees

**A.**         
**Directors and Senior Management**

The current directors and officers of our Company are as
follows:

Name Province/State Country of Residence
      and Position(s) with Merus(1)
    Periods during
      which Individual has Served as a Director or
      OfficerElie Farah Ontario, Canada President, Chief
      Executive Officer and Director
    January 12, 2012
       PresentAhmad Doroudian Vancouver, BC Canada Executive Vice
      Chairman and Director
    December 19, 2011
       PresentAndrew Patient Ontario, Canada Chief Financial
      Officer
    October 1, 2008 
      PresentUlrich Schoeberl Luxembourg Managing Director,
      European Operations
    July 26, 2012 
      PresentDavid Guebert(2)(3) Alberta, Canada Director
    February 10, 2011
       PresentRobert Pollock(3) Ontario, Canada Director
    February 10, 2011
       PresentMichael Cloutier(2)(3) Ontario, Canada Director
    July 8,2013 
      PresentTimothy Sorensen(2)(3) Ontario, Canada Director
    February 10, 2011
       Present


| | (1) | Information has been furnished by the respective
      individuals.
| | --- | -------------------------------------------------------------------
| | (2) | Denotes a member of the Audit Committee of our
      company.      
| | (3) | Denotes an independent director.                                   

Elie Farah  President, Chief Executive Officer and
Director

Mr. Farah was appointed as the Companys President in January
2012 and Chief Executive Officer in July 2012. Mr. Farah previously headed the
global mergers and acquisitions initiative with Boehringer Ingelheim GmbH, an
international pharmaceutical company based in Germany from October 1999 to March
2003. Mr. Farah executed and oversaw strategic transactions across Europe and
the Americas while working at the North American holding company in Canada and
subsequently at the global headquarters in Germany. Mr. Farah was the President
and CFO of Transition Therapeutics Inc. from July 2008 to December 2011 and the
Vice-President of Corporate Development of Transition Therapeutics from May 2005
to June 2008. During his time at Transition Therapeutics, Mr. Farah played an
instrumental role in the company listing on NASDAQ, completing equity
financings, managing and executing multiple company acquisitions as well as
licensing agreements with large pharmaceutical companies. He holds an MBA and an MAcc in addition to the following
designations; Chartered Financial Analyst (CFA) and Chartered Accountant (CA).

40

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Ahmad Doroudian  Executive Vice Chairman and Director

Dr. Doroudian was appointed as the President, Chief Executive
Officer and director of Old Merus on March 15, 2010. He was appointed as our CEO
on December 19, 2011 and served as CEO through July 2012. Since May 2009, Dr.
Doroudian has been the President, Chief Executive Officer and a director of
Merus former subsidiary, Merus Labs Inc. He is also a director of Neurokine
Pharmaceuticals Inc., a private pharmaceutical company that develops new uses
for existing drugs, since April of 2007. He was the Chief Executive Officer of
Neurokine Pharmaceuticals Inc. from May 2009 to September 2011. He was the
President of Rayan Pharma Inc., an exporter of pharmaceuticals to Eastern
Europe, from March 2003 to April 2007. From November 2003 to March 2004, Dr.
Doroudian was the Vice Chairman of the board of PanGeo Pharma Inc., a TSX listed
company (now PendoPharm, a division of Pharmascience Inc.) and he served as
Chief Executive Officer, Chairman and Director of PanGeo from April 1996 to
November 2003. Dr. Doroudian has been involved with early stage financing and
management of private and publicly listed companies since 1996. Dr. Doroudian
holds a Bachelors Degree in Biochemistry and a Masters Degree and Ph.D. in
Biopharmaceutics from the University of British Columbia. Dr. Doroudian is 49
years old and is a Canadian citizen resident in Vancouver, British Columbia.

Andrew Patient  Chief Financial Officer

Mr. Patient began serving as Envoys Chief Financial Officer in
2008. Mr. Patient joined Envoy in 2001, initially serving as controller at its
former wholly-owned subsidiary, Watt International Inc. In February 2006, Mr.
Patient moved to the corporate head office in the role of Director of Finance,
responsible for all aspects of Envoys financial reporting. Prior to joining
Envoy, Mr. Patient spent six years at BDO Dunwoody LLP in Canada and five years
in financial roles at early stage technology companies in San Diego, California.
Mr. Patient was appointed President and Chief Executive Officer of Envoy on
December 22, 2009. Mr. Patient ceased to serve as President and Chief Executive
Officer of Envoy on February 10, 2011 and was reappointed as Envoys Chief
Financial Officer. Mr. Patient holds a Bachelor of Accounting degree from Brock
University and obtained his CA designation in 1995.

Dr. Ulrich Schoeberl  Managing Director, European
Operations

Since 1997, Dr. Schoeberl has worked for Boehringer Ingelheim,
a multinational European based pharmaceutical company, in various management and
corporate development positions both in Europe and in North America. His most
recent position was that of Managing Director of Boehringer Ingelheim
Switzerland and he previously headed Strategic Planning and M&A at the world
headquarters of Boehringer Ingelheim in Germany. Prior to joining Boehringer
Ingelheim, he was a management consultant at McKinsey & Co. within their
health care practice. Dr. Schoeberl obtained his Ph.D. in Chemistry at the
University of Regensburg and worked as a post-doctoral fellow at the University
of Colorado in Boulder.

Robert S. Pollock  Director

Mr. Pollock is Director, President of Primary Corp. (TSX: PYC),
a natural resources lending company, and Director and Chief Executive Officer of
Primary Capital Inc., an exempt market dealer. He served as Senior Vice
President of Quest Capital Corp. from September 2003 to October 2006. He was
formerly Vice President  Investment Banking at Dundee Securities Corporation
and has 15 years of experience in the Canadian capital markets with specific
experience in merchant banking, institutional sales and investment banking. Mr.
Pollock holds an MBA from St. Marys University (1993) and a BA from Queens
University (1991).

Mr. Pollocks principal occupations during the five preceding
years are as follows: from February 10, 2011 to January 12, 2012, he was the
Chief Executive Officer and a Director of Envoy and our company. Since August
2008, he has been the Director and Chief Executive Officer of Primary Corp. and
since July 2008 he has been Director and Chief Executive Officer of Primary
Capital Inc. From September 2003 to October 2006 he served as Senior Vice
President of Quest Capital Corp.

41

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David D. Guebert  Director

Mr. Guebert is a chartered accountant and certified public
accountant with over 30 years of experience in finance and accounting, 20 of
which were served as chief financial officer of public and private companies in
the resource and technology sectors. He is currently the Chief Financial Officer
of Marret Resource Corp., a company focused on natural resource lending. He is
also is the Chief Financial Officer of Times Three Wireless Inc., a wireless
location technology company. Mr. Guebert holds a B.Comm. from the University of
Saskatchewan (1979).

Mr. Gueberts principal occupations during the five preceding
years are as follows: Since 2007 he has been Chief Financial Officer of Marret
Resource Corp. and since 2004 has been Chief Financial Officer of Cell-Loc
Location Technologies Inc. From 2010 to 2013 he was a director of Advitech Inc.,
a biotech company.

Timothy G. Sorensen  Director

Mr. Sorensen is a Director and the President of Primary Capital
Inc., an exempt market dealer. He recently joined Primary Capital from Macquarie
Capital Markets Canada where he served as Divisional Director Head of
Institutional Sales. Mr. Sorensen has over 14 years of capital markets
experience in institutional sales and equity analysis. He has a CFA designation
and holds an MBA (1996) and B.Comm (1995) both from the University of
Windsor.

Mr. Sorensens principal occupation during the five preceding
years is as follows: he has been President of Primary Capital Inc. since
November 2010. From January 2008 until September 2010, he was the Divisional
Director Head of Institutional Sales of Macquarie Capital Markets Canada and
prior to that, he was an institutional sales person from 2004 to 2008 with Orion
Financial Inc., which became Macquarie Group in 2007.

Michael Cloutier  Director

Mr. Michael Cloutier was appointed Director of Merus Labs
International Inc. on July 8, 2013. He is currently the President and General
Manager of InterMune Inc., a biotechnology company focused on the research,
development and commercialization of innovative therapies in pulmonology and
orphan fibrotic diseases. Prior to his appointment at Merus, Mr. Cloutier was
the CEO of the Canadian Diabetes Association from 2010 to 2013 and was the CEO
of Critical Outcomes Technology Inc., an early stage biotech company based in
London, Ontario with proprietary technology uniquely positioned to accelerate
and advance pre-clinical research and drug development activities, from 2008 to
2010. From 2003 to 2008, Mr. Cloutier held several roles with AstraZeneca
including the CEO of the Canadian operations and VP, HR, Global Marketing at the
corporate headquarters in London, England. Other leadership roles include
President of Pharmacia Canada from 2000 to 2003 and President of Searle Canada
from 1998 to 2000.

Selection of Directors and Officers

There are no arrangements or understandings between any
director or executive officer of our company with major shareholders, customers
or others, pursuant to which he or she was selected as such.

Family Relationship

There are no family relationships between any of the persons
named above.

**B.**          **Compensation**

Named Executive Officers

The following table sets forth in, Canadian dollars all
compensation for the fiscal year ended September 30, 2013 paid to the principal
executive officer of Merus, the principal financial officer of our company and
the three other most highly compensated officers who served as executive
officers of the Company (the Named Executive Officers):

42

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Name and
      Principal Position
    
    Long-Term Compensation
    All Other
    Compensation ($)Annual Compensation
    Awards
    PayoutsSalary
      ($)
    Bonus
      ($)
    Other
      Annual ($)
    Securities
      Under Option/SARs Granted (#)
    Restricted Shares
      or Restricted Share Units ($)
    LTIP
      Payouts ($)


Elie Farah, 
      President and Chief Executive Officer
    $270,000
    ---
    ---
    ---
    ---
    ---
    ---Andrew Patient, Chief Financial Officer
    $210,000
    ---
    ---
    50,000
    ---
    ---
    ---Ahmad Doroudian, Executive Vice Chairman
    $270,000
    ---
    ---
    ---
    ---
    ---
    ---Ali Moghaddam Vice President Business Development
    $158,400
    ---
    $7,2001
    ---
    ---
    ---
    ---Ulrich Schoeberl Managing Director, European Operations
    $259,436
    ---
    ---
    ---
    ---
    ---
    ---


|1. | Amounts received in respect of car
  allowance.
|-- | -----------------------------------------------

43

---

The following table sets forth options granted under the Stock
Option Plan to the Named Executive Officers of the Company in the most recently
completed fiscal year and the value of unexercised options held by them as at
the most recent fiscal year:

Stock Option Awards During 2013 Fiscal Year

Name
    Number of securities
      underlying unexercised options
      (#)
    Option exercise
      price ($)
    Option expiration date
    Number of options at
      FY-End Vested/Unvested (#)Elie Farah
    nil
    n/a
    n/a
    200,000/200,000Ahmad Doroudian
    nil
    n/a
    n/a
    640,000/nilAndrew Patient
    50,000
    $1.19
    January 7, 2018
    100,000/150,000Ali Moghaddam
    nil
    n/a
    n/a
    100,000/100,000Ulrich Schoeberl
    nil
    n/a
    n/a
    50,000/50,000


The following table sets forth options exercised under the
Stock Option Plan to the Named Executive Officers of the Company in the most
recently completed fiscal year and the value of unexercised options held by them
as at the most recent fiscal year:

Stock Options Exercised During 2013 Fiscal Year

Name
    Number of Shares
      Acquired on Exercise
    Aggregate Value
      Realized ($)
    Unexercised Options at
      FY-End Exercisable/ Unexercisable
      (#)
    Value of Unexercised In the
      Money Options at FY-End
      Exercisable/Unexercisable ($)Elie Farah
    Nil
    Nil
    200,000/200,000
    nil/nilAhmad Doroudian
    Nil
    Nil
    640,000/nil
    nil/nilAndrew Patient
    Nil
    Nil
    100,000/150,000
    nil/nilAli Moghaddam
    Nil
    Nil
    100,000/100,000
    nil/nilUlrich Schoeberl
    Nil
    Nil
    50,000/50,000
    nil/nil


The Company does not provide any pension, retirement plan or
other remuneration to its directors or officers that constitutes an expense to
the Company.

Compensation of Directors

All directors of the Company or any of its affiliates are
compensated for their services as directors and members of a committee through a
combination of monthly fees and share-based awards. In addition, directors are
entitled to participate in the Companys Stock Option Plan.

44

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Directors Compensation During 2013 Fiscal Year

Name
    Fees earned
      ($)
    Share- based
      awards ($)
    Option- based
      awards (#)
    Option exercise
      price ($)
    Option expiration
      Date
    All other
      compensation ($)Robert Pollock
    $30,250
    $nil
    nil
    n/a
    n/a
    $nilTim Sorensen
    $34,250
    $nil
    nil
    n/a
    n/a
    $nilDavid Guebert
    $36,750
    $nil
    nil
    n/a
    n/a
    $nilMichael Cloutier
    $6,500
    $nil
    150,0001
    $0.91
    July 7, 2018
    $nilJoseph Rus
    $30,250
    $nil
    nil
    n/a
    n/a
    $nil


Notes:

|1. | Options vested immediately.
|-- | ---------------------------

Directors and Officers Liability Insurance:

The Company maintains liability insurance for the benefit of
the directors and officers of the Company and its subsidiaries against liability
incurred by them in their respective capacities. The current annual policy limit
is $10,000,000. Under the policy, individual directors and officers are
reimbursed for losses incurred in their capacities as such, subject to a
deductible of $50,000 for securities or employment practices claims and no
deductible for all other claims. The deductible is the responsibility of the
Company. The Company paid the annual premium of $102,600.

**C.**          **Board Practices**

Our directors are re-elected and our officers are re-appointed
at the annual general meeting of our shareholders. Each of our current directors
and officers will continue to hold his respective office until his successor is
elected or appointed, unless his office is earlier vacated under any of the
relevant provisions of our Articles or of the British Columbia Business
Corporations Act.

All of our directors, except Mr. Farah, Mr. Pollock and Mr.
Cloutier, became directors of our company on December 19, 2011 in connection
with the amalgamation of Old Merus and Envoy. Mr. Pollock became a director
prior to the completion of the amalgamation in February 2011. Mr. Farah became a
director on January 12, 2012 and Mr. Cloutier became a director on July 8, 2013.

There are no directors service contracts with the company or
any of its subsidiaries providing for benefits upon termination of
employment.

The members of the Companys Audit Committee are:

Member
    Independent(1)
    Financially Literate(2)David Guebert(3)
    Yes
    YesTimothy Sorensen
    Yes
    YesMichael Cloutier
    Yes
    Yes


45

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|1 | A member of an audit committee is independent if the
      member has no direct or indirect material relationship with the Company,
      which could, in the view of the Board, reasonably interfere with the
      exercise of a members independent judgment.                                                                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2 | An individual is financially literate if he has the
      ability to read and understand a set of financial statements that present
      a breadth of complexity of accounting issues that are generally comparable
      to the breadth and complexity of the issues that can reasonably be
      expected to be raised by the Companys financial statements.
|3 | Mr. Guebert is the chair of the Audit
  Committee.                                                                                                                                                                                                                                                                                                              

The audit committee reviews and approves the scope of the audit
procedures employed by our independent auditors, reviews the results of the
auditors examination, the scope of audits. The audit committee also recommends
the selection of independent auditors.

Board Committees:

The directors have established the Audit Committee, the
Compensation Committee and the Nominating and Corporate Governance Committee to
focus resources and expertise in certain areas of the Boards mandate.

(a) Audit Committee

The Audit Committee is comprised of three directors, David
Guebert (Chair), Tim Sorensen and Michael Cloutier. All three members of the
Audit Committee are independent directors of the Company. Among other things,
the Audit Committee is responsible for reviewing the Companys annual and
quarterly consolidated financial statements and reporting to the Board in
connection therewith. On September 22, 2004 (amended on December 4, 2009), the
Audit Committee adopted a new Audit Committee Charter, which specifies the
auditors accountability to the Board and the authority and responsibilities of
the Audit Committee in compliance with National Instrument 52-110  Audit
Committees. A copy of the Audit Committee Charter is incorporated by reference
herein as Exhibit 15.1 to this Form 20-F.

(b) Compensation Committee

The purpose of the Compensation Committee is to assist the
Board in its oversight responsibilities relating to the compensation,
nomination, evaluation and succession of the executive officers of the Company;
the administration of the Companys Stock Option/Stock Appreciation Right Plan;
and the review of executive compensation disclosure. The Compensation Committee
is comprised of three directors, Tim Sorensen (Chair), Rob Pollock and David
Guebert, all of whom are independent directors. A copy of the Compensation
Committee Charter is incorporated by reference herein as Exhibit 15.2 to this
Form 20-F.

(c) Nominating and Corporate Governance Committee

The Board has delegated to the Nominating and Corporate
Governance Committee of the Board responsibility for co-coordinating and
managing the process of recruiting, interviewing and recommending candidates to
the Board; developing and recommending standards of performance of the Board as
a whole, its committees and individual directors; assessing the effectiveness of
the Board as a whole and its committees and the contribution of individual
directors; making recommendations to the Board regarding the composition of
committees of the Board; providing new directors with an orientation program
through a review of past Board materials and other public and private documents
concerning the Company; reviewing and making recommendations to the Board with
respect to developments in the area of corporate governance and the structure
and practices of the Board; and reviewing and assessing compliance by the
Company with applicable corporate governance rules and guidelines established by
securities regulators and stock exchanges. The Nominating and Corporate
Governance Committee is comprised of three independent directors, Tim Sorensen
(Chair), David Guebert and Robert Pollock. A copy of the Nominating and
Corporate Governance Committee Charter is incorporated by reference herein as
Exhibit 15.3 to this Form 20-F.

46

---

Position Descriptions:

The Board has a broad responsibility for supervising the
management of the business and affairs of the Company. The Chairman of the Board
is responsible for establishing the Agenda for each Board meeting and ensuring
agenda items are dealt with. The Board has not found it necessary to develop
specific position descriptions for the Chair of Board committees. The Board is
currently of the view that the general mandates of committees on which such
directors may sit are sufficient to delineate the role and responsibilities of
the Chair of each committee.

The Companys articles state that the Chief Executive Officer
of the Company shall exercise general supervision over the affairs of the
Company. The Board has not found it necessary to develop a specific position
description for the Chief Executive Officer beyond this description.

Orientation and Continuing Education:

New directors are given the opportunity to individually meet
with members of senior management to improve their understanding of the
Companys business. All directors have regular access to senior management to
discuss Board presentations and other matters of interest.

The Company also gives directors a reference manual, which
contains information about the Companys history and current status, corporate
governance materials, its investments and its shareholders. This reference
manual is updated regularly. It includes the Companys Code of Business Conduct,
which also applies to the directors, as well as governance and responsibilities
of the Board and its committees, and a description of the duties and obligations
of directors. As part of its mandate, the Nominating and Corporate Governance
Committee is also responsible for providing orientation and continuing education
for all board members, including reimbursing costs of attending certain outside
director education programs. During their regular scheduled Board meetings,
directors are given presentations on various aspects of the Companys
business.

Nomination of Directors:

The members of the Companys Nominating and Corporate
Governance Committee are all independent directors. The Nominating and Corporate
Governance Committee has the responsibility for assessing potential Board
nominees, screening their qualifications and making recommendations for approval
by the Board of nominees for election or appointment to the Board. To help
achieve this task, the Nominating and Corporate Governance Committee develops
qualifications and criteria for the selection of directors.

The Board aims to have a sufficient range of skills, expertise
and experience to ensure that it can carry out its responsibilities effectively.
Directors are chosen for their ability to contribute to the broad range of
issues that the Board must deal with. The Board reviews each directors
contribution through the Nominating and Corporate Governance Committee and
determines whether the Boards size allows it to function efficiently and
effectively. The Nominating and Corporate Governance Committee is mandated to
review the size of the Board from time to time and recommend changes in size
when appropriate.

Each year, the Nominating and Corporate Governance Committee
reviews how directors are compensated for serving on the Board and its
committees. It compares their compensation to that of similar companies and
recommends any changes to the Board. In 2012, the Board adopted a new
compensation structure to better align the goals of the Company and its senior
management. Directors are paid an annual fee of $20,000, an additional $5,000
for serving on a sub-committee and meeting fees of $1,000 or $750. Directors may
also participate in the Companys Stock Option Plan.

Other Board Committees:

The Board has not established any committees other than the
Audit Committee, the Compensation Committee and the Nominating and Corporate
Governance Committee.

47

---

Assessments:

As part of its charter, the Nominating and Corporate Governance
Committee is required to survey every year all directors on the effectiveness
and performance of the Board and the Boards committees, as well as individual
directors. This is done primarily by distributing questionnaires to each
director and will often include individual interviews with the Chair of the
Nominating and Corporate Governance Committee.

The Companys Board Mandate states that the Nominating and
Corporate Governance Committee will report to the Board annually on the
evaluation of the performance of the Board, each of its committees and that of
individual directors, based on the results of the directors annual
questionnaire.

Shareholder Communication:

The objective of the Companys shareholder communication policy
is to ensure open and timely exchange of information relating to the Companys
business, affairs and performance, subject to the requirements of applicable
securities legislation and other statutory and contractual obligations limiting
the disclosure of such information. Information material to the Companys
business is released through news wire services, the general media, telephone
conferences and shareholder mailings, thereby ensuring timely dissemination.
Additionally, individual queries, comments or suggestions can be made at any
time directly to the Companys secretarial department located at its head
office.

**D.**         
**Employees**

As at November 30, 2013, Merus had 3 employees based in
Toronto, Canada, 1 employee in Vancouver, Canada, 1 employee in Montreal, Canada
and 1 employee in Luxembourg.

**E.**         
**Share Ownership**

Shares

The following table sets forth shares owned by the Named
Executive Officers and Directors as of November 30, 2013:

Identity of Person
    Number of Common Shares
      Owned(1)
    Percent of
      Outstanding Class(2)Elie Farah
    888,235
    2.3%Ahmad Doroudian
    1,853,456
    4.8%Andrew Patient
    100,000
    0.3%Ulrich Schoeberl
    nil
    nilAli Moghaddam
    150,000
    0.4%Robert Pollock
    3,467,098
    9.0%Timothy Sorensen
    888,500
    2.3%David Guebert
    209,167
    0.5%Michael Cloutier
    nil
    nil


|(1) | Does not include common shares of Merus issuable pursuant
      to any options or warrants held by the security holder.                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(2) | Based on 38,391,512 common shares issued and outstanding
      as of November 30, 2013. Beneficial ownership is determined in accordance
      with the rules of the SEC and generally includes voting or investment
      power with respect to securities. Except as otherwise indicated, we
      believe that the beneficial owners of the common stock listed above, based
      on information furnished by such owners, have sole investment and voting power
with respect to such shares, subject to community property laws where
applicable.

48

---

Options

Stock Option Plan

The Company has established a Stock Option Plan pursuant to
which options to purchase common shares may be granted to directors, officers,
employees or certain consultants to the Company or any of its subsidiaries, as
determined by the Board. The Plan authorizes the Board or the Compensation
Committee, as applicable, to grant options to purchase shares on the following
terms and conditions:

- the aggregate number of shares which may be issued pursuant to options
  granted under the Plan will not exceed that number which is equal to ten
  percent of the issued and outstanding shares from time to time;
- any increase in the issued and outstanding shares will result in an
  increase in the available number of shares issuable under the Plan, and any
  exercises of options will make new grants available under the Plan effectively
  resulting in a re-loading of the number of options available to grant under
  the Plan;
- no single participant in the Plan and his, her or its associates may be
  granted options which could result in the issuance of shares exceeding five
  percent of the issued and outstanding Common Shares, within a one year period,
  to such participant and his, her or its associates, in the aggregate;
- the number of shares issuable to any single participant in the Plan
  pursuant to options, shall not exceed five percent of the issued and
  outstanding shares;
- the number of shares issuable to Insiders, at any time, under all share
  compensation arrangements, shall not exceed ten percent of the issued and
  outstanding shares;
- the exercise price of an option shall not be less than the closing price on
  the day prior to the date of grant of the option;
- options granted under the Plan will be granted for a term not to exceed ten
  years from the date of grant;
- in the event of the termination of a participants employment with for
  cause or as a result of the participants voluntary resignation prior to
  normal retirement, such participants options will terminate three months from
  the date of such termination, and in the event of the retirement, death,
  physical or mental disability or termination (other than for cause) by the
  Company, the participants options will terminate 12 months from the date
  employment ceased, provided in each case that no options will be extended past
  their term except as provided below;
- the Board or Compensation Committee is entitled to extend the time during
  which a participant may exercise their options at its discretion provided that
  such extension does not extend past the maximum ten year term;
- during a participants lifetime, an option may not be assigned or
  transferred except to a participants trust; and

Outstanding Stock Options

The maximum number of common shares currently reserved for
issuance upon exercise of options under the Stock Option Plan is 3,839,151
common shares. As at September 30, 2013 there were 2,465,000 outstanding options
to purchase common shares under the Stock Option Plan. The aggregate number of
common shares reserved for issuance to any one individual under the Stock Option
Plan may not exceed 5% of the issued and outstanding common shares.

49

---

Stock Options Held by Directors and Senior Management

Details of the stock options held by our officers and directors
are set forth below as of November 30, 2013.

Name and Position
    Grant Date
    Expiry Date
    Exercise Price
    TotalElie Farah, President and Chief Executive Officer
    January 6, 2012
    January 5, 2017
    $2.05
    400,000 (1)Ahmad Doroudian, Vice-Executive Chairman
    January 19, 2012
    January 18, 2017
    $2.02
    640,000 (2)Andrew Patient, Chief Financial Officer
    January 19, 2012 January 8, 2013
    January 18, 2017 January 7, 2018
    $2.02 $1.19
    200,000 (1)50,000(3)Ulrich Schoeberl
    September 11, 2012
    September 10, 2017
    $1.52
    100,000(1)David Guebert, Director
    July 26, 2012
    July 25, 2017
    $2.00
    150,000 (2)Robert Pollock, Director
    July 26, 2012
    July 25, 2017
    $2.00
    150,000 (2)Timothy Sorensen, Director
    July 26, 2012
    July 25, 2017
    $2.00
    150,000 (2)Michael Cloutier, Director
    July 8, 2013
    July 7, 2018
    $0.91
    150,000 (2)Total:
    
  1,990,000


| | (1) | Options vest as to 25% upon grant and 25% upon each one
      year anniversary of the grant of the stock options until fully
    vested
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                        
| | (2) | Options vest immediately                                                                                                               
| |     |                                                                                                                                        
| | (3) | Options vest on one year anniversary of the
  grant                                                                                    

Each option may be exercised to purchase one of our common
shares at the exercise price.

Stock Purchase Warrants

Details of share purchase warrants held by our officers and
directors are set forth below as of November 30, 2013.

Name and Position
    Issue Date
    Expiry Date
    Exercise Price
    TotalRobert Pollock, Director
    December 19, 2011
    December 19, 2014
    $3.00
    375,000Timothy Sorensen, Director
    December 19, 2011
    December 19, 2014
    $3.00
    25,750Total:
    
    400,750


Each share purchase warrant may be exercised to purchase one of
our common shares at the exercise price.

50

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Item 7: Major Shareholders And Related Party
Transactions

**A.**          **Major Shareholders**

Ownership of Merus securities are recorded on the books of its
transfer agent in registered form, however the majority of such shares are
registered in the name of intermediaries such as brokerage firms and clearing
houses on behalf of their respective clients. Accordingly, Merus does not have
actual knowledge of the beneficial owners thereof, except for the beneficial
ownership by officers and directors of Merus. Merus is not directly or
indirectly owned or controlled by another corporation or entity or by any
foreign government.

The following table sets forth persons known to us to be the
beneficial owner of more than five percent (5%) of each class of our common
shares issued and outstanding as of November 30, 2013:

Name
    Number of Common Shares(1)
    Percentage of Common Shares(3)Robert Pollock
    3,467,098
      (2)
    9.0%CIBC Global Asset Management Inc.
    2,718,300
    7.1%Pasquale DiCapo
    2,211,875
    5.8%Acuity Investment Management Inc.
    2,031,900
    5.3%


|(1) | Does not include common shares of Merus issuable pursuant
      to any options or warrants held by the security holder.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(2) | Includes (i) 3,002,223 shares held directly, and (ii)
      464,875 shares held by the spouse of Mr. Pollock. In addition, Mr. Pollock
      holds (i) options to purchase 150,000 additional common shares of Merus,
      and (ii) warrants to purchase an additional 375,000 common shares of
      Merus.                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(2) | Based on 38,391,512 common shares issued and outstanding
      as of November 30, 2013. Beneficial ownership is determined in accordance
      with the rules of the SEC and generally includes voting or investment
      power with respect to securities. Except as otherwise indicated, we
      believe that the beneficial owners of the common stock listed above, based
      on information furnished by such owners, have sole investment and voting
      power with respect to such shares, subject to community property laws
      where applicable.

On February 10, 2011, Mr. Pollock purchased 1,200,000 shares
from Mr. Geoffrey Genovese in a private transaction for aggregate consideration
of $1,860,000. On December 29, 2011, Mr. Pollock announced that, on December 19,
2011, he had acquired aggregate direct ownership of 2,187,500 common shares of
Merus and 606,250 common share purchase warrants of Merus, with each warrant
entitling Mr. Pollock to acquire one additional common share of Merus. On
December 19, 2011, a joint actor of Mr. Pollock acquired ownership and control
of 39,540 broker warrants of Merus, with each broker warrant entitling the joint
actor to acquire one common share of Merus and one-half of one common share
purchase warrant, with each whole common share purchase warrant entitling the
joint actor to acquire one additional common share of Merus.

On December 28, 2011, Mr. DiCapo announced that, on December
21, 2011, he had acquired direct ownership of 1,900,000 common shares of Merus
and 406,250 common share purchase warrants, with each warrant entitling Mr.
DiCapo to acquire one additional common share of Merus. In addition, on December
21, 2011, a joint actor of Mr. DiCapo acquired ownership and control of 523,750
common shares of Merus, 130,937 common share purchase warrants of Merus, with
each warrant entitling the joint actor to acquire one additional common share of
Merus and 58,160 broker warrants of Merus. Each broker warrant entitled the
joint actor to acquire one additional common share of Merus and one-half of one
common share purchase warrant, with each whole common share purchase warrant
entitling the holder thereof to acquire an additional common share of Merus.

On June 29, 2012, CIBC Global Asset Management Inc. filed an
Alternative Monthly Report announcing that as a result of transactions in the
market in the ordinary course of business by one or more of its mutual fund,
pension fund or other client accounts during the month of June 2012 and/or as a
result of reorganization of capital structure of shares of Merus, the aggregate
number of shares of Merus held by all of its client accounts as at June 29, 2012
was 3,506,500 common shares, representing, based on CIBC Global Asset Management
Inc.'s understanding, approximately 11.68% of all outstanding shares of that
class as of that time. On April 8, 2013, CITC Global Asset Management Inc. reported that the aggregate number of shares of
Merus held by all of its client accounts as at March 31, 2013 was 2,718,300
common shares, representing based on CIBC Global Asset Management Inc.'s
understanding, approximately 8.85% of the outstanding common shares of Merus as
of that time. CIBC Global Asset Management Inc. specifically disclaimed any
beneficial ownership of the reported securities but, as investment manager, it
maintains exclusive power to exercise investment control or direction over the
shares of Merus held for its client accounts as the beneficial owners.

51

---

As of December 19, 2013, Olympia Trust Company, our registrar
and transfer agent, reported that the Common Shares are held as follows:

Number of RegisteredLocation
    Number of Shares
    Percentage of Shares
    Shareholders of RecordCanada
    32,877,989
    85%
    21United States
    5,413,523
    14%
    4Other
    100,000
    1%
    1Total
    38,391,512
    100%
    26


To the best of our knowledge, and with the exception of the
amalgamation transaction described above, no other significant change in the
percentage ownership of any major shareholder of the Company has taken place
during the past three years.

See also Item 6.E Share Ownership for information regarding
outstanding stock options to purchase common shares.

**B.**         
**Related Party Transactions**

No director or executive officer, and no relative or spouse of
the foregoing persons (or relative of such spouse) who has the same house as
such person or any executive officer or director of any parent or subsidiary of
Merus has, since the beginning of the last completed fiscal year of Merus, had
any material interest, direct or indirect, in any transactions, or in any
proposed transaction, which in either such case has materially affected or will
materially affect Merus. There are no outstanding loans currently owed to Merus
by any director or executive officer of Merus or any subsidiary of Merus.

Interests of Experts and Counsel

Not applicable.

Item 8: Financial Information

The audited financial statements of the Company for the years
ended September 30, 2013, 2012 and 2011 can be found under Item 17 Financial
Statements.

Legal Proceedings

There are no pending legal proceedings to which we are a party
or of which any of our property is the subject. There are no legal proceedings
to which any director, officer or affiliate of our company or any associate of
any such director, officer or affiliate of our company is a party or has a
material interest adverse to us.

52

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Dividend Distributions

Holders of our common shares are entitled to receive such
dividends as may be declared from time to time by our board, in its discretion,
out of funds legally available for that purpose. We intend to retain future
earnings, if any, for use in the operation and expansion of our business and do
not intend to pay any cash dividends in the foreseeable future.

Significant Changes

There are no significant changes that have occurred since the
date of our audited financial statements other than as disclosed in this annual
report.

Item 9: The Offer and Listing

**A.**         
**Price History**

Our common shares are listed on the TSX under the symbol MSL
and on NASDAQ under the symbol MSLI. Prior to December 19, 2011, our common
shares were listed for trading on the TSX under the symbol ECG and on NASDAQ
under the symbol ECGI. The common shares began trading on NASDAQ on June 6,
2000 and on the TSX on September 3, 1997.

The following table sets forth the reported high and low sale
prices in Canadian dollars for the common shares on the TSX for the fiscal,
quarterly and monthly periods indicated.

High
    LowFiscal 2009
    $2.34
    $1.10Fiscal 2010
    1.55
    0.88Fiscal 2011
    2.10
    0.76Fiscal 2012
    2.49
    1.36Fiscal 2013
    1.55
    0.48


High
    LowQuarterly 2013First Quarter
    1.55
    0.85Second Quarter
    1.35
    0.80Third Quarter
    0.90
    0.48Fourth Quarter
    1.45
    0.80


53

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Quarterly 2012First Quarter
    2.38
    1.57Second Quarter
    2.49
    1.48Third Quarter
    2.35
    1.51Fourth Quarter
    1.90
    1.36


For the month endedNovember 30, 2013
    $1.58
    $1.20October 31, 2013
    1.67
    1.31September 30, 2013
    1.45
    1.00August 31, 2013
    1.14
    0.87July 31, 2013
    1.29
    0.80June 30, 2013
    0.90
    0.60


The following table sets forth the reported high and low sale
prices in U.S. dollars of trading for the common shares as reported on NASDAQ
for the fiscal, quarterly and monthly periods indicated.

High
    LowFiscal 2009
    $2.09
    $0.82Fiscal 2010
    1.50
    0.75Fiscal 2011
    2.18
    0.10Fiscal 2012
    2.41
    1.26Fiscal 2013
    2.15
    0.46


High
    LowQuarterly 2013First Quarter
    $1.67
    $0.90Second Quarter
    1.37
    0.74Third Quarter
    1.05
    0.46Fourth Quarter
    2.15
    0.74Quarterly 2012First Quarter
    $2.31
    $1.55Second Quarter
    2.41
    1.41Third Quarter
    2.41
    1.52Fourth Quarter
    1.98
    1.26


54

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For the month endedNovember 30, 2013
    1.49
    1.17October 31, 2013
    1.60
    1.17September 30, 2013
    1.37
    0.97August 31, 2013
    1.15
    0.85July 31, 2013
    2.15
    0.74June 30, 2013
    1.05
    0.58


On November 29, 2013, the closing price of our common shares as
reported on the TSX was $1.34 and on NASDAQ was US$1.26.

B. Plan of Distribution

Not applicable.

C. Markets

Our common shares are exclusively traded on the TSX and NASDAQ
markets.

D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the Issue

Not applicable.

Item 10: Additional Information

**A.**         
**Share Capital**

Not applicable.

**B.**          **Memorandum and Articles of Association**

The Company was formed as Merus Labs International Inc.  on
December 19, 2011 through the amalgamation of Envoy and Old Merus. On October 1,
2012, the Company amalgamated with its wholly owned subsidiary, Merus Labs Inc.,
and continued under the name Merus Labs International Inc. The Articles of the
Company following this amalgamation were the original Articles of the Company
adopted upon its formation on December 19, 2011 and are attached to this annual
report on Form 20-F as Exhibit 1.1. The Companys current Notice of Articles is
dated October 1, 2012 and is attached to this annual report on Form 20-F as
Exhibit 1.2.

The following is a summary of certain material provisions of
(i) Meruss Notice of Articles and Articles, and (ii) certain provisions of the
British Columbia Business Corporations Act (the Business Corporations
Act) applicable to Merus:

**1.**          **Objects and Purposes**

Merus's Notice of Articles and Articles do not specify objects
or purposes. Merus is entitled under the Business Corporations Act to
carry on all lawful businesses which can be carried on by a natural person.

55

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**2.**         
**Directors**

Directors power to vote on a proposal, arrangement or
contract in which the director is interested.

According to the Business Corporations Act, a director
holds a disclosable interest in a contract or transaction if:

| | 1. | the contract or transaction is material to the
      company;                             
| | -- | ------------------------------------------------------------------------------------------
| |    |                                                                                           
| | 2. | the company has entered, or proposes to enter, into the
      contract or transaction, and
| |    |                                                                                           
| | 3. | either of the following applies to the
director:                                          
| |    |                                                                                           
| |    | a.                                                                                        
| |    |                                                                                           
| |    | b.                                                                                        

However, the Business Corporations Act also provides
that in the following circumstances, a director does not hold a disclosable
interest in a contract or transaction if:

| | 1. | the situation that would otherwise constitute a
      disclosable interest arose before the coming into force of the                                                                                                                             
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                  
| |    | Business Corporations Actor, if the company was
      recognized under the Business Corporations Act, before that
      recognition, and was disclosed and approved under, or was not required to
      be disclosed under, the legislation that:
| |    |                                                                                                                                                                                                                                                  
| |    | a.                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                  
| |    | b.                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                  
| | 2. | both the company and the other party to the contract or
      transaction are wholly owned subsidiaries of the same
  corporation;                                                                                                               
| |    |                                                                                                                                                                                                                                                  
| | 3. | the company is a wholly owned subsidiary of the other
      party to the contract or transaction;                                                                                                                                                
| |    |                                                                                                                                                                                                                                                  
| | 4. | the other party to the contract or transaction is a
      wholly owned subsidiary of the company; or                                                                                                                                             
| |    |                                                                                                                                                                                                                                                  
| | 5. | where the director or senior officer is the sole
      shareholder of the company or of a corporation of which the company is a
      wholly owned subsidiary.                                                                                   

The Business Corporations Act further provides that a
director of a company does not hold a disclosable interest in a contract or
transaction merely because:

| | 1. | the contract or transaction is an arrangement by way of
      security granted by the company for money loaned to, or obligations
      undertaken by, the director or senior officer, or a person in whom the
      director or senior officer has a material interest, for the benefit of the
      company or an affiliate of the company;
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                              
| | 2. | the contract or transaction relates to an indemnity or
      insurance;                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                              
| | 3. | the contract or transaction relates to the remuneration
      of the director or senior officer in that person's capacity as director,
      officer, employee or agent of the company or of an affiliate of the
      company;                                                                                                              

56

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| | 4. | the contract or transaction relates to a loan to the
      company, and the director or senior officer, or a person in whom the
      director or senior officer has a material interest, is or is to be a
      guarantor of some or all of the loan; or                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                     
| | 5. | the contract or transaction has been or will be made with
      or for the benefit of a corporation that is affiliated with the company
      and the director or senior officer is also a director or senior officer of
      that corporation or an affiliate of that
corporation.

Under Meruss Articles, a director or senior officer who holds
a disclosable interest (as that term is used in the Business Corporations
Act) in a contract or transaction into which Merus has entered or proposes
to enter:

| | 1. | is liable to account to Merus for any profit that accrues
      to the director or senior officer under or as a result of the contract or
      transaction only if and to the extent provided in the Act;                                                                    
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                               
| | 2. | is not entitled to vote on any directors resolution to
      approve that contract or transaction, unless all the directors have a
      disclosable interest in that contract or transaction, in which case any or
      all of those directors may vote on such resolution;
| |    |                                                                                                                                                                                                                                                                               
| | 3. | and who is present at the meeting of directors at which
      the contract or transaction is considered for approval may be counted in
      the quorum at the meeting whether or not the director votes on any or all
      of the resolutions considered at the meeting.    

A director or senior officer who holds any office or possesses
any property, right or interest that could result, directly or indirectly, in
the creation of a duty or interest that materially conflicts with that
individuals duty or interest as a director or senior officer, must disclose the
nature and extent of the conflict as required by the Business Corporations
Act. No director or intended director is disqualified by his or her office
from contracting with Merus either with regard to the holding of any office or
place of profit the director holds with Merus or as vendor, purchaser or
otherwise, and no contract or transaction entered into by or on behalf of Merus
in which a director is in any way interested is liable to be voided for that
reason

Directors' power, in the absence of an independent
quorum, to vote compensation to themselves or any members of their
body.

The compensation of the directors is decided by the directors
unless the board of directors requests approval to the compensation from the
shareholders by ordinary resolution. The Business Corporations Act
provides that a director of a company does not hold a disclosable interest in a
contract or transaction merely because the contract or transaction relates to
the remuneration of the director or senior officer in that person's capacity as
director, officer, employee or agent of Merus or of an affiliate of Merus.

Borrowing powers exercisable by the directors.

Under the Articles, the directors may, on behalf of Merus:

| | 1. | borrow money in such manner and amount, on such security,
      from such sources and upon such terms, and conditions as they consider
      appropriate;                                                                                                  
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                            
| | 2. | issue bonds, debentures, and other debt obligations
      either outright or as a security for any liability or obligation of Merus
      or any other person and at such discounts or premiums and on such other
      terms as they consider appropriate;
| |    |                                                                                                                                                                                                                                                            
| | 3. | guarantee the repayment of money by any other person or
      the performance of any obligation of any other person;
  and                                                                                                                                 

57

---

| | 4. | mortgage, charge, whether by way of specific or floating
      charge, grant a security interest in, or give other security on, the whole
      or any part of the present and future assets and undertaking of
    Merus.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Retirement and non-retirement of directors under an age
limit requirement.

There are no such provisions applicable to Merus under its
Memorandum or its Articles or the Business Corporations Act.

Number of shares required for a directors
qualification.

Directors need not own any shares of Merus in order to qualify
as directors.

**3.**         
**Rights, Preferences and Restrictions Attaching to Each Class of Shares
Authorized Capital**

The Companys authorized capital consists of an unlimited
number of common shares and an unlimited number of preferred shares.

Common Shares

The rights, preferences and restrictions attached to the
Companys common shares are summarized as follows:

Dividends

Subject to any special rights as to dividends provided in
favour of the holder of any series of preferred shares and the provisions of the
Business Corporations Act, the directors may from time to time declare
and authorized payments of dividends out of available assets. Any dividends must
be declared and paid according to the number of shares held. Under the
Business Corporations Act, no dividend may be paid if Merus is, or would
as a result of payment of the dividend become, insolvent.

Voting Rights

Each common share is entitled to one vote on matters to which
common shares ordinarily vote including the annual election of directors,
appointment of auditors and approval of corporate changes. Directors are elected
to hold office at each annual meeting and hold office until the ensuing annual
meeting. Directors automatically retire at each annual meeting. There are no
staggered directorships among Meruss directors. There are no cumulative voting
rights applicable to Merus.

Rights to Profits and Liquidation Rights

Subject to any special rights as to distribution provided in
favour of any series of preferred shares, all common shares of Merus participate
ratably in any net profit or loss of Merus and participate ratably as to any
distribution of assets in the event of a winding up or other liquidation.

Redemption

The common shares are not subject to any rights of
redemption.

Sinking Fund Provisions

Merus has no sinking fund provisions or similar obligations
relating to the common shares.

58

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Shares Fully Paid

All common shares of Merus must, under the Business
Corporations Act, be issued as fully paid for cash, property or services.
They are therefore non-assessable and not subject to further calls for
payment.

Pre-emptive Rights

Holders of common shares of Merus are not entitled to any
pre-emptive rights which provide a right to any holder to participate in any
further offerings of the Companys equity or other securities.

Preferred Shares

Subject to the Business Corporations Act, the directors
may alter the Articles of the Company and authorize the alternation of the
Notice of Articles of the Company in order to establish series of preferred
shares and to designate the rights and restrictions attached to each series of
preferred shares. The rights and restrictions attached to a series of preferred
shares may include, without limitation, provisions regarding (i) the payment of
dividends, (ii) the consideration to be paid for the shares, (iii) conversion or
exchange rights, (iv) rights of redemption or repurchase, (v) restrictions on
payment of dividends or the repayment of capital in respect of other shares of
the Company, and (vi) voting rights and restrictions. The holders of preferred
shares shall be entitled on the liquidation or dissolution of the Company to
repayment of capital, together with accrued but unpaid dividends, in priority to
the holders of the common shares of the Company.

The Company has not to date designated any series of preferred
shares and does not have any preferred shares outstanding.

With respect to the rights, preferences and restrictions
attaching to Meruss common shares, there are generally no significant
differences between Canadian and United States law as the shareholders, or the
applicable corporate statute, will determine the rights, preferences and
restrictions attaching to each class of Meruss shares.

**4.**         
**Changes to Rights and Restrictions to Shares**

The Articles provide that, subject to the Business
Corporations Act, the Company may, by special resolution:

- create special rights or restrictions for, and attach those special rights
  or restrictions to, the shares of any class or series of shares, whether or
  not any or all of those shares have been issued; or
- vary or delete any special rights or restrictions attached to the shares of
  any class or series of shares, whether or not any or all of those shares have
  been issued.

Subject to the Business Corporations Act, the Company may by
directors resolution subdivide or consolidate all or any of its unissued, or
fully paid issued, shares and, if applicable, alter its Notice of Articles, and,
if applicable, its Articles.

The Articles provide that the Company may be directors
resolution authorize an alteration of its Notice of Articles in order to change
its name or adopt or change any translation of that name.

The Companys Articles provide that, subject to the Business
Corporations Act, the Company may by special resolution of shareholders (or
a resolution of the directors in the case of §(c) or §(f) below):

| | create one or more classes or series of shares;                                                                                                                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                            
| | increase, reduce or eliminate the maximum number of shares that Merus is
  authorized to issue out of any class or series of shares or establish a
  maximum number of shares that Merus is authorized to issue out of any class or
  series of shares for which no maximum is established;

59

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| | if the Company is authorized to issue shares of a class
      of shares with par value:                                                                                                             
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                     
|  | o                                                                                                                                                                                                   
|  |                                                                                                                                                                                                     
|  | o                                                                                                                                                                                                   
|  |                                                                                                                                                                                                     
| | change all or any of its unissued, or fully paid issued,
      shares with par value into shares without par value or any of its unissued
      shares without par value into shares with par value;
|  |                                                                                                                                                                                                     
| | alter the identifying name of any of its shares; or                                                                                                                                                 
|  |                                                                                                                                                                                                     
| | otherwise alter its shares or authorized share structure
      when required or permitted to do so by the Act where it does not specify a
      special resolution.                                 

The Articles provide that a special resolution is a resolution
of shareholders that is approved by two thirds (66 2/3%) of those votes cast at
a properly constituted meeting of shareholders. An ordinary resolution is a
resolution of shareholders that is approved by a majority of those votes cast at
a properly constituted meeting of shareholders.

If special rights and restrictions are altered and any right or
special right attached to issued shares is prejudiced or interfered with, then
the consent of the holders of shares of that class or series by a special
separate resolution will be required.

The Business Corporations Act also provides that a
company may reduce its capital if it is authorized to do so by a court order,
or, if the capital is reduced to an amount that is not less than the realizable
value of the company's assets less its liabilities, by a special resolution or
court order.

Generally, there are no significant differences between British
Columbia and United States law with respect to changing the rights of
shareholders as most state corporation statutes require shareholder approval
(usually a majority) for any such changes that affect the rights of
shareholders.

**5.**          **Meetings of Shareholders**

The Articles provide that the Company must hold its annual
general meeting once in every calendar year (being not more than 15 months from
the last annual general meeting) at such time and place to be determined by the
directors of Merus. Shareholders meetings are governed by the Articles of Merus
but many important shareholder protections are also contained in the Canadian
provincial securities laws that are applicable to Merus as a reporting issuer in
the Canadian provinces of British Columbia, Alberta, Saskatchewan, Manitoba,
Ontario, Quebec, New Brunswick and Prince Edward Island (Canadian Securities
Laws) and the British Columbia Corporations Act. The Articles
provide that Merus will provide at least 21 days' advance written notice of any
meeting of shareholders and will provide for certain procedural matters and
rules of order with respect to conduct of the meeting. The directors may fix in
advance a date, which is no fewer than 21 days prior to the date of the meeting
for the purpose of determining shareholders entitled to receive notice of and to
attend and vote at a general meeting.

Canadian Securities Law and the British Columbia
Corporations Actsuperimpose requirements that generally provide that
shareholders meetings require not less than a 60 day notice period from initial
public notice and that Merus makes a thorough advanced search of intermediary
and brokerage registered shareholdings to facilitate communication with
beneficial shareholders so that meeting proxy and information materials can be
sent via the brokerages to unregistered but beneficial shareholders. The form
and content of information circulars and proxies and like matters are governed
by Canadian Securities Lawsand the British Columbia Corporations
Act . This legislation specifies the disclosure requirements for the proxy
materials and various corporate actions, background information on the nominees
for election for director, executive compensation paid in the previous year and
full details of any unusual matters or related party transactions. Merus must
hold an annual shareholders meeting open to all shareholders for personal
attendance or by proxy at each shareholder's determination.

60

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Most state corporation statutes require a public company to
hold an annual meeting for the election of directors and for the consideration
of other appropriate matters. The state statutes also include general provisions
relating to shareholder voting and meetings. Apart from the timing of when an
annual Meeting must be held and the percentage of shareholders required to call
an annual Meeting or an extraordinary meeting, there are generally no material
differences between Canadian and United States law respecting annual meetings
and extraordinary meetings.

**6.**         
**Rights to Own Securities**

There are no limitations under Merus's Articles or in the
Business Corporations Acton the right of persons who are not citizens of
Canada to hold or vote common shares.

**7.**         
**Restrictions on Changes in Control, Mergers, Acquisitions or Corporate
Restructuring of the Company**

The Companys Articles do not contain any provisions that would
have the effect of delaying, deferring or preventing a change of control of the
Company. The Company has not implemented any shareholders' rights or other
"poison pill" protection against possible takeovers. There are no provisions in
the Companys Articles triggered by or affected by a change in outstanding
shares which gives rise to a change in control.

**8.**         
**Ownership Threshold Requiring Public Disclosure**

The Articles of Merus do not require disclosure of share
ownership. Share ownership of director nominees must be reported annually in
proxy materials sent to Merus's shareholders. There are no requirements under
British Columbia corporate law to report ownership of shares of Merus but
Canadian Securities Law requires disclosure of trading by insiders (generally
officers, directors and holders of 10% of voting shares) within 5 days of the
trade. In addition, Canadian Securities Laws require disclosure of acquisition
of more than 10% of the issued and outstanding shares of the Company by press
release and filing of an early warning report within 2 business days of the
acquisition. Canadian Securities Laws also require that we disclose in our
annual general meeting proxy statement, holders who beneficially own more than
10% of our issued and outstanding shares, and United States federal securities
laws require the disclosure in our annual report on Form 20-F of holders who own
more than 5% of our issued and outstanding shares.

Most state corporation statutes do not contain provisions
governing the threshold above which shareholder ownership must be disclosed.
United States federal securities laws require a company that is subject to the
reporting requirements of the Securities Exchange Act of 1934 to disclose, in
its annual reports filed with the Securities and Exchange Commission those
shareholders who own more than 5% of a corporations issued and outstanding
shares.

**9.**          **Differences in Law between the US and British Columbia**

Differences in the law between United States and British
Columbia, where applicable, have been explained above within each category.

**10.**        **Changes in the Capital of the Company**

There are no conditions imposed by Meruss Notice of Articles
or Articles which are more stringent than those required by the Business
Corporations Act.

C. Material Contracts

The material contracts entered into by the Company entered into
within the two years immediately preceding the date of this annual report on
Form 20-F are summarized in Item 4 of this Form 20-F.

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D. Exchange Controls and Other Limitations Affecting
Security Holders

In general, there is no governmental law, decree or regulation
in Canada that restricts the export or import of capital, or that affects the
remittance of dividends, interest or other payments to a non-resident holder of
common shares of Merus, other than withholding tax requirement. See Item l0.E.
Taxation.

Except as provided in the Investment Canada Act, there are no
limitations specific to the rights of non-Canadians to hold or vote our common
shares under the laws of Canada or British Columbia or in our charter documents.
The following summarizes the principal features of the Investment Canada Act for
non-Canadian residents proposing to acquire our common shares.

This summary is of a general nature only and is not intended to
be, and should not be construed to be, legal advice to any holder or prospective
holder of our common shares, and no opinion or representation to any holder or
prospective holder of our common shares is hereby made. Accordingly, holders and
prospective holders of our common shares should consult with their own legal
advisors with respect to the consequences of purchasing and owning our common
shares.

The Investment Canada Act governs the direct or indirect
acquisition of control of an existing Canadian business by non-Canadians. Under
the Investment Canada Act, non-Canadian persons or entities acquiring control
(as defined in the Investment Canada Act) of a corporation carrying on business
in Canada are required to either notify, or file an application for review with,
Industry Canada, unless a specific exemption, as set out in the Investment
Canada Act, applies. Industry Canada may review any transaction which results in
the direct or indirect acquisition of control of a Canadian business, where the
gross value of corporate assets exceeds certain threshold levels (which are
higher for investors from members of the World Trade Organization, including
United States residents, or World Trade Organization member-controlled
companies) or where the activity of the business is related to Canadas cultural
heritage or national identity. No change of voting control will be deemed to
have occurred, for purposes of the Investment Canada Act, if less than one-third
of the voting control of a Canadian corporation is acquired by an investor. In
addition, the Investment Canada Act permits the Canadian government to review
any investment where the responsible Minister has reasonable grounds to believe
that an investment by a non-Canadian could be injurious to national security. No
financial threshold applies to a national security review. The Minister may deny
the investment, ask for undertakings, provide terms or conditions for the
investment or, where the investment has already been made, require divestment.
Review can occur before or after closing and may apply to corporate
re-organizations where there is no change in ultimate control.

If an investment is reviewable under the Investment Canada Act,
an application for review in the form prescribed is normally required to be
filed with Industry Canada prior to the investment taking place, and the
investment may not be implemented until the review has been completed and the
Minister responsible for the Investment Canada Act is satisfied that the
investment is likely to be of net benefit to Canada. If the Minister is not
satisfied that the investment is likely to be of net benefit to Canada, the
non-Canadian applicant must not implement the investment, or if the investment
has been implemented, may be required to divest itself of control of the
Canadian business that is the subject of the investment. The Minister is
required to provide reasons for a decision that an investment is not of net
benefit to Canada.

Certain transactions relating to our common shares will
generally be exempt from the Investment Canada Act, subject to the Ministers
prerogative to conduct a national security review, including:

| | (a) | the acquisition of our common shares by a person in the
      ordinary course of that persons business as a trader or dealer in
      securities;                                                                                           
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                              
| | (b) | the acquisition of control of our company in connection
      with the realization of security granted for a loan or other financial
      assistance and not for a purpose related to the provisions of the
      Investment Canada Act; and

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| | (c) | the acquisition of control of our company by reason of an
      amalgamation, merger, consolidation or corporate reorganization following
      which the ultimate direct or indirect control in fact of our company,
      through ownership of our common shares, remains
  unchanged.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

**E.**         
**Taxation**

Certain Canadian Federal Income Tax Considerations

The following discussion is intended to be a general summary of
certain material Canadian federal income tax considerations applicable to
holders of common shares described below and is not intended to be, nor should
it be construed to be, legal or tax advice to any particular person, and no
opinion or representation with respect to income tax considerations is hereby
given or made. It does not take into account the particular circumstances of any
investor and does not address considerations applicable to an investor to whom
special provisions of Canadian income tax law apply. Each person should consult
their own tax advisors with respect to the tax consequences of an investment in
the common shares in their own particular circumstances.

The following summary is based upon the current provisions of
the Income Tax Act (Canada) (the ITA), and the regulations thereunder and the
Canada-United States Income Tax Convention (1980) as amended (the Convention),
all proposed amendments to the ITA and the regulations thereunder publicly
announced by the Department of Finance, Canada prior to the date hereof, and the
current published administrative policies and assessing practices of the Canada
Revenue Agency. Except for the foregoing, this summary does not take into
account or anticipate any changes in the law or the Convention or the
administrative policies or assessing practices of the Canada Revenue Agency
whether by legislative, governmental or judicial action or decision, and does
not take into account or anticipate provincial, territorial or foreign tax
legislation or considerations, which may differ significantly from the Canadian
federal income tax considerations described herein.

The summary discusses the principal Canadian federal income tax
considerations under the ITA and the regulations thereunder generally applicable
to purchasers of common shares who, at all relevant times (i) for purposes of
the ITA, are not resident in or deemed to be resident in Canada, deal at arms
length with Merus, are not affiliated with Merus, hold their common shares as
capital property, do not use or hold, and will not be deemed to use or hold
their common shares in, or in the course of carrying on, a business in Canada,
and are not financial institutions for the purposes of the mark-to-market
rules, and (ii) for purposes of the Convention, are residents of the U.S. and
not residents of Canada, are qualifying persons entitled to the benefits of
the Convention, and do not hold their common shares as part of the business
property of, or so that their common shares are effectively connected with, a
permanent establishment in Canada, or in connection with a fixed base in Canada.
A purchaser that meets all of the foregoing requirements is referred to in this
summary as a U.S. Holder, and this summary only addresses such U.S. Holders.
Special rules, which are not discussed in this summary, may apply to a U.S.
Holder that is an insurer carrying on a business in Canada and elsewhere. Other
U.S. Holders of special status or in special circumstances are also not
addressed in this summary.

Amounts in respect of common shares paid or credited or deemed
to be paid or credited as, on account or in lieu of payment of, or in
satisfaction of, dividends to a U.S. Holder will generally be subject to
Canadian non-resident withholding tax. Such withholding tax is levied at a rate
of 25% under the ITA, which may be reduced pursuant to the terms of the
Convention. Under the Convention, the rate of Canadian non-resident withholding
tax on the gross amount of dividends beneficially owned by a U.S. Holder is
generally reduced to 15% (and to 5% in certain limited circumstances).

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In general, a U.S. Holder will not be subject to tax under the
ITA in respect of a capital gain realized on a disposition of common shares
unless, at the time of such disposition, such common shares constitute taxable
Canadian property of the holder for purposes of the ITA. If the common shares
are listed on a designated stock exchange for the purposes of the ITA, including
the TSX, at the time they are disposed of, a common share will generally not
constitute taxable Canadian property of the U.S. Holder at such time unless,
at any time during the 60-month period immediately preceding the disposition of
the common share, (i) 25% or more of the issued shares of any class or series of
Merus was owned by the U.S. Holder, by persons with whom the U.S. Holder did not
deal at arms length, or by the U.S. Holder and persons with whom the U.S.
Holder did not deal at arms length AND (ii) more than 50% of the fair market
value of the share was derived directly or indirectly from one or any
combination of real or immovable property situated in Canada, Canadian resource
properties or timber resource properties (as defined under the ITA) or options
in respect of or interests in (or for civil law rights in) any of the foregoing.
The common shares may also be deemed to be taxable Canadian property in certain
other circumstances under the ITA. Under the Convention, gains derived by a U.S.
Holder from the disposition of common shares will generally not be taxable in
Canada unless the value of the common shares is derived principally from real
property situated in Canada. Affected U.S. Holders should consult with their own
tax advisors in this regard.

Certain United States Federal Income Tax Considerations

The following is a general discussion of certain material
anticipated United States federal income tax considerations relevant to U.S.
Holders, defined below, of Merus common shares who hold such shares as capital
assets (as defined in Section 1221 of the United States Internal Revenue Code of
1986, as amended (the Code)). This discussion is based on the Code, U.S.
Treasury regulations thereunder (the Treasury Regulations), administrative
rulings, and court decisions, all as in effect as of the date hereof and all of
which are subject to differing interpretations and may change at any time
(possibly with retroactive effect). This discussion is intended to be a general
description of the United States federal income tax considerations material to a
purchase, ownership and a disposition of common shares. Readers are cautioned
that this discussion does not address all relevant tax consequences relating to
an investment in the common shares, nor does it take into account tax
consequences peculiar to persons subject to special provisions of United States
federal income tax law, such as financial institutions, tax-deferred accounts,
tax-exempt organizations, qualified retirements plans, real estate investment
trusts, regulated investment companies or brokers, dealers or traders in
securities, persons actually or constructively owning 10% or more of the voting
power of Merus stock, persons that hold common shares through a partnership or
other pass through entity, or persons that hold common shares that are a hedge
against, or that are hedged against, currency risk or that are part of a
straddle or conversion transaction, or persons whose functional currency is not
the United States dollar. Therefore, investors should consult a tax advisor
regarding the particular consequences of purchasing common shares.

U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT
TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR
PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE UNITED
STATES FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF ANY STATE, LOCAL OR
FOREIGN TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.

Except as otherwise described, this discussion applies to
investors that are (i) citizens or individual residents of the United States;
(ii) corporations (or other entities taxable as corporations), that are created
or organized in or under the laws of the United States, any state of the United
States or the District of Columbia; (iii) estates, the income of which is
subject to federal income taxation, regardless of its source; or (iv) trusts
(a), if a court within the United States is able to exercise primary supervision
over the administration of such trust and one or more United States persons as
described in Section 7701(a)(30) of the Code has the authority to control all
substantial decisions of such trust, or (b) that was in existence on August 20,
1996, was treated as a U.S. person under the code on the previous day and has a
valid election in effect under applicable Treasury Regulations to be treated as
a United States person (a U.S. Holder).

The United States federal income tax treatment of a holder of
common shares that is a partnership (or other entity taxable as a partnership
for United States federal tax purposes) generally will depend on the status of
the partner and the activities of the partnership. Partners in partnerships
holding common shares should consult their tax advisors about the United States
federal income tax consequences of the purchase, ownership and disposition of
common shares.

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Passive Foreign Investment Company Rules

Special United States federal income tax rules apply to U.S.
Holders owning shares of a passive foreign investment company (a PFIC). A
non-United States corporation generally will be classified as a PFIC for United
States federal income tax purposes in any taxable year in which, after applying
relevant look-through rules with respect to the income and assets of
subsidiaries, either at least 75% of its gross income is passive income, (the
income test), or on average at least 50% of the gross value of its assets, as
determined on a quarterly average, is attributable to assets that produce
passive income or are held for the production of passive income (the asset
test). For this purpose, passive income generally includes, among other things,
dividends, interest, certain rents and royalties, and gains from the disposition
of passive assets. Merus believes that it was a PFIC for the taxable year ended
September 30, 2011, and has been a PFIC in prior tax years. Depending on its
income, assets and activities, Merus believes that it may be a PFIC in the
current taxable year and in subsequent taxable years.

If Merus is classified as a PFIC for any taxable year during
which a U.S. Holder holds common shares, Merus will continue to be treated as a
PFIC with respect to such U.S. holder in all succeeding years, regardless of
whether Merus continues to meet the income test or asset test described above in
such succeeding years. However, under the Treasury Regulations, such U.S. Holder
will not be treated as holding stock in a PFIC, if in a subsequent taxable year
in which Merus is not a PFIC, such holder elects to recognize any unrealized
gain in such common shares as of the last day of the last taxable year during
which Merus qualified as a PFIC (a deemed sale election). Any gain so
recognized will be subject to the adverse ordinary income and any special
interest charge consequences described below. Any loss realized on the deemed
sale is not recognized.

If a U.S. Holder holds common shares of Merus in any year in
which it is classified as a PFIC, unless a U.S. Holder has a valid qualified
electing fund (QEF) election or a mark-to-market election, described below,
in effect with respect to the common shares, the following income tax
consequences will result to the U.S. Holder:

1. Distributions with respect to Merus common shares made by
Merus during the taxable year to a U.S. Holder that are excess distributions
(generally distributions that exceed 125% of the average amount of distributions
in respect of such common shares received during the preceding three years or,
if shorter, during the U.S. Holder's holding period prior to the distribution
year) must be allocated ratably to each day of the U.S. Holders holding period.
The amounts allocated to the current taxable year and to taxable years prior to
the first year in which Merus was classified as a PFIC are included as ordinary
income in a U.S. Holders gross income for that year. The amount allocated to
each other prior taxable year is taxed as ordinary income at the highest tax
rate in effect for the U.S. Holder in that prior year and the tax is subject to
an interest charge at the rate applicable to deficiencies in income taxes (the
special interest charge), and

2. The entire amount of any gain realized upon the sale or
other disposition of Merus common shares will be treated as an excess
distribution made in the year of sale or other disposition and as a consequence
will be treated as ordinary income and, to the extent allocated to years prior
to the year of sale or disposition, will be subject to the interest charge
described above. No portion of any excess distribution will be eligible for the
favorable 15% United States federal income tax rate applicable to so-called
qualified dividend income.

QEF Election

A U.S. Holder that owns common shares may elect to have Merus
treated as a QEF, provided that Merus provides such person with certain
information. A QEF election must be made by a U.S. Holder before the due date
(with regard to extensions) for such persons U.S. federal income tax return for
the taxable year for which the election is made and once made, is effective for
all subsequent taxable years ofsuch U.S. Holder unless revoked with the
consent of the IRS. A U.S. Holder that has a QEF election in effect with respect
to all years that such holder holds Merus stock and that Merus is a PFIC is
referred to herein as an Electing U.S. Holder. Merus has made available to
U.S. Holders, and expects to continue to make available to U.S. Holders, in
accordance with applicable procedures, the annual information statement
currently required by the IRS, which will include information as to the
allocation of Merus ordinary earnings and net capital gain among the common
shares and as to distributions on such common shares. Such statement may be used
by Electing U.S. Holders for purposes of complying with the reporting
requirements applicable to the QEF election.

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An Electing U.S. Holders gain or loss on the sale or other
disposition of such common shares generally will be a capital gain or loss. Such
capital gain or loss generally will be long-term if such Electing U.S. Holder
held the common shares for more than one year at the time of the disposition.
For non-corporate U.S. Holders, long-term capital gain is generally subject to a
maximum federal income tax rate (currently imposed at a rate of 15%) for taxable
years beginning on or before December 31, 2010 (and, possibly, a higher rate
thereafter).

A U.S. Holder holding common shares with respect to which a QEF
election is not in effect for any taxable year in which Merus is a PFIC may
avoid the adverse ordinary income and special interest charge consequences
(described above) upon any subsequent disposition of such common shares if such
person elects to recognize any unrealized gain in such common shares as of the
first day in the first year that the QEF election applies to such common shares
(a deemed sale election). Any gain so recognized, however, will be subject to
the adverse ordinary income and special interest charge consequences described
above.

In any year that Merus is treated as a PFIC, an Electing U.S.
Holder will be required to include currently in gross income such U.S. Holders
pro rata share of Merus annual ordinary earnings and annual net capital gains.
Such inclusion will be required whether or not such U.S. Holder owns common
shares for an entire year or at the end of Merus taxable year. The amount so
includable will be determined without regard to the amount of cash
distributions, if any, received from Merus. Electing U.S. Holders will be
required to pay United States federal income tax currently on such imputed
income, unless, as described below, an election is made to defer such payment.
The amount currently included in income will be treated as ordinary income to
the extent of the Electing U.S. Holders allocable share of Merus ordinary
earnings and generally will be treated as long-term capital gain to the extent
of such U.S. Holders allocable share of Merus net capital gains. Such net
capital gains ordinarily would be subject to a maximum 15% United States federal
income tax rate for taxable years beginning on or before December 31, 2010 (and,
possibly, a higher rate thereafter) in the case of non-corporate U.S. Holders,
unless Merus elects to treat the entire amount of its net capital gain as
ordinary income. No portion of such ordinary earnings will be eligible for the
favorable 15% United States federal income tax rate applicable to so-called
qualified dividend income.

If an Electing U.S. Holder demonstrates to the satisfaction of
the IRS that amounts actually distributed to him have been previously included
in income as described above by such U.S. Holder or a previous U.S. Holder, such
distributions generally will not be taxable. An Electing U.S. Holders adjusted
tax basis in his common shares will be increased by any amounts currently
included in income under the QEF rules and will be decreased by any subsequent
distributions from Merus that are treated as non-taxable distributions of
previously-included income (as described in the preceding sentence). For
purposes of determining the amounts includable in income by Electing U.S.
Holders, the tax bases of Merus assets, and Merus ordinary earnings and net
capital gains, will be computed on the basis of United States federal income tax
principles. Accordingly, it is anticipated that such tax bases and such ordinary
earnings and net capital gains may differ from the figures set forth in Merus
financial statements.

An Electing U.S. Holder who sells his common shares prior to
the end of Merus taxable year will be required to include in income, as of the
last day of Merus taxable year, a portion of Merus ordinary earnings and net
capital gains attributable on a pro rata basis to the period during which such
common shares were held during such taxable year. However, the amount of such
U.S. Holders taxable gain on the sale should be reduced, or the amount of his
taxable loss increased, by the amount of such income inclusion. If an Electing
U.S. Holder sells his common shares in a taxable year of such U.S. Holder ending
during Merus then current taxable year, such U.S. Holder may nevertheless have
to include his proportionate share of Merus ordinary earnings and net capital
gains in gross income for his taxable year which includes the last day of Merus
above referred taxable year. While the matter is unclear, such U.S. Holder
should be able to claim a loss in his subsequent taxable year equal to the
amount by which such holders adjusted tax basis in the common shares would have
increased to reflect the imputed income under the QEF rules.

An Electing U.S. Holder may elect to defer, until the
occurrence of certain events, payment of the United States federal income tax
attributable to amounts includable in income for which no current distributions
are received, but will be required to pay interest on the deferred tax computed
by using the statutory rate of interest applicable to an extension of time for
payment of tax.

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Under temporary Treasury Regulations, an individual is required
to include in income a proportionate share of the investment expenses of certain
pass-through entities. It is not clear under such Treasury Regulations whether
a PFIC for which a QEF election is in effect may be treated as a pass-through
entity. If these provisions were to apply to Merus, each individual Electing
U.S. Holder would be required to include in income an amount equal to a portion
of Merus investment expenses and would be permitted an offsetting deduction (if
otherwise allowable under the Code) to the extent that the amount of such
expenses included in income, plus certain other miscellaneous itemized
deductions of such U.S. Holder, exceed 2% of such U.S. Holders adjusted gross
income.

Generally, a QEF election that is made with respect to Merus
will remain in effect throughout an Electing U.S. Holders holding period for
Merus shares, even if Merus does not qualify as a PFIC in every taxable year
following the taxable year in which the election is made. In any year in which
Merus is not treated as a PFIC, an Electing U.S. Holder will have the tax
consequences described below, under the heading, Ownership and Disposition of
Common Shares if Merus is Not a PFIC.

Mark-to-Market Election

A U.S. Holder generally may make a mark-to-market election with
respect to shares of marketable stock of a PFIC. Under the Code and the
Treasury Regulations, the term marketable stock includes stock of a PFIC that
is regularly traded on a qualified exchange or other market. Because Merus
common shares are traded on a qualified exchange or other market, a
market-to-market election will be available with respect to the common
shares.

As a result of a mark-to-market election, a U.S. Holder will
generally be required to report gain annually in an amount equal to the excess
of the fair market value of such common shares at the end of the taxable year
over the adjusted tax basis of such common shares at that time and will
generally be required to report loss annually in an amount equal to the excess
of the adjusted tax basis of such common shares at the end of the taxable year
over the fair market value of the common shares at that time, but only to the
extent of any net market-to market gains for prior years. Any gain under this
computation and any gain on an actual sale or other disposition of the common
shares will be treated as ordinary income. Any loss under this computation will
be treated as ordinary loss. Any loss on an actual sale or other disposition
will be treated as an ordinary loss to the extent of the prior net
mark-to-market gain and thereafter will be considered capital loss. Thus, a U.S.
Holder that makes a mark-to-market election will be taxed on appreciation with
respect to the U.S. Holders common shares even though such U.S. Holder has no
corresponding receipt of cash. In addition, unlike the case of a QEF election, a
U.S. Holder that has made a mark-to-market election generally cannot obtain any
favorably-taxed long-term capital gains with respect to the common shares. The
U.S. Holders adjusted tax basis in the common shares is adjusted for any gain
or loss taken into account under the mark-to-market election. Under the Treasury
Regulations, if a U.S. Holder has made a QEF election and subsequently makes a
mark-to-market election with respect to the same stock, the mark-to-market
election will automatically terminate the QEF election, and such U.S. Holder may
not make another QEF election with respect to the stock before the sixth taxable
year thereafter. Unless either (i) the mark-to-market election is made as of the
first taxable year in which Merus is a PFIC during the U.S. Holders holding
period for the common shares, or (ii) a QEF election has been in effect with
respect to such U.S. holders common stock for all years in which Merus was a
PFIC during such U.S. holders holding period, any mark-to-market gain for the
election year generally will be subject to the excess distribution rules
applicable to dispositions described above.

U.S. Holders are urged to consult their tax advisors
concerning the United States federal income tax consequences of holding and
disposing of stock of a PFIC.

Ownership and Disposition of Common Shares if Merus is Not a
PFIC

U.S. Holders who do not hold common shares during any taxable
year in which Merus is classified as a PFIC will not be subject to the rules
described above, under the heading Passive Foreign Investment Company Rules.
Instead, such U.S. Holders will be required to include the gross amount of any
distribution on common shares (without reduction for Canadian tax withheld) in
their gross income as a taxable dividend, to the extent such distribution is
paid out of Merus current or accumulated earnings and profits as determined
under United States federal income tax principles. U.S. Holders must include in
income an amount equal to the United States dollar value of such dividends on
the date of receipt, based on the exchange rate on such date. Provided that
Merus is not treated as a PFIC, described above, during any year in which a U.S.
Holder holds Merus common shares in the case of a non-corporate U.S. Holder,
including individuals, such dividends generally will be eligible for a maximum
rate of tax of 15% under current law for dividends received in a taxable year
beginning before January 1, 2011, provided certain conditions are satisfied. To
the extent that distributions paid by Merus exceed Merus current or accumulated
earnings and profits, they will be treated first as a return of capital up to
the U.S. Holders adjusted tax basis in the shares, and then as a gain from the
sale or exchange of the shares.

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U.S. Holders will generally be entitled to a foreign tax
credit, or deduction, for United States federal income tax purposes, in an
amount equal to the Canadian tax withheld from a distribution on common shares.
For taxable years beginning on or before December 31, 2006, dividends paid by
Merus generally will constitute foreign source passive income or financial
services income for foreign tax credit purposes. For taxable years beginning
after December 31, 2006, such dividends generally will be treated as passive
category income or general category income, for United States foreign tax
credit purposes. The Code applies various limitations on the amount of foreign
tax credit that may be claimed by a United States taxpayer. Because of the
complexity of those limitations, U.S. Holders should consult their own tax
advisors with respect to the amount of foreign taxes they may claim as a credit.
Dividends paid by Merus on the common shares will not generally be eligible for
the dividends received deductions.

A U.S. Holder that sells common shares will generally recognize
a gain or loss in an amount equal to the difference, if any, between the amount
realized on the sale and the U.S. Holders adjusted tax basis in the shares.
Unless Merus is treated as a PFIC during any year in which the U.S. Holder holds
Merus common shares (described above), any gain or loss recognized upon the
sale of shares held as capital assets will be a long-term or short-term capital
gain or loss, depending on whether the common shares have been held for more
than one year. Such gain or loss generally will be treated as United States
source income or loss for United States foreign tax credit purposes.

Backup Withholding and Information Reporting

United States backup withholding tax and information reporting
requirements generally apply to certain payments to certain non-corporate
holders of the common shares. Information reporting generally will apply to
payments of dividends on, and to proceeds from the sale or disposition of,
common shares by a payor within the United States to a U.S. Holder (if such
person is other than an exempt recipient, including a corporation, not a United
States person that provides an appropriate certification or certain other
persons).

A payor within the United States will be required to withhold
tax (currently imposed at a rate of 28%) on any payments made to a common
shareholder (if that common shareholder is not an exempt recipient) consisting
of dividends on, or proceeds from the sale or disposition of, the common shares,
if the selling common shareholder fails to timely furnish a correct taxpayer
identification number on IRS Form W-9 or otherwise fails to comply with, or
establish an exemption from, such backup withholding tax requirements. Moreover,
a payor or middleman may rely on a certification provided by a payee that is not
a United States person only if such payor or middleman does not have actual
knowledge or a reason to know that any information or certification stated in
such certificate is incorrect. Investors will be allowed a refund or a credit
equal to any amounts withheld under the United States backup withholding tax
rules against their United States federal income tax liability, provided that
they furnish the required information to the IRS.

**F.**         
**Dividend and Paying Agents**

Not applicable.

**G.**         
**Statement by Experts**

Not applicable.

68

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**H.**         
**Documents on Display**

Any statement in this Annual Report about any of our contracts
or other documents is not necessarily complete. If the contract or document is
filed as an exhibit to this Annual Report, the contract or document is deemed to
modify our description. You must review the exhibits themselves for a complete
description of the contract or document.

We are subject to the informational reporting requirement of
the Exchange Act and files reports and other information with the SEC. You may
examine all reports and other information filed by Merus with the SEC, including
the documents that are exhibits to this Annual Report, without charge, at the
public reference facilities maintained by the SEC at 100 F Street, N.E.,
Washington, D.C., 20549. For more information on the public reference rooms,
call the SEC at l.800.SEC.0330. our reports and other information filed with the
SEC are also available to the public from commercial document retrieval services
and the website maintained by the SEC at http://www.sec.gov.

**I.**         
**Subsidiary Information**

We have the following wholly owned subsidiaries: ECG Holdings
Inc., governed by the laws of Delaware, US; Merus Labs Luxco S.a.r.L., governed
by the laws of Luxembourg; Merus Labs Netherlands B.V., governed by the laws of
Netherlands; and Orbis Pharma Inc., governed by the laws of Ontario.

Item 11: Quantitative and Qualitative Disclosures about
Market Risk

Except as described below, the Company does not have a material
position or exposure with respect to any market risk sensitive instruments (as
defined in Item 11 in Form 20-F).

Until December 19, 2011, a major component of the Companys
strategy revolved around investment operations. The Companys business involved
the purchase and sale of securities and, accordingly, the majority of the
Companys assets were comprised of financial instruments. The use of financial
instruments can expose the Company to several risks, including market, credit
and liquidity risks. Apart from the risks listed below, management is of the
opinion that they are not exposed to any other significant risks. A discussion
of the Companys use of financial instruments and its risk management is
provided below.

(i) Liquidity risk

Liquidity risk is the risk that the Company will have
sufficient cash resources to meet its financial obligations as they come due.
The Companys liquidity and operating results may be adversely affected if the
Companys access to the capital markets is hindered, whether as a result of a
downturn in stock market conditions generally or related to matters specific to
the Company, or if the value of the Companys investments declines, resulting in
losses upon disposition. In order to mitigate this risk, the Company maintains a
sufficient cash balance in order to satisfy short-term liabilities as they come
due and actively pursues raising capital through various public and private
financing mechanisms to satisfy longer term needs.

(ii) Market risk:

Market risk is the risk that the fair value of, or future cash
flows from, the Companys financial instruments will significantly fluctuate
because of changes in market prices. The value of the financial instruments can
be affected by changes in interest rates, foreign exchange rates, and equity and
commodity prices. The Company is exposed to market risk in trading its
investments and unfavourable market conditions could result in dispositions of
investments at less than favourable prices.

(iii) Currency risk:

The Company is subject to currency risk through its sales of
products denominated in foreign currencies, purchases of inventory in US dollars
and product acquisitions denominated in foreign currencies.. As such, changes in
the exchange rate affect the operating results of the Company. Dependent on the
nature, amount and timing of foreign currency receipts and payments, the Company may from time to
time enter into foreign currency derivative contracts to reduce its exposure to
foreign currency risk.

69

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(iv) Credit risk:

Certain of the Companys financial assets, including cash,
short-term investments and loans receivable are exposed to the risk of financial
loss occurring as a result of default of a counterparty on its obligations to
the Company. The Company may, from time to time, invest in debt obligations. The
Company is also exposed, in the normal course of business, to credit risk from
customer receivables. These amounts are continually monitored by management for
collectability, and, in general, are lower risk as they are typically due from
large institutions or multinational distributors.

(v) Interest rate risk:

Interest risk is the impact that changes in interest rates
could have on the Companys earnings and liabilities. The Company is exposed to
variable interest rates as a result of its senior secured debt, which currently
bears interest at bank prime plus 3.0% . The Company is able to manage this
exposure through facilities under its credit agreement which allow the Company
to convert the interest charge to a fixed rate, either through converting to
Bankers' Acceptance notes on a short-term basis or through interest rate swaps
over the remaining term of the loan. As a result of this flexibility, it is
managements opinion that the Company is not exposed to significant interest
rate risk. At September 30, 2013, the Company held no interest-bearing
investments.

Item 12: Description of Securities Other Than Equity
Securities

Not applicable

PART II

Item 13: Defaults, Dividends Arrearages and
Delinquencies

Not applicable

Item 14: Material Modifications to the Rights of Security
Holders and Use of Proceeds

A.          
There have been no material modifications in the constituent instruments
defining any class of registered securities of the Company.

B.          
There has been no material limitation or qualification of the rights evidenced
by any class of registered securities of the Company by the issuance or
modification of any other class of securities of the Company.

**C.**         
There has been no material withdrawal or substitution of assets securing any
class of registered securities of the Company.

D.          
Not applicable.

E.         
Not applicable.

Item 15: Controls and Procedures

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that
are designed to ensure that the information required to be disclosed in the
Companys Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms, and that such
information is accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. After evaluating the effectiveness of the Companys disclosure
controls and procedures (as defined in Rules l3a - 15(e) and 15d- 15(e) of the
Exchange Act) as of September 30, 2013, our Chief Executive Officer and Chief
Financial Officer have concluded that as of such date, the Companys disclosure
controls and procedure were effective.

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Internal Control over Financial Reporting

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.

During the quarter ended March 31, 2013, management determined
that there was a material weakness in internal controls over financial reporting
as at September 30, 2012 which had persisted through the quarter ended December
31, 2012. In addition, management has concluded that as of September 30, 2012
and December 31, 2012, Merus disclosure controls and procedures were not
effective as a result of the material weakness in internal controls over
financial reporting. During the fiscal 2012 audit, there were a number of manual
post-close adjustments as well as several significant adjustments relating to
complex accounting areas. Concerns centred around two areas of the financial
reporting process: We did not maintain financial close process and procedures
that were adequately designed, documented and executed to support the accurate
and timely reporting of our financial results. As a result, we made a number of
manual post-close adjustments necessary in order to prepare the financial
statements included in the annual report. In certain instances, calculations
were not performed to the required level of accuracy or provisions within
contractual arrangements were not appropriately recorded. In addition, we did
not have adequate policies and procedures in place to ensure the timely,
effective review of estimates, assumptions and analyses related to complex
accounting areas. As a result, certain adjustments were made to non-cash
expenses such as goodwill and share-based payments and reclassifications
occurred as a result of not appropriately interpreting technical guidance
related to revenue recognition.

With the oversight of senior management and our audit
committee, we took steps to remediate the underlying causes of the material
weakness. In order to address the weakness in the financial close process,
management implemented additional levels of review along with increased
involvement of senior management at an earlier stage of the financial reporting
cycle. The Company also added additional period-end procedures relating to the
review of account reconciliations and preparation of schedules and analysis to
accurately reflect contractual terms and arrangements. To address the weakness
in dealing with complex accounting areas, the Company hired additional finance
personnel with specific skills in area of valuations and IFRS reporting and will
consult, as appropriate, with outside accounting expertise on complex technical
matters. Management began to implement these improvements in internal controls
shortly after the issuance of its annual report for the year ended September 30,
2012 and believes it has remediated the root causes of the audit adjustments.
The remedial measures had been implemented by the end of our second quarter as
at March 31, 2013.

The identification of the material weakness at September 30,
2012 was due to a reassessment of conditions that existed at September 30, 2012.
The deficiencies did not result in any misstatement of the results for either
the year ended September 30, 2012 or the quarter ended December 31, 2012.

As at September 30, 2013, management evaluated the design and
operating effectiveness of the Companys internal controls over financial
reporting and concluded as at September 30, 2013, the Companys internal
controls over financial reporting were operating effectively. In making this
evaluation, the Companys management used the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).

Because of its inherent limitations, the Companys internal
control over financial reporting may not prevent or detect all possible
misstatements or frauds. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with policies
or procedures may deteriorate.

71

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Auditors Attestation Report

This annual report does not include an attestation report of
our independent auditors regarding internal control over financial reporting.
Management's report was not subject to attestation by our independent auditors
pursuant to rules of the SEC that permit our Company to provide only
management's report in this annual report.

Changes In Internal Controls Over Financial Reporting

Other than described above under Ïnternal Control over
Financial Reporting, there were no material changes made to the Companys
internal controls over financial reporting during the year ended September 30,
2013 that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.

Item 16A: Audit Committee Financial Expert

The Companys Board of Directors has determined that David
Guebert, an independent director of the Company, is an audit committee
financial expert (as that term is defined in Item 407 of Regulation S-K under
the Exchange Act). The Company has determined that Mr. Guebert is an
independent director under Rules 5605(a)(2) and 5605(c)(2) of the Nasdaq
Listing Rules.

The Audit Committee has determined that all three members of
the Audit Committee are Financially Literate. Financially Literate means that
a member has the ability to read and understand a set of financial statements
that present a breadth and level of complexity of accounting issues that are
generally comparable to the breadth and complexity of the issues that can
reasonably be expected to be raised by the Companys financial statements. David
Guebert was determined to be Financially Literate based on his qualifications as
a Canadian Chartered Accountant and experience as the Chief Financial Officer of
a number of public companies where he was responsible for supervising the
preparation of financial statements of a similar breadth and complexity to the
Companys financial statements, where he was responsible for making judgments
and decisions related to accounting matters on behalf of management and where he
was accountable for internal controls and financial reporting procedures. Tim
Sorensen was determined to be Financially Literate based on his significant
experience as director of capital markets and institutional sales. Michael
Cloutier was determined to be Financially Literate based on his experience as
CEO and President of multiple companies. The particulars of each members
experience can be found in the biographies under Item 6A.

Item 16B: Code of Business Conduct

The Board has adopted a Code of Business Conduct (the Code).
All of the Companys employees, directors and officers must follow the Code,
which provides guidelines for ethical behaviour. A copy of the Code is
incorporated by reference herein as Exhibit 11.1 to this Form 20-F.

The Code sets out in detail the principles and general business
tenets and ethics and compliance policies applicable to the Companys business
and activities. The Code addresses topics such as: honest and ethical conduct
and conflicts of interest; compliance with applicable laws and Company policies
and procedures; business integrity and fair dealing; public disclosure; use of
corporate property and opportunities; confidentiality; compliance with insider
trading and other legal requirements; and records and document retention.

The Board expects all employees at all levels of the companies
within its group, as well as officers, directors, customers, suppliers, vendors,
contractors and partners, to read, understand and comply with the Code. If any
employee is uncertain about a situation, the employee is expected to refer the
matter to a supervisor or Human Resources representative. All employees are also
expected to report in good faith any violations or potential violations of the
Code and to co-operate in internal investigations about a reported violation.
Supervisors are expected to answer employee questions about the Code or direct
them to the right source of information; provide timely advice and guidance to
employees on ethics and compliance concerns; handle all employee reports
promptly and confidentially; encourage employees to ask questions and get advice
before they act; and report in good faith any violations of the Code or
situations that could result in violations to the Companys Chief Legal Officer.
In addition to employees and supervisors responsibilities
detailed above, senior management has the responsibility to continuously promote
ethical business conduct, in line with the Companys values and general business
principles.

72

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No material change report has been filed since October 1, 2007
that pertains to any conduct of a director or executive officer that constitutes
a departure from the Code.

In addition to the Code, the Company has also developed
procedures for the receipt, retention and treatment of complaints regarding
accounting, internal controls, auditing matters or evidence of an activity that
may constitute corporate fraud or violation of applicable law and for the
confidential and anonymous submission by employees of concerns regarding
questionable accounting or auditing matters. The complete Complaint Procedures
for Accounting and Auditing Matters is incorporated by reference herein as
Exhibit 11.2 to this Form 20-F.

Directors and officers of the Company are required under the
British Columbia Business Corporations Act to disclose any material
interest in any material contract or transaction with the Company and refrain
from voting with respect thereof, subject to certain exceptions.

Item 16C: Principal Accountant Fees and
Services

|(a) | AUDIT FEESwere $280,000 in fiscal 2013 and
      $300,000 in fiscal 2012. These fees include year-end audit work, consents,
      reviews and assistance with regulatory filings.                                                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(b) | AUDIT-RELATED FEESwere $68,000 in fiscal 2013 and
      $15,000 in fiscal 2012. These fees include assistance with due diligence
      and accounting research.                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(c) | TAX FEESwere $45,325 in fiscal 2013 and $69,000
      in fiscal 2012. These fees include tax compliance services and tax
      advice.                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(d) | All OTHER FEESwere $nil in fiscal 2013, and $nil
      in fiscal 2012.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(e) | In accordance with the Companys Audit Committee Charter,
      the Audit Committee ensures the independent auditor submits a formal
      written statement delineating all relationships between the independent
      auditor and the Company and pre-approves all audit fees and non-audit
      services to be provided to the Company or any subsidiary by the
      independent auditor. All services provided to the Company after the
      adoption of the Audit Committee Charter were pre-approved by the Audit
      Committee.

Item 16D: Exemptions from the Listing Standards for Audit
Committees

Not Applicable.

Item 16E: Purchases of Equity Securities by the Issuer
and Affiliated Purchaser

Not Applicable.

Item 16F: Change in Registrants Certifying
Accountant.

Saturna Group Chartered Accountants LLP has resigned as the
Companys auditor, effective February 27, 2012, at the request of the Company.
PricewaterhouseCoopers LLP was subsequently appointed as the Companys auditor,
effective March 1, 2012. The resignation of Saturna Group Chartered Accountants
LLP and the appointment of PricewaterhouseCoopers LLP as the Companys auditor
was considered and approved by the Companys Audit Committee and Board of
Directors. There were no reservations in Saturna Group Chartered Accountants
LLPs report on the financial statements of Old Merus for the year ended May 31,
2011 or any subsequent period. There have been no reportable events within the
meaning assigned under Form 20-F.

Effective April 3, 2012, PricewaterhouseCoopers LLP resigned as
the Companys auditor at the request of the Company. Deloitte LLP was appointed
as the Companys auditor, effective April 9, 2012. The resignation of PricewaterhouseCoopers LLP and the appointment of Deloitte LLP
as the Companys auditor were considered and approved by the Companys Audit
Committee and Board of Directors. PricewaterhouseCoopers LLPs did not produce
any report relating to financial statements of the Company, however, in
PricewaterhouseCoopers LLPs view, Old Merus should have been treated as the
accounting acquirer. In the Companys opinion, this difference of opinion
between the Company and PricewaterhouseCoopers LLP constituted a disagreement
as defined in Form 20-F and, as a result, constituted a reportable event. The
Companys Audit Committee did not have formal discussions with the former
auditor, however, there were discussions with the Audit Committee Chair
regarding the disagreement. The former auditor was authorized to respond fully
to inquiries by the successor auditor concerning the disagreement.

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Item 16G. Corporate Governance.

The following is a summary of the significant ways in which the
Companys corporate governance practices differ from those required to be
followed by U.S. domestic issuers pursuant to NASDAQ Listing Rules.

The Companys Board of Directors is responsible for determining
whether or not each director is independent. In making this determination, the
Board has adopted the definition of "independence" as set forth in National
Instrument 58-101 Disclosure of Corporate Governance Standards and the director
independence standards contained in Rule 5605 of the NASDAQ Listing Rules and,
for members of the Companys audit committee, the audit committee independence
provisions of Rule 10A-3 of the Exchange Act.

Rule 5620(c) of the NASDAQ Listing Rules requires that the
quorum for meetings of shareholders of a listed company be not less than 33 1/3%
of the issued and outstanding shares entitled to vote at a meeting of
shareholders. The Companys articles provide that a quorum for the transaction
of business at a shareholder meeting is two people who are, or who represent by
proxy, shareholders who, in the aggregate, hold at least 5% of the outstanding
shares of the Company carrying voting rights at the meeting.

The Company has also elected to follow Canadian rules regarding
shareholder approval for private placements and material acquisitions.

Item 16H. Mine Safety Disclosure.

Not applicable.

74

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PART III

Item 17: Financial Statements

The audited financial statements of the Company for the years
ended September 30, 2013, 2012 and 2011 are presented as follows.

(i)
    Auditors Report
    F-1(ii)
    Consolidated
      Balance Sheets as at September 30, 2013 and 2012
    F-2(iii)
    Consolidated
      Statements of Operations for the years ended September 30, 2013, 2012 and
      2011
    F-3(iv)
    Consolidated
      Statements of Cash Flows for the years ended September 30, 2013, 2012 and
      2011
    F-4(v)
    Notes to
      Consolidated Financial Statements
    F-5


Item 18: Financial Statements

The Company has elected to provide financial statements
pursuant to Item 17.

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Item 19: Exhibits

EXHIBIT INDEX

Exhibit No.
    Description1.1
    Articles dated December 19, 2011 (Incorporated by
      reference to our Report of Foreign Private Issuer on Form 6-K filed on
      December 21, 2011)1.2
    Notice of Articles of Merus Labs International Inc. dated
      October 1, 2012 (Incorporated by reference to our Annual Report on Form
      20-F, filed on January 2, 2013)1.3
    Certificate of Amalgamation dated October 1, 2012
      (Incorporated by reference to our Annual Report on Form 20-F, filed on
      January 2, 2013)4.1
    Exclusive License and Distribution Agreement between
      Merus Labs and Innocoll Pharmaceuticals Limited dated September 17, 2010
      (Incorporated by reference to our Report by Foreign Private Issuer on Form
      6-K filed on April 16, 2012)4.2
    Asset Purchase Agreement between Merus Labs and Iroko
      International LP dated May 13, 2011 (Incorporated by reference to our
    Report by Foreign Private Issuer on Form 6-K filed on April 16, 2012)4.3
    Arrangement Agreement between Old Merus and Envoy dated
      November 10, 2011 (Incorporated by reference to our Report by Foreign
      Private Issuer on Form 6-K filed on April 16, 2012)4.4
    Asset Purchase Agreement between Novartis Pharma AG and
      Merus Labs Luxco SARL dated July 11, 2012 (portions of the exhibit have
      been omitted pursuant to a request for confidential treatment)
      (Incorporated by reference to our Annual Report on Form 20-F, filed on
      January 2, 2013, as amended)4.5
    Credit Agreement among Merus Labs International Inc.,
      Merus Labs Luxco S.A.R.L., Merus Labs Inc., ECG Holdings Inc., Merus Labs
      Netherlands B.V. and PDL BioPharma, Inc. dated July 10, 2012 (portions
      of the exhibit have been omitted pursuant to a request for confidential
      treatment) (Incorporated by reference to our Annual Report on Form
      20-F, filed on January 2, 2013, as amended)4.6
    Credit Agreement among Merus Labs International Inc.,
      Bank of Montreal and Royal Bank of Canada dated September 20, 2013
      (Incorporated by reference to our Report by Foreign Private Issuer on Form
      6-K filed on September 20, 2013)4.7
    Form of Convertible Debenture dated September 20, 20134.8
    2011 Incentive Stock Option Plan8.1
    Subsidiaries (contained in Item 4.A hereof)11.1
    Code of Business Conduct (Incorporated by reference to
      our Annual Report on Form 20-F, filed on December 29, 2005)11.2
    Complaint Procedures for Accounting and Auditing Matters
      (Incorporated by reference to our Annual Report on Form 20-F, filed on
      December 29, 2005)11.3
    Board Mandate (Incorporated by reference to our Annual
      Report on Form 20-F, filed on December 29, 2005)12.1*
    Certification of Chief Executive Officer Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 200212.2*
    Certification of Chief Financial Officer Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200213.1*
    Certifications of Chief Executive Officer Pursuant to
  Section 906 of the Sarbanes-Oxley Act of 2002


76

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13.2*
    Certifications of Chief Financial Officer Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 200215.1
    Audit Committee Charter (Incorporated by reference to our
      Annual Report on Form 20-F, filed on December 29, 2005)15.2
    Compensation Committee Charter (Incorporated by reference
      to our Annual Report on Form 20-F, filed on December 29, 2005)15.3
    Nominating and Corporate Governance Committee Charter
      (Incorporated by reference to our Annual Report on Form 20-F, filed on
      December 29, 2005)16.1
    Letter dated February 27, 2012 from Saturna Group
      Chartered Accountants LLP has re change in certifying accountant
      (Incorporated by reference to our Report by Foreign Private Issuer on Form
      6- K filed on April 20, 2012)16.2
    Letter dated April 3, 2012 from PricewaterhouseCoopers
      LLP re change in certifying accountant (Incorporated by reference to our
    Report by Foreign Private Issuer on Form 6-K filed on April 20, 2012)


* Filed as an exhibit to this annual report on Form 20-F

77

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SIGNATURES

The registrant hereby certifies that it meets all of the
requirements for filing on Form 20-F and that it has duly caused and authorized
the undersigned to sign this Annual Report on its behalf.

|                        | MERUS LABS INTERNATIONAL INC.             
|----------------------- | ------------------------------------------
|                        |                                           
|                        |                                           
|Date: December 30, 2013 | /s/ ELIE FARAH                            
|                        | Name:     Elie Farah                      
|                        | Title:      
      Chief Executive Officer

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