Document:

Exhibit 4.2

 

Consolidated Financial Statements
of

 

BELLUS
HEALTH INC.

 

Years ended December 31, 2018
and 2017

 

     

     

    

 

 

 

	 	KPMG LLP	Telephone	(514) 840-2100
	 	600 de Maisonneuve Blvd., West	Fax	(514) 840-2187
	 	Suite 1500	Internet	www.kpmg.ca
	 	Tour KPMG	 
	 	Montréal (Québec) H3A 0A3	 

 

Independent
auditors’ Report

 

To the Shareholders of BELLUS Health Inc.

 

Opinion

 

We have audited the consolidated financial
statements of BELLUS Health Inc. (the Entity), which comprise:

 

		·	the consolidated statements of financial position as at
December 31, 2018 and December 31, 2017;

		·	the consolidated statements of loss and other comprehensive
loss for the years then ended;

		·	the consolidated statements of changes in shareholders’
equity for the years then ended;

		·	the consolidated statements of cash flows for the years
then ended;

		·	and notes to the consolidated financial statements, including
a summary of significant accounting policies.

 

(Hereinafter referred to as the “financial
statements”).

 

In our opinion, the accompanying financial
statements present fairly, in all material respects, the consolidated financial position of the Entity as at December 31, 2018
and December 31, 2017, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance
with International Financial Reporting Standards (IFRS).

 

Basis for Opinion

 

We conducted our audit in accordance with
Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the “Auditors’
Responsibilities for the Audit of the Financial Statements” section of our auditors’ report.

 

We are independent of the Entity in accordance
with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other
responsibilities in accordance with these requirements.

 

We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our opinion.

 

Other Information

 

Management is responsible for the other
information. Other information comprises:

 

		·	the information included in Management’s Discussion
and Analysis filed with the relevant Canadian Securities Commissions;

		·	the information, other than the financial statements and
the auditors’ report thereon, included in a document likely to be entitled “2018 Annual Report”.

 

Our opinion on the financial statements
does not cover the other information and we do not and will not express any form of assurance conclusion thereon.

 

KPMG
LLP is a Canadian limited liability partnership and a member firm of the KPMG

network of independent member firms affiliated with KPMG International Cooperative

(“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP.

 

     

     

    

 

 

 

In connection with our audit of the financial
statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information
is materially inconsistent with the financial statements or our knowledge obtained in the audit and remain alert for indications
that the other information appears to be materially misstated.

 

We obtained the information included in
Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions as at the date of this auditors’
report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of
this other information, we are required to report that fact in the auditors’ report.

 

We have nothing to report in this regard.

 

The information, other than the financial
statements and the auditors’ report thereon, included in a document likely to be entitled “2018 Annual Report”
is expected to be made available to us after the date of this auditors’ report. If, based on the work we will perform on
this other information, we conclude that there is a material misstatement of this other information, we are required to report
that fact to those charged with governance.

 

Responsibilities of Management and
Those Charged with Governance for the Financial Statements

 

Management is responsible for the preparation
and fair presentation of the financial statements in accordance with International Financial Reporting Standards (IFRS), and for
such internal control as management determines is necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error.

 

In preparing the financial statements, management
is responsible for assessing the Entity’s ability to continue as a going concern, disclosing as applicable, matters related
to going concern and using the going concern basis of accounting unless management either intends to liquidate the Entity or to
cease operations, or has no realistic alternative but to do so.

 

Those charged with governance are responsible
for overseeing the Entity’s financial reporting process.

 

Auditors’
Responsibilities for the Audit of the Financial Statements

 

Our objectives are to obtain reasonable
assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error,
and to issue an auditors’ report that includes our opinion.

 

Reasonable assurance is a high level of
assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will
always detect a material misstatement when it exists.

 

Misstatements can arise from fraud or error
and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions
of users taken on the basis of the financial statements.

 

As part of an audit in accordance with Canadian
generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit.

 

     

     

    

 

 

We also:

		·	identify and assess the risks of material misstatement
of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion;

		·	the risk of not detecting a material misstatement resulting
from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations,
or the override of internal control;

		·	obtain an understanding of internal control relevant to
the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Entity's internal control;

		·	evaluate the appropriateness of accounting policies used
and the reasonableness of accounting estimates and related disclosures made by management;

		·	conclude on the appropriateness of management's use of
the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related
to events or conditions that may cast significant doubt on the Entity's ability to continue as a going concern. If we conclude
that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures
in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit
evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Entity to cease
to continue as a going concern;

		·	evaluate the overall presentation, structure and content
of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions
and events in a manner that achieves fair presentation;

		·	communicate with those charged with governance regarding,
among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies
in internal control that we identify during our audit;

		·	provide those charged with governance with a statement
that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and
other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards;

		·	obtain sufficient appropriate audit evidence regarding
the financial information of the entities or business activities within the Group Entity to express an opinion on the financial
statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible
for our audit opinion.

 

The engagement partner on the audit resulting
in this auditors’ report is Marc Tétreault.

 

Montreal, Canada

February 20, 2019

 

     

     

    

 

Bellus health INC.

Consolidated Financial Statements

 

Years ended December 31, 2018 and
2017

 

	Consolidated Financial Statements	 
	 	 
	Consolidated Statements of Financial Position	1
	 	 
	Consolidated Statements of Loss	2
	 	 
	Consolidated Statements of Other Comprehensive Loss	3
	 	 
	Consolidated Statements of Changes in Shareholders’ Equity	4
	 	 
	Consolidated Statements of Cash Flows	5
	 	 
	Notes to Consolidated Financial Statements	6

 

     

     

    

 

bellus health INC.

Consolidated Statements of Financial Position

 

December 31, 2018 and 2017

(in thousands of Canadian dollars)

 

	 	 	 	December 31,	 	 	 	December 31,	 
	 	 	 	2018	 	 	 	2017	 
	 	 	 	 	 
	Assets	 	 	 	 
	 	 	 	 	 
	Current assets:	 	 	 	 	 	 	 	 
	 	Cash and cash equivalents (note 5)	 	$	14,933	 	 	$	7,749	 
	 	Short-term investments (note 5)	 	 	33,973	 	 	 	16,139	 
	 	Trade and other receivables (note 6)	 	 	809	 	 	 	1,714	 
	 	Contingent consideration receivable (note 7)	 	 	—	 	 	 	384	 
	 	Prepaid expenses and other assets	 	 	1,149	 	 	 	84	 
	 	Total current assets	 	 	50,864	 	 	 	26,070	 
	 	 	 	 	 	 	 	 	 
	Non-current assets:	 	 	 	 	 	 	 	 
	 	Other assets	 	 	77	 	 	 	69	 
	 	In-process research and development assets (note 8)	 	 	2,359	 	 	 	2,359	 
	 	Total non-current assets	 	 	2,436	 	 	 	2,428	 
	Total Assets	 	$	53,300	 	 	$	28,498	 
	 	 	 	 	 	 	 	 	 
	Liabilities and Shareholders' Equity	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Current liabilities:	 	 	 	 	 	 	 	 
	 	Trade and other payables (note 10)	 	$	2,716	 	 	$	2,190	 
	 	Financial liabilities – CVRs (note 11)	 	 	—	 	 	 	20	 
	 	Total current liabilities	 	 	2,716	 	 	 	2,210	 
	Total Liabilities	 	 	2,716	 	 	 	2,210	 
	 	 	 	 	 	 	 	 	 
	Shareholders' equity:	 	 	 	 	 	 	 	 
	 	Share capital (note 12 (a))	 	 	502,706	 	 	 	467,253	 
	 	Other equity (notes 12 (b) (i) and (ii))	 	 	27,101	 	 	 	26,202	 
	 	Deficit	 	 	(479,223	)	 	 	(467,167	)
	Total Shareholders’ Equity	 	 	50,584	 	 	 	26,288	 
	Commitments and contingencies (note 17)	 	 	 	 	 	 	 	 
	Total Liabilities and Shareholders’ Equity	 	$	53,300	 	 	$	28,498	 

 

See accompanying notes to consolidated financial
statements.

 

On behalf of the Board of Directors
by:

 

	(Signed) Pierre Larochelle	(Signed) Franklin M. Berger 
	Director	Director

 

    	1

     

    

 

bellus health INC.

Consolidated Statements of Loss

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars,
except per share data)

 

	 	 	Year ended	 	 	 	Year ended	 
	 	 	December 31,	 	 	 	December 31,	 
	 	 	2018	 	 	 	2017	 
	 	 	 	 	 
	Revenues (note 9)	 	$	35	 	 	$	165	 
	 	 	 	 	 	 	 	 	 
	Expenses:	 	 	 	 	 	 	 	 
	 	Research and development	 	 	7,185	 	 	 	3,610	 
	 	Research tax credits	 	 	(653	)	 	 	(289	)
	 	 	 	6,532	 	 	 	3,321	 
	 	 	 	 	 	 	 	 	 
	 	General and administrative	 	 	3,409	 	 	 	2,529	 
	 	Total operating expenses	 	 	9,941	 	 	 	5,850	 
	 	 	 	 	 	 	 	 	 	 
	Loss from operating activities	 	 	(9,906	)	 	 	(5,685	)
	 	 	 	 	 	 	 	 	 
	Finance income	 	 	746	 	 	 	80	 
	Finance costs	 	 	(5	)	 	 	(61	)
	Net finance income (note 14)	 	 	741	 	 	 	19	 
	 	 	 	 	 	 	 	 	 
	Change in fair value of contingent consideration receivable (note 7)	 	 	81	 	 	 	—	 
	Realized gain on sale of investment in FB Health (note 7)	 	 	—	 	 	 	1,909	 
	Gain on sale of subsidiary (note 9)	 	 	—	 	 	 	1,944	 
	Loss before income taxes	 	 	(9,084	)	 	 	(1,813	)
	 	 	 	 	 	 	 	 	 
	Deferred tax expense (note 15)	 	 	—	 	 	 	61	 
	Net loss for the year	 	$	(9,084	)	 	$	(1,874	)
	 	 	 	 	 	 	 	 	 
	Loss per share (note 16)	 	 	 	 	 	 	 	 
	 	Basic and diluted	 	$	(0.08	)	 	$	(0.03	)

 

See accompanying notes to consolidated financial
statements.

 

    	2

     

    

 

bellus health INC.

Consolidated Statements of Other Comprehensive
Loss

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars)

 

	 	 	Year ended	 	 	Year ended	 
	 	 	December 31,	 	 	December 31,	 
	 	 	2018	 	 	2017	 
	 	 	 	 	 	 	 
	Net loss for the year	 	$	(9,084	)	 	$	(1,874	)
	 	 	 	 	 	 	 	 	 
	Other comprehensive loss (that may be reclassified subsequently to net loss):	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Unrealized gain on investment in FB Health (note 7)	 	 	—	 	 	 	1,514	 
	Related income taxes expense	 	 	—	 	 	 	(204	)
	Realized gain on investment in FB Health reclassified to net loss (note 7)	 	 	—	 	 	 	(1,909	)
	Related income taxes expense	 	 	—	 	 	 	265	 
	Other comprehensive loss for the year	 	 	—	 	 	 	(334	)
	Comprehensive loss for the year	 	$	(9,084	)	 	$	(2,208	)

 

See accompanying notes to consolidated financial
statements.

 

    	3

     

    

 

bellus health INC.

Consolidated Statements of Changes
in Shareholders’ Equity

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars)

 

	 	 	Share

capital	 	 	Other

equity	 	 	Accumulated

other

comprehensive

income	 	 	Deficit	 	 	Total	 
	 	 	(note 12(a))	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, December 31, 2017	 	$	467,253	 	 	$	26,202	 	 	$	—	 	 	$	(467,167	)	 	$	26,288	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total comprehensive loss for the year:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net loss and comprehensive loss	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(9,084	)	 	 	(9,084	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total comprehensive loss for the year	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(9,084	)	 	 	(9,084	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Transactions with shareholders, recorded directly in shareholders’ equity:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Issued in connection with the 2018 Offering (note 12 (a) (i))	 	 	35,000	 	 	 	387	 	 	 	—	 	 	 	(2,972	)	 	 	32,415	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Issued upon broker warrants exercise (note 12 (b) (ii))	 	 	453	 	 	 	(187	)	 	 	—	 	 	 	—	 	 	 	266	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Stock-based compensation (note 12 (b) (i))	 	 	—	 	 	 	699	 	 	 	—	 	 	 	—	 	 	 	699	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, December 31, 2018	 	$	502,706	 	 	$	27,101	 	 	$	—	 	 	$	(479,223	)	 	$	50,584	 

 

	 	 	Share

capital	 	 	
Other

equity	 	 	Accumulated

other

comprehensive

income	 	 	Deficit	 	 	Total	 
	 	 	(note 12(a))	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, December 31, 2016	 	$	445,753	 	 	$	25,527	 	 	$	334	 	 	$	(463,351	)	 	$	8,263	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total comprehensive loss for the year:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net loss	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(1,874	)	 	 	(1,874	)
	Other comprehensive loss	 	 	—	 	 	 	—	 	 	 	(334	)	 	 	—	 	 	 	(334	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total comprehensive loss for the year	 	 	—	 	 	 	—	 	 	 	(334	)	 	 	(1,874	)	 	 	(2,208	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Transactions with shareholders, recorded directly in shareholders’ equity:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Issued in connection with the 2017 Offering (note 12 (a) (ii))	 	 	20,000	 	 	 	483	 	 	 	—	 	 	 	(1,942	)	 	 	18,541	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Issued as part of upfront payment for license acquisition (note 12 (a) (iii))	 	 	1,500	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	1,500	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Stock-based compensation (note 12 (b) (i))	 	 	—	 	 	 	192	 	 	 	—	 	 	 	—	 	 	 	192	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, December 31, 2017	 	$	467,253	 	 	$	26,202	 	 	$	—	 	 	$	(467,167	)	 	$	26,288	 

 

See accompanying notes to consolidated financial
statements.

 

    	4

     

    

 

bellus health INC.

Consolidated Statements of Cash Flows

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars)

 

	 	 	 	Year ended	 	 	 	Year ended	 
	 	 	 	December 31,	 	 	 	December 31,	 
	 	 	 	2018	 	 	 	2017	 
	 	 	 	 	 
	Cash flows from (used in) operating activities:	 	 	 	 	 	 	 	 
	 	Net loss for the year	 	$	(9,084	)	 	$	(1,874	)
	 	Adjustments for:	 	 	 	 	 	 	 	 
	 	 	Stock-based compensation	 	 	699	 	 	 	192	 
	 	 	Net finance income	 	 	(741	)	 	 	(19	)
	 	 	Change in fair value of contingent consideration	 	 	(81	)	 	 	—	 
	 	 	Realized gain on sale of investment in FB Health	 	 	—	 	 	 	(1,909	)
	 	 	Gain on sale of subsidiary	 	 	—	 	 	 	(1,944	)
	 	 	Deferred tax expense	 	 	—	 	 	 	61	 
	 	 	Other items	 	 	42	 	 	 	(13	)
	 	Changes in operating assets and liabilities	 	 	 	 	 	 	 	 
	 	 	Trade and other receivables	 	 	30	 	 	 	(29	)
	 	 	Prepaid expenses and other assets	 	 	(999	)	 	 	33	 
	 	 	Trade and other payables	 	 	(20	)	 	 	1,256	 
	 	Financial liabilities – CVRs	 	 	(20	)	 	 	(115	)
	 	 	 	 	(10,174	)	 	 	(4,361	)
	 	 	 	 	 	 	 	 	 
	Cash flows from (used in) financing activities:	 	 	 	 	 	 	 	 
	 	Issuance of common shares through equity offerings, net of share issue costs	 	 	32,888	 	 	 	18,831	 
	 	Issuance of common shares upon broker warrant exercise	 	 	266	 	 	 	—	 
	 	Interest and bank charges paid	 	 	(5	)	 	 	(11	)
	 	 	 	 	33,149	 	 	 	18,820	 
	 	 	 	 	 	 	 	 	 
	Cash flows from (used in) investing activities:	 	 	 	 	 	 	 	 
	 	Net purchases of short-term investments	 	 	(17,651	)	 	 	(11,880	)
	 	Proceeds on sale of investment in FB Health (note 7)	 	 	465	 	 	 	1,769	 
	 	Acquisition of in-process research and development asset, net of costs and deferred development support payments (note 8)	 	 	475
 
	 	 	 	(1,334)
 
	 
	 	Proceeds from sale of subsidiary, net of costs (note 9)	 	 	400	 	 	 	2,117	 
	 	Interest received	 	 	340	 	 	 	80	 
	 	 	 	(15,971	)	 	 	(9,248	)
	Net increase in cash and cash equivalents	 	 	7,004	 	 	 	5,211	 
	 	 	 	 	 	 	 	 	 
	Cash and cash equivalents, beginning of year	 	 	7,749	 	 	 	2,575	 
	Effect of foreign exchange on cash and cash equivalents	 	 	180	 	 	 	(37	)
	 	 	 	 	 	 	 	 	 
	Cash and cash equivalents, end of year	 	$	14,933	 	 	$	7,749	 
	 	 	 	 	 	 	 	 	 
	Supplemental cash flow disclosure: 
	 	 	 	 	 	 	 	 
	Non-cash transactions:	 	 	 	 	 	 	 	 
	 	Contingent consideration receivable
in connection with sale of investment in FB Health (note 7)	 	$	—	 	 	$	384	 
	 	Issuance of common shares in connection
with acquisition of in-process research and development asset (note 8)	 	 	—	 	 	 	1,500	 
	 	Development support payment receivable
in connection with acquisition of in-process research and development asset in Trade and other receivables (note 8)	 	 	—	 	 	 	475	 
	 	Deferred payment on sale of subsidiary in Trade and other receivables (note 9)	 	 	—	 	 	 	400	 
	 	Share issue costs - 2018 Offering, in Trade and other payables (note 12(a)(i))	 	 	473	 	 	 	—	 
	 	Issuance of broker warrants in connection with 2018 Offering (note 12 (b) (ii))	 	 	387	 	 	 	—	 
	 	Share issue costs - 2017 Offering, in Trade and other payables (note 12(a)(ii))	 	 	—	 	 	 	290	 
	 	Issuance of broker warrants in connection with 2017 Offering (note 12 (b) (ii))	 	 	—	 	 	 	483	 
	 	Ascribed
value related to issuance of common shares upon broker warrants exercise (note 12 (b) (ii))	 	 	187	 	 	 	—	 
	 	Value of DSUs in Prepaid expenses and other assets (note
12 (b) (iii))	 	 	73	 	 	 	—	 

 

See accompanying notes to consolidated financial
statements.

 

    	5

     

    

 

bellus health INC.

Notes to Consolidated Financial Statements

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		1.	Reporting entity:

 

BELLUS Health Inc. (“BELLUS
Health” or the “Company”) is a clinical-stage biopharmaceutical company developing novel therapeutics for conditions
with high unmet medical need. The Company’s lead drug candidate is BLU-5937 being developed for the treatment of chronic
cough. The Company is domiciled in Canada. The address of the Company’s registered office is 275 Armand-Frappier Blvd., Laval,
Quebec, H7V 4A7. The Company's shares trade on the Toronto Stock Exchange (“TSX”) under the symbol BLU.

 

The Company is subject to a number
of risks associated with the conduct of its drug development programs and their results, the establishment of strategic alliances
and the successful development of new drug products and their marketing. The Company has incurred significant operating losses
and negative cash flows from operations since inception. To date, the Company has financed its operations primarily through public
offerings of common shares, private placements, the issuance of convertible notes, asset sales and the proceeds from research tax
credits. The ability of the Company to ultimately achieve future profitable operations is dependent upon the successful expansion
and development of its pipeline of projects, obtaining regulatory approval in various jurisdictions and successful sale or commercialization
of the Company’s products and technologies, which is dependent on a number of factors outside of the Company’s control.

 

		2.	Basis of preparation:

 

		(a)	Statement of compliance:

 

These consolidated
financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as
issued by the International Accounting Standards Board (“IASB”).

 

These consolidated financial
statements for the year ended December 31, 2018, were approved by the Board of Directors on February 20, 2019.

 

		(b)	Basis of measurement:

 

The consolidated financial statements
have been prepared on the historical cost basis except for the following items in the consolidated statement of financial position:

 

		(i)	contingent consideration receivable in connection with the sale of the investment in FB Health,
which is measured at fair value; and

 

		(ii)	liabilities for cash-settled share-based payment arrangements which are measured at fair value,
and equity-classified share-based payment arrangements which are measured at fair value at grant date pursuant to IFRS 2, Share-based
payment.

 

    	6

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		2.	Basis of preparation (continued):

 

		(b)	Basis of measurement (continued):

 

Certain of the Company’s
accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities.
In establishing fair value, the Corporation uses a fair value hierarchy based on levels as defined below:

 

		·	Level 1: defined as observable inputs such as quoted prices in active markets.

 

		·	Level 2: defined as inputs other than quoted prices in active markets that are either directly
or indirectly observable.

 

		·	Level 3: defined as inputs that are based on little or no little observable market data, therefore
requiring entities to develop their own assumptions.

 

		(c)	Functional and presentation currency:

 

Items included in the consolidated
financial statements of the Company are measured using the currency of the primary economic environment in which the Company operates
(the functional currency). These consolidated financial statements are presented in Canadian dollars, which is the Company’s
functional and presentation currency.

 

		(d)	Use of estimates and judgments:

 

The preparation of the consolidated
financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application
of accounting policies and the reported amounts of assets, liabilities, income and expenses. The reported amounts and note disclosures
reflect management’s best estimate of the most probable set of economic conditions and planned course of actions. Actual
results may differ from these estimates.

 

A critical judgment in applying
accounting policies that has the most significant effect on the amounts recognized in the consolidated financial statements relates
to the use of the going concern basis of preparation of the financial statements. At the end of each reporting period, management
assesses the basis of preparation of the financial statements. These financial statements have been prepared on a going concern
basis in accordance with IFRS. The going concern basis of presentation assumes that the Company will continue its operations for
the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal course of
business.

 

    	7

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		2.	Basis of preparation (continued):

 

		(d)	Use of estimates and judgments (continued):

 

Information about assumptions
and estimation uncertainties that have a significant risk of resulting in a material adjustment is included within the following
notes and is described below:

 

		(i)	Estimation of accrued expenses:

 

As part of the process of preparing
its financial statements, the Company is required to estimate its accrued expenses. This process involves reviewing open contracts
and purchase orders, communicating with personnel to identify services that have been performed on the Company’s behalf and
estimating the level of service performed and the associated cost incurred for the service when the Company has not yet been invoiced
or otherwise notified of the actual cost.

 

For research and development
activities, the majority of service providers invoice the Company in arrears for services performed, on a pre-determined schedule
or when contractual milestones are met; however, some require advanced payments. There may be instances in which payments to the
service providers will exceed the level of services provided and result in a prepayment of the expense. The majority of prepaid
expenses in the Company’s statement of financial position relate to these instances.

 

The Company estimates its accrued
expenses as of each statement of financial position date in its financial statements based on facts and circumstances known at
that time.

 

		(ii)	Estimating the recoverable amount of the in-process research and development asset related to BLU-5937
for the purpose of the annual impairment test (note 8).

 

Other areas
requiring the use of management estimates and judgements include assessing the recoverability of research tax credits as well as
estimating the initial fair value of equity-classified stock-based compensation. Estimates and underlying assumptions are reviewed
on an ongoing basis. Revisions to accounting estimates are recognized in the period in which they are made and in future periods
affected.

 

		3.	Significant accounting policies:

 

The accounting policies set out
below have been applied consistently to all years presented in these consolidated financial statements.

 

		(a)	Basis of consolidation:

 

These consolidated
financial statements include the accounts of BELLUS Health Inc. and its subsidiaries.

 

    	8

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		3.	Significant accounting policies (continued):

 

		(a)	Basis of consolidation (continued):

 

Subsidiaries
are entities controlled by BELLUS Health Inc. The financial statements of subsidiaries are included in the consolidated financial
statements from the date that control commences until the date that control ceases. Intercompany balances and transactions have
been eliminated on consolidation.

 

On March 16, 2017, BELLUS Health
entered into a share purchase agreement (“Share Purchase Agreement”) with Taro Pharmaceuticals Inc. (“Taro”)
for the sale of the Company’s wholly-owned subsidiary Thallion Pharmaceuticals Inc. (“Thallion”), including all
the rights to the drug candidate ShigamabTM (refer to note 9). Prior to the effective date of the Share Purchase Agreement,
BELLUS Health proceeded with an internal reorganization under which BHI Limited Partnership (“BHI LP”), a partnership
operated by BELLUS Health where BELLUS Health’s main business and operations were carried, was dissolved, and transferred
its assets and liabilities to BELLUS Health.

 

On March 16, 2017, the Company
incorporated a new wholly-owned subsidiary, BELLUS Health Cough Inc.

 

		(b)	Cash, cash equivalents and short-term investments:

 

The Company considers all investments
with maturities of three months or less at inception, that are highly liquid and readily convertible into cash, to be cash equivalents.
Investments with maturities greater than three months and less than one year are presented as short-term investments in the consolidated
statement of financial position.

 

		(c)	Revenue recognition:

 

Revenue from contracts with customers
is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third
parties. A company recognizes revenue when it transfers control of a product or service to a customer. The Company does not have
any revenue from contracts with customers.

 

Revenue from other contracts may
be derived from development and other services provided by the Company. Revenue from contracted services is recognized over time
as the contracted services are performed.

 

Consideration received from other
contracts may also include amounts received as licensing fees, costs reimbursements, sales-based royalty payments, upfront payments
and regulatory and sales-based milestone payments for specific achievements. Revenue is recognized in income only when conditions
and events under the contract have been met or occurred and it is probable that the Company will collect the consideration to which
it is entitled.

 

    	9

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		3.	Significant accounting policies (continued):

 

		(d)	Research and development:

 

Research and development costs
consist of direct and indirect expenditures, including a reasonable allocation of overhead expenses, associated with the Company's
various research and development programs. Overhead expenses comprise general and administrative support provided to the research
and development programs and involve costs associated with support activities.

 

Research expenditures undertaken
with the prospect of gaining new scientific or technical knowledge are expensed as incurred. Development expenditures are deferred
when they meet the criteria for capitalization in accordance with IFRS, and the future benefits could be regarded as being reasonably
certain. The criteria to be fulfilled in order to capitalize development costs are if such costs can be measured reliably, if the
product or process is technically and commercially feasible, if future economic benefits are probable and if the Company intends
to and has sufficient resources to complete the development and to use or sell the asset. As at December 31, 2018 and 2017, no
development costs were deferred.

 

		(e)	In-process research and development asset:

 

The in-process research and development
(“IPR&D”) asset acquired by the Company is accounted for as an indefinite-lived intangible asset until the project
is completed or abandoned, at which point it will be amortized or impaired, respectively. Subsequent research and development costs
associated with the IPR&D asset are accounted for consistent with the research and development policy in note 3 (d).

 

The Company assesses at each reporting
date whether there is an indication that the asset may be impaired. Irrespective of whether there is any indication of impairment,
the IPR&D asset is tested for impairment annually by comparing its carrying amount with its recoverable amount.

 

The asset’s recoverable
amount is the greater of its fair value less costs to sell and its value in use. If the carrying amount of the asset exceeds its
recoverable amount, the asset is considered impaired and is written down to its recoverable amount immediately. Impairment losses
are recognized in income. A previously recognized impairment loss is reversed only if there has been a change in the assumptions
used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so
that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been
determined, had no impairment loss been recognized for the asset in prior years.

 

    	10

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		3.	Significant accounting policies (continued):

 

		(f)	Government assistance:

 

Government assistance, consisting
of research tax credits, is recorded as a reduction of the related expense. Research tax credits are recognized when management
determines that there is reasonable assurance that the tax credits will be received. Research tax credits claimed for the current
and prior years are subject to government review and approval which could result in adjustments to amounts recognized by the Company.
Adjustments from tax authorities, if any, would be recognized in the period of revision.

 

		(g)	Foreign exchange:

 

Transactions in foreign currencies
are translated to the functional currency of the Company at exchange rates at the dates of the transactions. Monetary assets and
liabilities denominated in foreign currencies are translated to the functional currency at the exchange rate at the reporting date.
Non-monetary assets and liabilities denominated in foreign currencies that are measured at historical cost are translated using
the exchange rate at the date of the transaction. Income and expenses denominated in foreign currencies are translated at exchange
rates in effect at the transaction date. Translation gains and losses are recognized in income.

 

		(h)	Leased assets:

 

All of the Company’s leases
are operating leases. Lease payments related to leased assets are recognized in income on a straight-line
basis over the term of the lease.

 

		(i)	Income taxes:

 

Deferred tax is recognized for
temporary differences between the financial reporting bases and the income tax bases of the Company’s assets and liabilities
and is recorded using the substantively enacted tax rates anticipated to be in effect when the tax differences are expected to
reverse. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities
and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities,
but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized
simultaneously. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to
the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets
are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will
be realized.

 

    	11

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		3.	Significant accounting policies (continued):

 

		(j)	Provisions:

 

A provision is recognized if,
as a result of a past event, the Company has a present, legal or constructive obligation that can be estimated reliably, and it
is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting
the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks
specific to the liability. The unwinding of the discount is recognized as finance cost.

 

		(k)	Earnings per share:

 

Basic earnings per share are determined
using the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed in a
manner consistent with basic earnings per share, except that the weighted average number of shares outstanding is increased to
include additional shares from the assumed exercise of dilutive stock options and broker warrants. The number of additional shares
is calculated by assuming that outstanding stock options and broker warrants were exercised, and that the proceeds from such exercises
were used to acquire common shares at the average market price during the reporting period.

 

		(l)	Employee benefits:

 

		(i)	Short-term employee benefits:

 

Short-term employee benefit obligations
are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount
expected to be paid if the Company has a present legal or constructive obligation to pay this amount as a result of past service
provided by the employee, and the obligation can be estimated reliably.

 

		(ii)	Share-based payment arrangements:

 

The Company follows the fair
value-based method to account for stock options granted to employees, whereby compensation cost is measured at fair value at the
date of grant and is expensed over the award’s vesting period with a corresponding increase to equity. For the stock options
with graded vesting, the fair value of each tranche is recognized over its respective vesting period. The amount recognized as
an expense is adjusted to reflect the number of awards for which the related service vesting conditions are expected to be met,
such that the amount ultimately recognized as an expense is based on the number of awards that meet the related service conditions
at the vesting date.

 

When stock options are exercised,
the Company issues new shares. The proceeds received, together with the related portion previously recorded in other equity, are
credited to share capital.

 

    	12

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		3.	Significant accounting policies (continued):

 

		(l)	Employee benefits (continued):

 

		(ii)	Share-based payment arrangements (continued):

 

The Company also grants Deferred
Share Units (“DSU”) as compensation for directors and designated employees. Upon termination of service, DSU participants
are entitled to receive for each DSU credited to their account the payment in cash on the date of settlement based on the value
of a BELLUS Health common share. For DSUs, compensation cost is measured based on the market price of the Company's common shares
from the date of grant through to the settlement date. Any changes in the market value of the Company's common shares through to
the settlement date result in a change to the measure of compensation cost for those awards and are recorded in income.

 

		(m)	Financial instruments:

 

The Company measures its financial
instruments as follows:

 

Financial assets and Financial
liabilities

 

		(i)	Recognition and initial measurement:

 

Trade receivables are initially
recognized when they are originated. All other financial assets and financial liabilities are initially recognized when the Company
becomes a party to the contractual provisions of the instrument.

 

A financial asset (unless it
is a trade receivable without a significant financing component) or financial liability is initially measured at fair value plus,
for an item not at fair value through profit or loss (“FVTPL”), transaction costs that are directly attributable to
its acquisition or issue. A trade receivable without a significant financing component is initially measured at the transaction
price.

 

		(ii)	Classification and subsequent measurement:

 

Financial
assets - Classification:

 

On initial recognition, a financial
asset is classified as measured at amortized cost, fair value through other comprehensive income (“FVOCI”) –
debt investment, FVOCI – equity investment or FVTPL.

 

Financial assets are not reclassified
subsequent to their initial recognition unless the Company changes its business model for managing financial assets, in which case
all affected financial assets are reclassified on the first day of the first reporting period following the change in the business
model.

 

    	13

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		3.	Significant accounting policies (continued):

 

		(m)	Financial instruments (continued):

 

Financial assets and Financial
liabilities (continued)

 

		(ii)	Classification and subsequent measurement (continued):

 

Financial assets - Classification
(continued):

 

A financial asset is measured
at amortized cost if it meets both the following conditions and is not designated as at FVTPL: it is held within a business model
whose objective is to hold assets to collect contractual cash flows; and its contractual terms give rise on specified dates to
cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

A debt investment is measured
at FVOCI if it meets both of the following conditions and is not designated as FVTPL: it is held within a business model whose
objective is achieved by both collecting contractual cash flows and selling financial assets; and its contractual terms give rise
on specified dates to cash flows that are solely payments of principal and interest in the principal amount outstanding.

 

On initial recognition of an
equity investment that is not held for trading, the Company may irrevocably elect to present subsequent changes in the investment’s
fair value in other comprehensive income (“OCI”). This election is made on an investment by investment basis.

 

All financial assets not classified
as measured at amortized cost or FVOCI as described above are measured at FVTPL. On initial recognition, the Company may irrevocably
designate a financial asset that otherwise meets the requirements to be measured at amortized cost or FVOCI as at FVTPL if doing
so eliminates or significantly reduces an accounting mismatch that would otherwise arise.

 

Financial
assets - Subsequent measurement and gains and losses:

 

Financial assets at amortized
cost are subsequently measured at amortized cost using the effective interest method. The amortized cost is reduced by impairment
losses. Interest income, foreign exchange gains and losses and impairment are recognized in income. Any gain or loss on derecognition
is recognized in income.

 

Debt investments at FVOCI are
subsequently measured at fair value. Interest income calculated using the effective interest method, foreign exchange gains and
losses and impairment are recognized in income. Other net gains and losses are recognized in OCI. On derecognition, gains and losses
accumulated in OCI are reclassified to income.

 

    	14

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		3.	Significant accounting policies (continued):

 

		(m)	Financial instruments (continued):

 

Financial assets and Financial
liabilities (continued)

 

		(ii)	Classification and subsequent measurement (continued):

 

Financial
assets - Subsequent measurement and gains and losses (continued):

 

Equity investments at FVOCI
are subsequently measured at fair value. Dividends are recognized as income in income unless the dividend clearly represents a
recovery of part of the cost of the investment. Other net gains and losses are recognized in OCI and are never reclassified to
income.

 

Financial assets at FVTPL are
subsequently measured at fair value. Net gains and losses are recognized in income.

 

Financial
liabilities - Classification:

 

Financial liabilities are classified
as measured at amortized cost or FVTPL. A financial liability is classified as at FVTPL if it is classified as held-for-trading,
it is a derivative or it is designated as such on initial recognition.

 

Financial liabilities - Subsequent
measurement and gains and losses:

 

Financial liabilities at FVTPL
are subsequently measured at fair value and net gains and losses, including any interest expense, are recognized in income. Other
financial liabilities are subsequently measured at amortized cost using the effective interest method. Interest expense and foreign
exchange gains and losses are recognized in income. Any gain or loss on derecognition is also recognized in income.

 

Cash, cash equivalents and short-term
investments, trade receivables, amounts receivable under license agreements and other receivables are measured at amortized cost.

 

The contingent consideration receivable
in connection with the sale of the investment in FB Health, which was received by the Company in November 2018, was measured
at FVTPL.

 

Trade and other payables are measured
at amortized cost.

 

Share capital

 

Common shares and preferred shares
that are not redeemable or are redeemable only at the Company’s option are classified as equity. Incremental costs directly
attributable to the issue of equity-classified shares are recognized as a deduction from the deficit, net of any tax effects.

 

    	15

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		4.	Changes in significant accounting policies

 

		(a)	Changes in significant accounting policies in 2018

 

On January 1, 2018, the Company
adopted the following new accounting standards and interpretations issued by the IASB:

 

		(i)	Share-based payment:

 

Amendments to IFRS 2, Share-Based
Payment clarify how to account for certain types of share-based payment transactions. The amendments provide requirements on
the accounting for the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments, share-based
payment transactions with a net settlement feature for withholding tax obligations and a modification to the terms and conditions
of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. The adoption of
amendments to IFRS 2 did not have a material impact on the consolidated financial statements.

 

		(ii)	Financial instruments:

 

The
final 2014 version of IFRS 9, Financial Instruments addresses the classification and measurement of financial assets and
liabilities, impairment and hedge accounting, replacing IAS 39, Financial Instruments: Recognition and Measurement. The
adoption of IFRS 9 (2014) did not have a material impact on the consolidated financial statements. The classification of the Company’s
financial instruments in accordance with IFRS 9 (2014) is presented in note 3 (m).

 

		(iii)	Revenue:

 

IFRS 15, Revenue from Contracts
with Customers replaces IAS 18, Revenue, as well as other revenue-related standards and interpretations. The standard
contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time
or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue
is recognized. New estimates and judgmental thresholds have been introduced, which determine the amount and/or timing of revenue
recognized. The new standard applies to contracts with customers. The Company adopted IFRS 15 using the modified retrospective
transition method, with the cumulative effect of initially applying the standard recognized as an adjustment to opening retained
earnings at date of initial adoption. Given the Company’s limited revenues, the adoption of IFRS 15 did not have a material
impact on the consolidated financial statements.

 

    	16

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		4.	Changes in significant accounting policies (continued)

 

		(b)	New accounting standard
and interpretations not yet adopted:

 

Leases

 

In January 2016, the IASB issued
IFRS 16, Leases, which will replace IAS 17, Leases and the related interpretations. This standard introduces a single
lessee accounting model and requires all leases of more than 12 months to be reported on a company’s statement of financial
position as assets and liabilities, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use
asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments.
This standard substantially carries forward the lessor accounting requirements of IAS 17, while requiring enhanced disclosures
to be provided by lessors. Other areas of the lease accounting model have also been impacted, including the definition of a lease.
Transitional provisions have been provided.

 

The new standard is effective
for annual periods beginning on or after January 1, 2019. The Company will adopt IFRS 16 using the modified retrospective
transition method, with the cumulative effect of initially applying the standard recognized as an adjustment to opening retained
earnings at date of initial adoption. The Company does not expect that the adoption of the standard will have a material effect
on the consolidated financial statements, other than that its operating leases will need to be recognized in its consolidated statement
of financial position on initial adoption of IFRS 16.

 

The nature of expenses related
to those leases will now change because the Company will recognize a depreciation charge for right-of-use assets and interest expense
on lease liabilities. Previously, the Company recognized operating lease expense on a straight-line basis over the term of the
lease, and recognised assets and liabilities only to the extent that there was a timing difference between actual lease payments
and the expense recognized.

 

Based on the information currently
available, the Company expects that the right-of-use asset and lease liability on January 1, 2019 will be between $100 and $164.

 

    	17

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		5.	Cash, cash equivalents and short-term investments:

 

Cash, cash equivalents and short-term
investments consist of cash balances with banks and short-term investments:

 

	 	 	December 31,	 	 	December 31,	 
	 	 	2018	 	 	2017	 
	 	 	 	 	 	 	 
	Cash balances with banks	 	$	1,464	 	 	$	2,932	 
	Short-term investments with initial maturities of less than three months (yielding interest at 1.70% to 1.95% as at December 31, 2018) (December 31, 2017 – 0.95% to 1.20%)	 	 	13,469	 	 	 	4,817	 
	Cash and cash equivalents	 	 	14,933	 	 	 	7,749	 
	 	 	 	 	 	 	 	 	 
	Short-term investments with initial maturities greater than three months and less than one year (yielding interest at 1.90% to 3.10% as at December 31, 2018) (December 31, 2017 – 1.00% to 2.20%)	 	 	33,973	 	 	 	16,139	 
	Cash, cash equivalents and short-term investments	 	$	48,906	 	 	$	23,888	 

 

		6.	Trade and other receivables:

 

Trade and other
receivables consist of:

 

	 	 	December 31,	 	 	December 31,	 
	 	 	2018	 	 	2017	 
	 	 	 	 	 	 	 
	Trade receivables	 	$	3	 	 	$	25	 
	Development support payment receivable (note 8)	 	 	—	 	 	 	475	 
	Deferred payment on sale of subsidiary (note 9)	 	 	—	 	 	 	400	 
	Research tax credits receivable	 	 	655	 	 	 	301	 
	Amounts receivable under license agreements	 	 	35	 	 	 	60	 
	Other receivables	 	 	116	 	 	 	453	 
	 	 	$	809	 	 	$	1,714	 

 

		7.	Sale of investment in FB Health:

 

On June 30, 2017, BELLUS Health
sold its equity interest in FB Health S.p.A (“FB Health”) for a potential total consideration of $2,536, consisting
of an upfront cash payment of $1,769 and a contingent revenue-based milestone payment of up to $767 (€518) to be determined
based on FB Health’s revenues for the twelve-month period ended June 30, 2018. The Company received an amount of $465
in November 2018 as payment of the contingent consideration receivable.

 

In the third quarter of 2018,
prior to payment, the Company adjusted the estimated fair value of the contingent consideration receivable to $465 in the consolidated
statement of financial position, based on available information representing management’s revised best estimate of the amount
to be received ($384 as at December 31, 2017). The change in fair value for the year ended December 31, 2018 amounted to $81,
presented in the consolidated statement of loss (2017 - nil).

 

    	18

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		7.	Sale of investment in FB Health (continued):

 

Prior to the sale of the investment
in FB Health on June 30, 2017, the Company increased the fair value of its investment from $639 to $2,153, representing the estimated
fair value of the total consideration to be received. Total consideration consisted of $1,769 received in cash on closing and the
estimated fair value of the contingent consideration of $384 on the transaction date, determined based on management’s best
estimate of FB Health’s future revenues at that time.

 

A realized gain on sale of investment
in FB Health in the amount of $1,909 (before related income tax expense of $265), being the difference between the fair value of
the total consideration and the amount paid for the original investment, was recognized by the Company in the consolidated statement
of loss for the year ended December 31, 2017, following the sale of the investment.

 

In connection with the fair
value determination of its investment prior to its sale, the Company recorded an increase in fair value of $1,514 for the year
ended December 31, 2017, recognized in other comprehensive income.

 

		8.	In-process research and development asset:

 

BELLUS Health acquired the IPR&D
asset related to BLU-5937 in February 2017 through the obtention from the NEOMED Institute (“NEOMED”) of an exclusive
worldwide license to develop and commercialize BLU-5937, a potent, highly selective, orally bioavailable small molecule antagonist
of the P2X3 receptor, a clinically validated target for chronic cough. The IPR&D asset is accounted for as an indefinite-lived
intangible asset until the project, currently in its clinical phase, is completed or abandoned, at which point it will be amortized
or impaired, respectively. The carrying value of the IPR&D asset related to BLU-5937 amounted to $2,359 as at December 31,
2018 and 2017.

 

Under the terms of the agreement,
BELLUS Health paid NEOMED in 2017 an upfront fee of $3,200, consisting of $1,700 in cash and $1,500 in equity with the issuance
of 5,802,177 BELLUS Health common shares.

 

In addition, NEOMED provided
development support to the BLU-5937 program and contributed $950 towards the funding of research and development activities, of
which $475 was received in 2017 and the balance of $475 was received in May 2018. As at December 31, 2017, the balance of $475
was presented as current Trade and other receivable in the consolidated statement of financial position.

 

Upon its acquisition, BELLUS
Health estimated the fair value of the IPR&D asset related to BLU-5937 at $2,359, being the fair value of the consideration
of $3,200 plus fees paid in relation to acquisition of $109, net of the agreed upon development support payment of $950.

 

    	19

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		8.	In-process research and development asset (continued):

 

As
at December 31, 2017 and 2018, the carrying amount of the IPR&D asset related to BLU-5937 did not exceed its estimated recoverable
amount. The recoverability of this asset is dependent on successfully developing this project and achieving the expected future
revenues from commercialization.

 

		9.	Sale of subsidiary:

 

On March 16, 2017, BELLUS Health
entered into a Share Purchase Agreement with Taro for the sale of 100% of the shares of its wholly-owned subsidiary, Thallion,
including all the rights to the drug candidate ShigamabTM, for a total consideration of $2,700, consisting of a cash payment
of $2,300 on closing and a deferred payment of $400, which was received by the Company in January 2018. In addition, the Company
is entitled to receive a portion of certain potential future post-approval revenues related to the ShigamabTM program. As
at December 31, 2017, the deferred payment on the sale of Thallion of $400 was presented as current Trade and other receivable
in the consolidated statement of financial position.

 

BELLUS Health also entered into
a one-year service agreement with Taro for BELLUS Health to provide support for the preclinical development plan of ShigamabTM
for service fees of $130 over the period. The Company recognized revenues of $130 under this agreement for the year ended December
31, 2017, as all obligations under the agreement had been performed and all service fees had been received at that date.

 

A gain on sale of subsidiary
in the amount of $1,944 (net of transaction costs of $183, the increase in fair value of the contingent consideration payable of
$31 and the carrying value of the asset sold of $542) was recognized in the consolidated statement of loss for the year ended December
31, 2017.

 

In accordance with the terms
of the agreements of the 2013 Thallion acquisition, 5% of the proceeds received by BELLUS Health from the sale of Thallion, including
the ShigamabTM technology (the “ShigamabTM Consideration”), was payable to CVR holders (refer to note
11).

 

		10.	Trade and other payables:

 

Trade and other
payables consist of:

 

	 	 	December 31,	December 31,	 
	 	 	2018	2017	 
	 	 	 	 	 	 	 
	Trade payables	$	555	$	479	 
	Other accrued liabilities	 	1,495	 	1,630	 
	Deferred share unit plans (note 12 (b) (iii))	 	666	 	81	 
	 	$	2,716	$	2,190	 

 

    	20

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		11.	Financial liabilities –
CVRs:

 

On August 15, 2013, BELLUS Health
acquired all the issued and outstanding common shares of Thallion in exchange for cash on closing of the transaction and the issuance
of one contingent value right (“CVR”) per common share to Thallion’s shareholders, with an expiration date of
August 14, 2028, to be paid upon the settlement of the amounts described below.

 

The
CVRs issued to Thallion’s shareholders entitle the holder thereof to: (i) its pro rata share of 100% of any additional purchase
price consideration to be received in relation to a 2009 sale transaction by Thallion, (ii) its pro rata share of 5% of the ShigamabTM
revenue generated or received by BELLUS Health, capped at $6,500, and (iii) its pro rata share of 100% of any net proceeds generated
from the licensing, selling or otherwise commercializing of (a) diagnostic products or services using certain Caprion Proteomics
Inc. products, and (b) all issued patents or pending patents pertaining to such Caprion Proteomics Inc. products, in respect of
which Thallion has an ownership interest or monetary entitlement.

 

The amount to which the holders
of CVRs may be entitled can be reduced for potential contingent liabilities owing by Thallion (including, but not limited to, in
respect of the indemnity agreement entered to in relation to the 2009 sale transaction by Thallion, accounts payable or litigation).

 

In relation to (i) above, BELLUS
Health announced in February 2017 that it had received $573 as settlement for the additional purchase price consideration (“Additional
Consideration Payment”) in relation to the 2009 sale transaction by Thallion. Accordingly, the Company paid a net amount
of $577 ($0.01609 per CVR) to the CVR holders in March 2017.

 

In relation to (ii) above, the
Company paid in April 2017 and in January 2018 net amounts of $95 ($0.00263 per CVR) and $15 ($0.00041 per CVR), respectively,
to the CVR holders, which consists of the ShigamabTM Consideration on the cash payments received on the sale of Thallion (refer
to note 9), less CVR agent costs.

 

As at December 31, 2017, the
Company estimated the fair value of the contingent consideration payable related to CVRs on ShigamabTM future revenues at
$20, consisting of the ShigamabTM Consideration on the deferred payment for the sale of Thallion, which was received by the
Company in January 2018. The ShigamabTM Consideration of $20 was paid to CVR holders in January 2018. The change in fair value
of the contingent consideration payable for the year ended December 31, 2017 amounted to $31 and was presented against the gain
on sale of subsidiary in the consolidated statement of loss.

 

In relation to (iii) above, no
value has been attributed to contingent consideration related to CVRs on future revenues from assets developed by Caprion Proteomics
Inc. as the Company does not expect to receive any revenue from these assets in the future.

 

    	21

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		11.	Financial liabilities – CVRs (continued):

 

The CVRs also entitled the holder
thereof to receive Thallion’s income tax credits deducted in the 2013 Thallion Statement of Net Cash in the event that they
were not claimed by tax authorities after their audit, or their assessment period expired (the “Income Tax Credits”).
As they were not claimed nor assessed, BELLUS Health paid on January 25, 2019 a net amount of $134 ($0.00374 per CVR) to the CVR
holders, which consists of the Income Tax Credits of $159 less CVR agent costs. The amount of $159 was provisioned against prior
to its payment and is presented as Trade and other payables in the consolidated statement of financial position at as December
31, 2018 and 2017.

 

All payments made to CVR holder
were in accordance with the terms of the agreements of the 2013 Thallion acquisition by BELLUS Health.

 

The Company expects that there
will be no additional payment to CVR holders.

 

		12.	Shareholders’ equity:

 

		(a)	Share capital:

 

The authorized
share capital of the Company consists of:

 

		·	an unlimited number of voting common shares with no par
value; and

		·	an unlimited number of non-voting preferred shares, issuable
in one or more series, with no par value.

 

Issued and outstanding common
shares are as follows:

 

	 	 	Number	 	 	Dollars	 
	 	 	 	 	 	 	 
	Balance, December 31, 2017	 	 	119,497,581	 	 	$	467,253	 
	 	 	 	 	 	 	 	 	 
	Issued in connection with the 2018 Offering (i)	 	 	36,842,105	 	 	 	35,000	 
	 	 	 	 	 	 	 	 	 
	Issued upon broker warrants exercise (note 12 (b) (ii))	 	 	700,000	 	 	 	453	 
	 	 	 	 	 	 	 	 	 
	Balance, December 31, 2018	 	 	157,039,686	 	 	$	502,706	 

 

    	22

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		12.	Shareholders’ equity (continued):

 

		(a)	Share capital (continued):

 

	 	 	 	Number	 	 	 	Dollars	 
	 	 	 	 	 
	Balance, December 31, 2016	 	 	61,063,824	 	 	$	445,753	 
	 	 	 	 	 	 	 	 	 
	Issued in connection with the 2017 Offering (ii)	 	 	52,631,580	 	 	 	20,000	 
	 	 	 	 	 	 	 	 	 
	Issued as part of upfront fee for license acquisition (iii)	 	 	5,802,177	 	 	 	1,500	 
	 	 	 	 	 	 	 	 	 
	Balance, December 31, 2017	 	 	119,497,581	 	 	$	467,253	 

 

		(i)	On December 18, 2018, the Company closed an equity offering,
issuing a total of 36,842,105 common shares from treasury at a price of $0.95 per share for aggregate gross proceeds
of $35,000 (the “2018 Offering”). Share issue costs of $2,972, comprised of agent commission, legal, professional and
filing fees of $2,585, as well as broker warrants having a fair value of $387 (refer to note 12 (b) (ii)), have been charged to
the deficit. 

 

		(ii)	On December 12, 2017, the Company closed an equity offering,
issuing a total of 52,631,580 common shares from treasury at a price of $0.38 per share for aggregate gross proceeds
of $20,000 (the “2017 Offering”). Share issue costs of $1,942, comprised of agent commission, legal, professional and
filing fees of $1,459, as well as broker warrants having a fair value of $483 (refer to note 12 (b) (ii)), have been charged to
the deficit. 

 

		(iii)	On February 28, 2017, the Company issued 5,802,177
common shares from treasury as part of an upfront payment to obtain an exclusive worldwide license to develop and commercialize
BLU-5937 (refer to note 8).

 

    	23

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		12.	Shareholders’ equity (continued):

 

		(b)	Share-based payment arrangements:

 

		(i)	Stock Option Plan:

 

Under
its stock option plan, the Company may grant options to purchase common shares to directors, officers, employees and consultants
of the Company (the “Stock Option Plan”). The number of common shares subject to each stock option, the vesting period,
the expiration date and other terms and conditions related to each stock option are determined and approved by the Board of Directors.
In general, stock options vest over a period of up to five years and are exercisable over a period of 10 years from the grant date.
The aggregate number of common shares reserved for issuance under this plan shall not exceed 12.5% of the total issued and outstanding
common shares of the Company from time to time. The aggregate number of common shares reserved for issuance at any time to any
optionee shall not exceed 5% of the issued and outstanding common shares of the Company. The aggregate number of common shares
issuable or reserved for issuance to insiders of the Company under this plan and any other share compensation arrangement of the
Company cannot at any time exceed 10% of the issued and outstanding common shares of the Company. The option price per share is
equal to the weighted average trading price of common shares for the five days preceding the date of grant during which the common
shares were traded on the TSX. 

 

Changes in outstanding stock
options issued under the Stock Option Plan for the years ended December 31, 2018 and 2017 were as follows:

 

	 	 	 	Number	 	 	 	Weighted 
average 
exercise price	 
	 	 	 	 	 
	Options outstanding, December 31, 2017	 	 	7,293,000	 	 	$	0.44	 
	Granted (1), (2)	 	 	4,300,000	 	 	 	0.36	 
	Options outstanding, December 31, 2018	 	 	11,593,000	 	 	$	0.41	 

 

		(1)	4,150,000 stock options were granted on February 20, 2018, having
an exercise price of $0.35; 3,800,000 granted to key management personnel and 350,000 granted to other employees.

		(2)	150,000 stock options were granted on July 10, 2018 to other employees,
having an exercise price of $0.57.

 

    	24

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		12.	Shareholders’ equity (continued):

 

		(b)	Share-based payment arrangements
(continued):

 

		(i)	Stock Option Plan (continued):

 

	 	 	 	Number	 	 	 	Weighted 
average 
exercise price	 
	 	 	 	 	 
	Options outstanding, December 31, 2016	 	 	4,788,000	 	 	$	0.53	 
	Granted (3), (4)	 	 	2,885,000	 	 	 	0.31	 
	Forfeited	 	 	(290,000	)	 	 	0.58	 
	Expired	 	 	(90,000	)	 	 	0.50	 
	Options outstanding, December 31, 2017	 	 	7,293,000	 	 	$	0.44	 

 

		(3)	Stock options granted on May 23, 2017, having an exercise price of
$0.30; 2,400,000 stock options were granted to key management personnel and 285,000 were granted to other employees.

		(4)	Stock options granted on November 7, 2017, having an exercise price
of $0.42; 150,000 stock options were granted to key management personnel and 50,000 were granted to other employees.

 

The following table summarizes
information about stock options outstanding and exercisable as at December 31, 2018:

 

	 	Options outstanding	Options exercisable
	 	 	Weighted	 
	 	 	average	 
	 	 	years to	 
	Exercise price/share	Number	expiration	Number
	 	 	 	 
	$0.30	2,630,000	8.3	562,000
	$0.35	4,150,000	9.1	—
	$0.42	200,000	8.9	40,000
	$0.50	4,300,000	3.6	4,300,000
	$0.57	150,000	9.5	—
	$1.05	60,000	3.6	60,000
	$1.12	103,000	7.2	41,200
	 	11,593,000	6.9	5,003,200

 

    	25

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		12.	Shareholders’ equity (continued):

 

		(b)	Share-based payment arrangements
(continued):

 

		(i)	Stock Option Plan (continued):

 

Stock-based
compensation:

 

For the year ended December
31, 2018, the Company recorded a stock-based compensation expense related to stock options granted under the stock option plan
in the amount of $699 in the consolidated statement of loss; from this amount, $109 is presented in Research and development expenses
and $590 is presented in General and administrative expenses (2017 – $192, $32 presented in Research and development
expenses and $160 presented in General and administrative expenses).

 

The fair value of each stock
option granted is estimated on the date of grant using the Black-Scholes pricing model. Expected volatility is estimated by considering
historic average share price volatility for a period commensurate with the expected life.

 

The weighted average assumptions
for stock options granted during the years ended December 31, 2018 and 2017 were as follows:

 

	 	 	 	2018 (1)	 	 	 	2017 (2)	 
	 	 	 	 	 
	Weighted average fair value of stock options at grant date	 	$	0.29	 	 	$	0.27	 
	Weighted average share price	 	$	0.36	 	 	$	0.31	 
	Weighted average exercise price	 	$	0.36	 	 	$	0.31	 
	Risk-free interest rate	 	 	2.19	%	 	 	1.19	%
	Expected volatility	 	 	100	%	 	 	107	%
	Expected life in years	 	 	7	 	 	 	7	 
	Expected dividend yield	 	 	Nil	 	 	 	Nil	 

 

		(1)	Stock options were granted
on February 20, 2018 and on July 10, 2018.

		(2)	Stock options were granted
on May 23, 2017 and on November 7, 2017.

 

Dividend yield was excluded
from the calculation, since it is the present policy of the Company to retain all earnings to finance operations and future growth.

 

		(ii)	Broker warrants:

 

In connection with the 2018
Offering on December 18, 2018, the Company issued 1,450,264 broker warrants exercisable for common shares. Each broker warrant
entitles the holders to buy one common share at a price of $0.95 per share for a period of 18 months from the closing of the
2018 Offering. The fair value of brokers warrants of $387 was allocated to Other Equity upon issuance.

 

    	26

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		12.	Shareholders’ equity (continued):

 

		(b)	Share-based payment arrangements
(continued):

 

		(ii)	Broker warrants (continued):

 

In connection with the 2017
Offering on December 12, 2017, the Company issued 1,806,735 broker warrants exercisable for common shares. Each broker warrant
entitles the holders to buy one common share at a price of $0.38 per share for a period of 18 months from the closing of the
2017 Offering. The fair value of brokers warrants of $483 was allocated to Other Equity upon issuance.

 

Changes in
outstanding broker warrants for the years ended December 31, 2018 and 2017 were as follows:

 

	 	 	 	Number	 	 	 	Dollars	 
	 	 	 	 	 
	Broker warrants outstanding, December 31, 2016	 	 	—	 	 	$	—	 
	 	 	 	 	 	 	 	 	 
	Issued in connection with the 2017 Offering	 	 	1,806,735	 	 	 	483	 
	 	 	 	 	 	 	 	 	 
	Broker warrants outstanding, December 31, 2017	 	 	1,806,735	 	 	$	483	 
	 	 	 	 	 	 	 	 	 
	Issued in connection with the 2018 Offering	 	 	1,450,264	 	 	 	387	 
	Exercised (1)	 	 	(700,000	)	 	 	(187	)
	 	 	 	 	 	 	 	 	 
	Broker warrants outstanding, December 31, 2018	 	 	2,556,999	 	 	$	683	 

 

		(1)	On September 12, 2018, the Company issued 700,000 common shares from treasury upon the exercise
of 700,000 broker warrants issued in connection with the 2017 Offering. As a result of their exercise, the carrying value of the
broker warrants of $187, initially allocated to Other equity pending the issuance of common shares, was reclassified to Share capital.

 

The fair value of broker warrants
issued was estimated on the date of issuance using the Black-Scholes pricing model. Expected volatility is estimated by considering
historic average share price volatility for a period commensurate with the expected life.

 

    	27

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		12.	Shareholders’ equity (continued):

 

		(b)	Share-based payment arrangements
(continued):

 

		(ii)	Broker warrants (continued):

 

The assumptions for broker warrants
issued during the years ended December 31, 2018 and 2017 were as follows:

 

	 	 	 	2018 (1)	 	 	 	2017 (2)	 
	 	 	 	 	 
	Fair value of broker warrants at grant date	 	$	0.27	 	 	$	0.27	 
	Share price	 	$	0.95	 	 	$	0.38	 
	Exercise price	 	$	0.95	 	 	$	0.38	 
	Risk-free interest rate	 	 	1.95	%	 	 	1.50	%
	Expected volatility	 	 	56	%	 	 	169	%
	Expected life in years	 	 	1.5	 	 	 	1.5	 
	Expected dividend yield	 	 	Nil	 	 	 	Nil	 

		(1)	Broker warrants issued on December 18, 2018 in connection with the 2018 Offering. 

		(2)	Broker warrants issued on December 12, 2017 in connection with the 2017 Offering. 

 

Dividend yield was excluded from
the calculation, since it is the present policy of the Company to retain all earnings to finance operations and future growth.

 

		(iii)	Deferred share unit (DSU) plans:

 

The Company has deferred share
unit (“DSU”) plans for employees and members of the Board of Directors created to afford the Company the flexibility
to offer DSUs as an alternative to cash compensation.

 

The
price of DSUs is determined by the five-day volume weighted average trading price of the Company’s common shares at the time
the DSUs are issued, as provided for under the respective plans. The DSUs are redeemable only upon the participant’s resignation,
termination, retirement or death, in cash, at a value equal to the number of DSUs credited, multiplied by the 5-day market value
weighted average price of common shares prior to the date on which a notice of redemption is filed.

 

For DSUs,
compensation cost is measured based on the market price of the Company's common shares from the date of grant through to the settlement
date. Any changes in the market value of the Company's common shares through to the settlement date result in a change to the measure
of compensation cost for those awards and are recorded in income.

 

    	28

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		12.	Shareholders’ equity (continued):

 

		(b)	Share-based payment arrangements (continued):

 

		(iii)	Deferred share unit (DSU) plans (continued):

 

Changes in the number of units
for the years ended December 31, 2018 and 2017 were as follows:

 

	Number of units	 	2018	 	 	2017	 
	Balance, beginning of year	 	 	217,953	 	 	 	217,953	 
	Units granted (1)	 	 	435,108	 	 	 	—	 
	Units redeemed	 	 	(193	)	 	 	—	 
	Balance, end of year	 	 	652,868	 	 	 	217,953	 
	Balance of DSU liability, included in Trade and other payables	 	$	666	 	 	$	81	 

		(1)	All DSUs were granted to key
management personnel.

 

During the year ended December
31, 2018, the Company granted 435,108 DSUs having a weighted average fair value per unit of $0.5510, and 193 units were redeemed
at a fair value per unit of $1.0671. The stock-based compensation expense related to DSU plans recorded in the consolidated statement
of loss for the year ended December 31, 2018 amounted to $512; from this amount, $1 is presented in Research and development expenses
and $511 is presented in General and administrative expenses (2017 – $18, presented in General and administrative expenses).
The value of DSUs granted in 2018 for which services have not been rendered as at December 31, 2018 amounts to $73 and is presented
in Prepaid expenses and other assets in the consolidated statement of financial position.

 

		13.	Personnel expenses:

 

The aggregate compensation to personnel
of the Company for the years ended December 31, 2018 and 2017 is set out below:

 

	 	 	 	2018	 	 	 	2017	 
	 	 	 	 	 
	Short-term benefits	 	$	2,412	 	 	$	2,037	 
	DSUs plans expense	 	 	512	 	 	 	18	 
	Stock option plan expense	 	 	699	 	 	 	192	 
	 	 	$	3,623	 	 	$	2,247	 

 

    	29

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		14.	Net finance income:

 

Finance
income and Finance costs for the years ended December 31, 2018 and 2017 were attributed as follows:

 

	 	 	2018	 	 	2017	 
	 	 	 	 	 	 	 
	Interest income	 	$	362	 	 	$	80	 
	Foreign exchange gain	 	 	384	 	 	 	—	 
	Finance income	 	 	746	 	 	 	80	 
	 	 	 	 	 	 	 	 	 
	Interest and bank charges	 	 	(5	)	 	 	(11	)
	Foreign exchange loss	 	 	—	 	 	 	(50	)
	Finance costs	 	 	(5	)	 	 	(61	)
	Net finance income	 	$	741	 	 	$	19	 

 

		15.	Income taxes:

 

Deferred tax expense

 

	 	 	December
    31,	 	 	December
    31,	 
	 	 	2018	 	 	2017	 
	 	 	 	 	 	 	 
	Origination
    and reversal of temporary differences	 	$	(2,111	)	 	$	(377	)
	Change in unrecognized
    deductible temporary differences	 	 	 	 	 	 	 	 
	including
    effect of change in tax rate of $26	 	 	 	 	 	 	 	 
	in
    2018 (2017 – $39)	 	 	2,111	 	 	 	438	 
	Deferred
    tax expense	 	$	—	 	 	$	61	 

 

 

    	30

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		15.	Income taxes (continued):

 

Deferred tax expense (continued)

 

Reconciliation of effective
tax rate:

 

	 	 	Year ended	 	 	Year ended	 
	 	 	December 31,	 	 	December 31,	 
	 	 	2018	 	 	2017	 
	Loss before income taxes	 	$	(9,084	)	 	$	(1,813	)
	Tax using the Company’s domestic tax rate	 	 	(2,425	)	 	 	(486	)
	Change in unrecognized deductible temporary differences	 	 	2,111	 	 	 	1,432	 
	Non-taxable accounting gain on sale of investment in FB Heath and sale of subsidiary	 	 	(22	)	 	 	(1,033	)
	Effect of change in tax rate	 	 	26	 	 	 	39	 
	Non-deductible stock option expense	 	 	186	 	 	 	51	 
	Permanent differences and other items	 	 	124	 	 	 	58	 
	Total deferred tax expense	 	$	—	 	 	$	61	 

 

The applicable statutory
tax rates are 26.7% in 2018 and 26.8% in 2017. The Company’s applicable tax rate is the Canadian combined rates applicable
in the jurisdiction in which the Company operates. The decrease is due to the reduction of the Quebec income tax rate in 2018
from 11.8% to 11.7%.

 

A deferred tax recovery of $61
related to the sale of the investment in FB Health on June 30, 2017, net of the increase in fair value of the investment prior
to its sale, was recognized in other comprehensive income for the year ended December 31, 2017, and an equal and offsetting amount
was recognized as a deferred tax expense in income.

 

Deferred tax assets and liabilities

 

Recognized deferred tax assets
and liabilities:

 

As at December 31, 2018 and
2017, recognized deferred tax assets and liabilities are attributable to the following:

 

	 	 	Assets	 	 	Liabilities	 	 	Net	 
	 	 	2018	 	 	2017	 	 	2018	 	 	2017	 	 	2018	 	 	2017	 
	Taxes losses carried forward	 	$	25	 	 	$	25	 	 	$	—	 	 	$	—	 	 	$	25	 	 	$	25	 
	Equipment	 	 	—	 	 	 	—	 	 	 	(16	)	 	 	(16	)	 	 	(16	)	 	 	(16	)
	Trade and other receivables	 	 	—	 	 	 	—	 	 	 	(9	)	 	 	(9	)	 	 	(9	)	 	 	(9	)
	Tax assets (liabilities)	 	 	25	 	 	 	25	 	 	 	(25	)	 	 	(25	)	 	 	—	 	 	 	—	 
	Set off of tax	 	 	(25	)	 	 	(25	)	 	 	25	 	 	 	25	 	 	 	—	 	 	 	—	 
	Net tax assets (liabilities)	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 

 

    	31

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		15.	Income taxes (continued):

 

Deferred tax assets and liabilities
(continued)

 

Unrecognized deferred tax assets
and investment tax credits:

 

As at December 31, 2018 and 2017,
the amounts and expiry dates of tax attributes and temporary differences for which no deferred tax assets was recognized were as
follows:

 

	 	 	December
    31, 2018	 	 	December
    31, 2017	 
	 	 	Federal	 	 	Provincial	 	 	Federal	 	 	Provincial	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Research
    and development expenses, without time limitation	 	$	6,300	 	 	$	6,496	 	 	$	1,122	 	 	$	778	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Federal research and development investment
    tax credits	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	2037	 	 	309	 	 	 	—	 	 	 	168	 	 	 	—	 
	 	2038	 	 	462	 	 	 	—	 	 	 	—	 	 	 	—	 
	 	 	 	 	771	 	 	 	—	 	 	 	168	 	 	 	—	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Tax losses carried forward	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	2032	 	 	338	 	 	 	211	 	 	 	525	 	 	 	525	 
	 	2033	 	 	894	 	 	 	894	 	 	 	894	 	 	 	894	 
	 	2034	 	 	822	 	 	 	822	 	 	 	822	 	 	 	822	 
	 	2035	 	 	1,116	 	 	 	1,051	 	 	 	1,116	 	 	 	1,051	 
	 	2036	 	 	1,143	 	 	 	1,143	 	 	 	1,143	 	 	 	1,143	 
	 	2037	 	 	2,311	 	 	 	2,476	 	 	 	4,103	 	 	 	4,507	 
	 	2038	 	 	5,131	 	 	 	4,947	 	 	 	—	 	 	 	—	 
	 	 	 	 	11,755	 	 	 	11,544	 	 	 	8,603	 	 	 	8,942	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Capital
    losses	 	 	14,120	 	 	 	14,120	 	 	 	14,171	 	 	 	14,171	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Other
    deductible temporary differences, without time limitation	 	$	3,808	 	 	$	3,808	 	 	$	101	 	 	$	101	 

 

Deferred tax assets and
investments tax credits have not been recognized in respect to these items because it is not probable that future taxable profit
will be available against which the Company can utilize the benefits therefrom. The generation of future taxable profit is dependent
on the successful commercialization of the Company’s products and technologies.

    	32

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		16.	Loss per share:

 

	 	 	Year ended	 	 	Year ended	 
	 	 	December 31,	 	 	December 31,	 
	 	 	2018	 	 	2017	 
	 	 	 	 	 	 	 
	Basic weighted average number of common shares outstanding	 	 	121,020,724	 	 	 	68,667,841	 
	 	 	 	 	 	 	 	 	 
	Basic and diluted loss per share	 	$	(0.08	)	 	$	(0.03	)

 

Excluded from the calculation
of the diluted loss per share for the years ended December 31, 2018 and 2017 is the impact of all stock options granted under the
Stock Option Plan and broker warrants, as they would be anti-dilutive.

 

Stock
options granted under the Stock Option Plan and broker warrants could potentially be dilutive in the future.

 

		17.	Commitments and contingencies:

 

		(a)	Operating leases:

 

Minimum annual lease payments
are as follows:

 

	 	 	 
	Less than one year	 	$	151	 
	Between one and five years	 	 	13	 
	 	 	$	164	 

 

The property lease is a non-cancellable
lease, with rent payable monthly in advance, which expires on January 31, 2020.

 

During the year ended December
31, 2018, an amount of $147 was recognized as an expense in the consolidated statement of loss in respect of operating leases (2017
 – $143).

 

		(b)	Contracts in the normal course of business:

 

The Company enters into contracts
in the normal course of business, including for research and development activities, consulting and other services.

 

As at December 31, 2018, the Company
has commitments for expenditures related to contracts for research and development activities of approximately $6,785, of which
$4,959 is due in 2019 and $1,826 is due in 2020.

 

    	33

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		17.	Commitments and contingencies (continued):

 

		(c)	Indemnity agreement:

 

The Company
is potentially liable in relation to the following indemnity agreement:

 

In March 2017, the Company entered
into a Share Purchase Agreement with Taro for the sale of the Company’s wholly-owned subsidiary Thallion, including all the
rights to the drug candidate ShigamabTM (refer to note 9). The Company agreed to indemnify Taro, subject to certain
conditions and limitations, for losses which it may suffer or incur, arising out of any debts, liabilities, commitments or obligations
of any nature resulting from any matters, actions, events, facts or circumstances related to the activities or affairs of Thallion,
which occurred prior to the effective time of the Share Purchase Agreement. No indemnity provision has been recorded by the Company
as at December 31, 2018 and 2017 for this matter as the Company does not expect to make any payments under this indemnity agreement.

 

		(d)	License agreements and research collaborations:

 

		(i)	On February 28, 2017, BELLUS Health announced that it had obtained from NEOMED an exclusive worldwide
license to develop and commercialize BLU-5937 (refer to note 8). Under the terms of the agreement, the Company is committed to
pay NEOMED a royalty on potential net sales-based future revenues from BLU-5937, and in lieu of milestone payments, a certain portion
of all other revenues received from BLU-5937 in accordance with a pre-established schedule whereby the shared revenue portion decreases
as the program progresses in development. No amount is payable as at December 31, 2018 under this agreement.

 

		(ii)	On February 1, 2006, the Company entered into an assignment agreement with Parteq Research and
Development Innovations (Parteq), which was amended on April 1, 2011 (the Assignment Agreement). Pursuant to the Assignment Agreement,
Parteq agreed and assigned certain intellectual property to the Company for consideration, comprising an upfront payment and various
deferred payment amounts. The Assignment Agreement also provides for annual technology payments, deferred milestone payments and
deferred graduated payments based on gross revenues to be generated from commercialized pharmaceutical products, as well as other
than pharmaceutical products, such as nutraceutical or natural health care products. Non-significant amounts are payable as at
December 31, 2018 under this agreement.

 

		(iii)	Under the terms of an agreement with the federal Ministry of Industry (Technology Partnerships
Canada Program), as amended in 2005, the Company is committed to pay the federal government royalties equal to 7.24% of certain
milestone revenue and 0.724% of end-product sales realized from the commercialization of effective orally-administered therapeutics
for the treatment of Alzheimer’s disease for a limited period after regulatory approval, subject to a maximum of $20,540.
To date, no royalties have been paid under this agreement.

 

    	34

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		17.	Commitments and contingencies (continued):

 

		(e)	Consulting and services agreement:

 

The payments under the consulting
and services agreement with Picchio International Inc. (Picchio International) (refer to note 18 (b)) will amount to $250
in 2019, plus the reimbursement of applicable expenses for services rendered under the agreement.

 

		(f)	Letter of credit:

 

As at December 31, 2018, the Company
is contingently liable for a letter of credit in the amount of $50 (2017 - $50). Cash is pledged under the letter of credit and
is presented as non-current Other assets in the consolidated statement of financial position as at December 31, 2018.

 

		18.	Related party transactions:

 

		(a)	There is no single ultimate controlling party.

 

		(b)	Dr. Francesco Bellini, Chairman of the Board of Directors, provides ongoing advisory services to
the Company under the terms of a consulting and services agreement between the Company and Picchio International, wholly-owned
by Dr. Francesco Bellini and his spouse. The agreement has a one-year term and shall renew for successive one-year terms. The Company
recorded fees and expenses of $381 for both of the years ended December 31, 2018 and 2017.

 

		(c)	Key management personnel:

 

The Chief Executive Officer, Vice-Presidents
and Directors of BELLUS Health are considered key management personnel.

 

The aggregate compensation to
key management personnel of the Company for the years ended December 31, 2018 and 2017 is set out below:

 

	 	 	 	2018	 	 	 	2017	 
	 	 	 	 	 
	Short-term benefits	 	$	1,810	 	 	$	1,676	 
	DSU plans expense	 	 	512	 	 	 	18	 
	Stock option plan expense	 	 	626	 	 	 	179	 
	 	 	$	2,948	 	 	$	1,873	 

 

		19.	Segment disclosures:

 

Business segment:

 

The Company operates in one business
segment, which is the development of drug candidates for health solutions. As at December 31, 2018, all of the Company’s
operations were conducted in Canada.

 

    	35

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		20.	Capital management:

 

The Company’s objective
in managing capital is to ensure a sufficient liquidity position to finance its research and development activities, including
pipeline expansion, general and administrative expenses, working capital and overall capital expenditures.

 

Since inception, the Company
has financed its liquidity needs primarily through public offerings of common shares, private placements, the issuance of convertible
notes, asset sales and the proceeds from research tax credits. When possible, the Company tries to optimize its liquidity needs
by non-dilutive sources, including research tax credits, grants, interest income, as well as with proceeds from collaboration and
research agreements, asset sales or product licensing agreements.

 

Historically, when the Company
had the option, it has settled its obligations through the issuance of common shares instead of in cash to preserve its liquidities
to finance its operations and future growth.

 

The Company defines capital to
include total shareholders’ equity.

 

The capital management objectives
remain the same as previous fiscal year.

 

As at December 31, 2018, cash,
cash equivalents and short-term investments amounted to $48,906. The Company’s general policy on dividends is to retain cash
to keep funds available to finance the Company’s growth.

 

The Company is not subject to
any capital requirements that are externally imposed.

 

		21.	Financial instruments:

 

		(a)	Financial instruments - carrying values and fair values:

 

Fair value estimates are made
as of a specific point in time, using available information about the financial instrument. These estimates are subjective in nature
and may not be determined with precision.

 

Financial assets and liabilities
measured at fair value on a recurring basis as at December 31, 2017 were the contingent consideration receivable in relation to
the sale of the investment in FB Health and the contingent consideration payable in relation to CVRs on ShigamabTM future
revenues. These financial instruments were measured using Level 3 inputs.

 

    	36

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		21.	Financial instruments (continued):

 

		(a)	Financial instruments - carrying values and fair values
(continued):

 

For the years
ended December 31, 2018 and 2017, the reconciliation of the beginning and ending balance of assets and liabilities measured at
fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows:

 

	 	 	Contingent	 	 	 	 	 	Contingent	 	 	Contingent	 
	 	 	consideration	 	 	Investment	 	 	right	 	 	consideration	 
	 	 	receivable	 	 	in FB Health	 	 	asset	 	 	payable	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance as at December 31, 2016	 	$	—	 	 	$	639	 	 	$	573	 	 	$	(677	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Change in fair value for the year (1)	 	 	—	 	 	 	1,514	 	 	 	—	 	 	 	—	 
	Sale of shares of financial asset (1)	 	 	—	 	 	 	(2,153	)	 	 	—	 	 	 	—	 
	Contingent consideration (1)	 	 	384	 	 	 	—	 	 	 	—	 	 	 	—	 
	Change in fair value (reported as a   reduction of the gain on sale of subsidiary) (2)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(31	)
	Payment received from third party	 	 	—	 	 	 	—	 	 	 	(573	)	 	 	—	 
	Reduction for distribution to CVR   holders	 	 	—	 	 	 	—	 	 	 	—	 	 	 	688	 
	Balance as at December 31, 2017	 	 	384	 	 	 	—	 	 	 	—	 	 	 	(20	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Change in fair value for the year	 	 	81	 	 	 	—	 	 	 	—	 	 	 	—	 
	Payment received from third party	 	 	(465	)	 	 	—	 	 	 	—	 	 	 	—	 
	Reduction for distribution to CVR holders	 	 	—	 	 	 	—	 	 	 	—	 	 	 	20	 
	Balance as at December 31, 2018	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 

		(1)	Change in fair value is presented in reduction of the realized
gain on sale of investment in FB Health (refer to note 7).

		(2)	Change in fair value is presented in reduction of the gain
on sale of subsidiary (refer to note 9).

 

For its financial assets and liabilities
measured at amortized cost as at December 31, 2018, the Company has determined that the carrying value of its short-term financial
assets and liabilities approximates their fair value because of the relatively short periods to maturity of these instruments.

 

    	37

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		21.	Financial instruments (continued):

 

		(b)	Credit risk management:

 

Credit risk results from the possibility
that a loss may occur from the failure of another party to perform according to the terms of the contract.

 

Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, short-term investments
and trade and other receivables. The Company invests cash mainly with major North American financial institutions. Cash equivalents
and short-term investments are comprised of fixed income instruments with a high credit ranking (not less than A-1) as rated by
Standard and Poor’s. The Company has investment policies that are designed to provide for the safety and preservation of
principal, the Company's liquidity needs and yields that are appropriate.

 

As at December 31, 2018, the Company’s
maximum credit exposure corresponded to the carrying amount of these financial assets.

 

		(c)	Liquidity risk management:

 

Liquidity risk is the risk that
the Company will not be able to meet its financial obligations as they fall due. The Company requires continued access to capital
markets to support its operations, as well as to achieve its strategic plans. Any impediments to the Company’s ability to
access capital markets, including the lack of financing capability or an adverse perception in capital markets of the Company’s
financial condition or prospects, could have a materially adverse effect on the Company. In addition, the Company’s access
to financing is influenced by the economic and credit market environment.

 

The Company manages liquidity
risk through the management of its capital structure, as outlined in note 20. It also manages liquidity risk by continuously
monitoring actual and projected cash flows. The Board of Directors reviews, approves and monitors the Company’s operating
and capital budgets, as well as any material transactions.

 

The balance of accounts payable
and accrued liabilities is due within one year. For information on the maturity of commitments and contingencies, see note 17.

 

    	38

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		21.	Financial instruments (continued):

 

		(d)	Foreign currency risk management:

 

Foreign currency risk is the risk
that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.
Foreign currency risk is limited to the portion of the Company’s business transactions denominated in currencies other than
Canadian dollars. The Company’s exposure relates primarily to changes in the Canadian dollar versus the US dollar exchange
rate. For the Company’s foreign currency transactions, fluctuations in the respective exchange rates relative to the Canadian
dollar will create volatility in the Company’s cash flows and the reported amounts for revenue and expenses in income. Additional
variability arises from the translation of monetary assets and liabilities denominated in currencies other than the Canadian dollar
at the rates of exchange at each statement of financial position date, the impact of which is reported as a foreign exchange gain
or loss in income. The Company holds a portion of its cash, cash equivalents and short-term investments in US dollars to meet its
liquidity needs in US dollars, but does not use derivative financial instruments to reduce its foreign exchange exposure.

 

The following table provides an
indication of the Company’s significant foreign currency exposures as at December 31, 2018:

 

	 	 	December 31,	 
	(in CDN dollars)	 	2018	 
	 	 	 	 
	Net assets denominated in US dollars:	 	 	 
	Cash and cash equivalents	$	7,477	 
	Short-term investments	 	14,333	 
	Trade and other payables	 	(760	)
	 	$	21,050	 

 

Based on the Company’s net
foreign currency exposure noted above, and assuming that all other variables remain constant, a hypothetical 10% depreciation or
appreciation of the Canadian dollar against the US dollar would result in an increase/decrease of $2,105 on income.

 

The $US to $CDN exchange rate
applied as at December 31, 2018 was 1.3637.

 

    	39

     

    

 

bellus health INC.

Notes to Consolidated Financial
Statements (Continued)

 

Years ended December 31, 2018 and 2017

(in thousands of Canadian dollars, except per
share data, unless otherwise noted)

 

 

		21.	Financial instruments (continued):

 

		(e)	Interest rate risk:

 

Interest rate risk is the risk
that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

 

The Company’s exposure to
interest rate risk is as follows:

 

	Cash and cash equivalents	Short-term fixed and variable interest rate
	Short-term investments	Short-term fixed interest rate
	Restricted cash	Short-term fixed interest rate

 

Based on the carrying amount of
variable interest-bearing financial instruments as at December 31, 2018, an assumed 1% increase or 1% decrease in interest
rates during such period would have had no significant effect on income.

 

Management believes that the risk
that the Company will realize a loss as a result of the decline in the fair value of its cash equivalents and short-term investments
is limited because these investments have short-term maturities and are generally held to maturity.

 

The capacity of the Company to
reinvest the short-term amounts with equivalent returns will be impacted by variations in short-term fixed interest rates available
in the market.

 

Interest income presented in the
consolidated statement of loss represents interest income on financial assets classified as loans and receivables.

 

    	40Exhibit 4.3

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

This Management’s Discussion and Analysis
(“MD&A”) provides a review of BELLUS Health Inc.’s (“BELLUS Health” or the “Company”)
operations and financial performance for the years ended December 31, 2018 and 2017. It should be read in conjunction with
the Company’s audited consolidated financial statements for the year ended December 31, 2018, which have been prepared in
accordance with International Financial Reporting Standards (“IFRS”). Additional information relating to the Company,
including its Annual Report and Annual Information Form, as well as other public filings, is available on SEDAR at www.sedar.com.
This document contains forward-looking statements, which are qualified by reference to, and should be read together with the “Forward-Looking
Statements” cautionary notice, which can be found at the end of this MD&A.

 

The consolidated financial
statements and MD&A have been reviewed by the Company’s Audit Committee and approved by the Board of Directors. This
MD&A was prepared by management with information available as at February 20, 2019.

 

All currency figures reported in the consolidated
financial statements and in this document are in Canadian dollars, unless otherwise specified.

 

CORPORATE PROFILE

 

BELLUS Health is a clinical-stage biopharmaceutical
company developing novel therapeutics for conditions with high unmet medical need. The Company’s lead drug candidate is BLU-5937
being developed for the treatment of chronic cough. The Company's shares trade on the Toronto Stock Exchange (“TSX”)
under the symbol BLU.

 

BUSINESS OVERVIEW

 

BELLUS Health’s lead drug candidate
is BLU-5937 for the treatment of chronic cough, a high unmet medical condition affecting millions of patients.

 

In November 2018, the Company announced
positive top-line results from the clinical Phase 1 study for BLU-5937, in which BLU-5937 was shown to be safe and well tolerated.
BLU-5937 did not cause any taste loss at the anticipated therapeutic doses, confirming the Company’s expectation that at
these doses there is no or very limited effect on taste perception. The benign side effect profile, in combination with the anti-tussive
effect demonstrated in several preclinical studies, further reinforces the Company’s position that BLU-5937 has the potential
to be a best-in-class therapeutic for chronic cough patients.

 

Based on the positive data from the Phase
1 study, BELLUS Health expects to initiate a clinical Phase 2 study for BLU-5937 in chronic cough patients in mid-2019, with
top-line results anticipated in mid-2020.

 

In December 2018, the Company completed
a $35 million equity financing, with the vast majority of the offering subscribed by U.S. institutional healthcare investors. The
Company concluded 2018 with a cash, cash equivalents and short-term investments position (“liquidity position”) of
$48.9 million. As at February 20, 2019, the Company has 157,389,686 common shares outstanding and 174,844,685 common shares on
a fully diluted basis, including 15,248,000 stock options granted under the stock option plan and 2,206,999 broker warrants.

 

    	 	1	 

     

    

  

2018 Highlights 

 

		·	Announced positive top-line results from the clinical Phase 1 study for BLU-5937, the Company’s
lead drug candidate for chronic cough. BLU-5937 was shown to be safe and well tolerated with no taste loss at the anticipated therapeutic
doses;

 

		·	Based on the positive top-line data from the Phase 1 study, expects to initiate a clinical Phase
2 study for BLU-5937 in chronic cough patients in mid-2019, with top-line results anticipated in mid-2020;

 

		·	Closed a $35 million equity offering, with the vast majority of the offering subscribed by U.S.
institutional healthcare investors led by OrbiMed;

 

		·	Secured patent protection for BLU-5937 in all major pharmaceutical markets; patents were granted
by the European Patent Office and the Japan Patent Office in 2018 in addition to patents granted in the United States and China
in 2017, with claims covering the composition of matter of BLU-5937 until 2034;

 

		·	Was granted a new U.S. patent claiming P2X3 selectivity as a means of minimizing taste effects
for BLU-5937. This patent extends BLU-5937’s patent protection to 2038;

 

		·	Appointed an international clinical advisory board to provide strategic guidance and support to
the BLU-5937 development program;

 

		·	Concluded the year with cash, cash equivalents and short-term investments totalling $48.9 million,
which should enable the Company to finance its operations for more than two years.

 

2018 Equity Offering

 

On December 18, 2018, the Company closed
an equity offering, issuing a total of 36,842,105 common shares from treasury at a price of $0.95 per share for aggregate
gross proceeds of $35 million (the “2018 Offering”). The 2018 Offering was subscribed in vast majority by U.S.
institutional healthcare investors led by OrbiMed and also included New Leaf Venture Partners, First Manhattan Co., Samsara BioCapital,
Fonds de solidarité FTQ, AppleTree Partners and Amzak Health.

 

In addition, 1,450,264 broker warrants exercisable
for common shares were issued to the agents of the 2018 Offering. Each broker warrant entitles the agents to buy one common
share at a price of $0.95 per share for a period of 18 months from the closing of the 2018 Offering.

 

Net proceeds from the 2018 Offering will
be used to fund the Company’s research and development activities, including but not limited to, activities related to BLU-5937’s
clinical development, general and administrative expenses, working capital needs and other general corporate purposes.

 

BLU-5937 for Chronic Cough

 

The Company’s lead drug candidate
is BLU-5937, a potent, highly selective, orally bioavailable small molecule antagonist of the P2X3 receptor, a clinically validated
target for chronic cough. In preclinical studies, BLU-5937 exhibited a potent anti-tussive effect without affecting taste perception
and an excellent safety profile. BLU-5937 has the potential to be a best-in-class therapeutic for chronic cough patients who do
not respond to current therapies.

 

    	 	2	 

     

    

  

On November 19, 2018, the Company announced
positive top-line results from the clinical Phase 1 study for BLU-5937. The Phase 1 top-line data demonstrated that BLU-5937 has
a good safety and tolerability profile, as well as a pharmacokinetic profile supporting twice-a-day (BID) dosing. At the anticipated
therapeutic doses of 50 to 100 mg, BLU-5937 did not cause any loss of taste perception; only 1 out of 24 subjects reported transient
taste alteration. Based on these data, the Company is preparing for the clinical Phase 2 study of BLU-5937 in chronic cough patients,
expected to begin in mid-2019.

 

BLU-5937 Clinical Phase 1 Study Data

 

The Phase 1 data demonstrated that BLU-5937
has an excellent pharmacokinetic profile. Plasma half-life was established at 4 to 9 hours, supporting BID dosing. Based on pre-clinical
efficacy studies and comparison with drug levels achieved with a clinically validated comparator, the Company anticipates that
drug levels required for optimal inhibition of cough will be achieved at 50 mg or 100 mg BID.

 

BLU-5937 plasma concentration increased
dose-proportionally and was not affected by food, supporting BLU-5937 administration without regard to meals.

 

The Phase 1 data also showed that BLU-5937
has a good safety and tolerability profile. The overall incidence of adverse events was comparable between placebo (50%) and BLU-5937
(44%).

 

There were no serious adverse events and
no subjects withdrew prematurely due to an adverse event during the study. No significant trends of mean changes in vital signs,
electrocardiogram (ECG) and clinical laboratory values have been observed in the Phase 1 study for BLU-5937.

 

No subject reported total loss of taste
at any dose level. Only one subject out of 24 (4.2%) reported taste alteration at the anticipated therapeutic doses of 50-100 mg.
This taste effect was reported only on the first day out of 7 days of dosing in a subject receiving 100 mg BID. There were only
2 cases of transient and sporadic partial taste loss reported: one at 400 mg BID and one at the 800 mg single dose level. At supra
therapeutic doses of 200 mg to 1200 mg, 13 subjects out of 48 (27.1%) reported transient and sporadic taste alteration. No subject
out of 16 reported any taste loss or taste alteration at 200 mg. All taste adverse events were transitory and sporadic in nature
and almost all of them were mild. The other most frequent adverse events reported in the Phase 1 study (> 5%) for BLU-5937 were:
headache (11%), numbness (11%), nausea (8%), dizziness (6%) and heartburn (6%).

 

BLU-5937 Clinical Phase 1 Study 

 

The clinical Phase 1 study was a randomized,
double-blind, placebo-controlled study of orally administered BLU-5937 in 90 healthy adult subjects. The primary objectives of
the clinical Phase 1 study were to assess the safety, tolerability (including taste perception) and pharmacokinetic profile of
BLU-5937 in healthy subjects.

 

The study was divided in two parts:

 

Part 1: A single ascending dose (SAD) study
was conducted in 60 healthy subjects. Subjects were randomized into 6 cohorts of 10 subjects (8 BLU-5937: 2 placebo). The study
evaluated single oral doses of BLU-5937 from 50 to 1200 mg.

 

Part 2: A multiple ascending dose (MAD)
study was conducted in 30 healthy subjects. Subjects were randomized into 3 cohorts of 10 subjects (8 BLU-5937: 2 placebo). The
study evaluated multiple oral doses of BLU-5937 of 100, 200 and 400 mg administered twice-a-day (BID) for 7 consecutive days.

 

    	 	3	 

     

    

  

BLU-5937 Clinical Phase 2 Study Design

 

Based on the positive top-line data from
the Phase 1 study, BELLUS Health expects to initiate a clinical Phase 2 study for BLU-5937 in chronic cough patients in mid-2019,
with top-line results anticipated in mid-2020. This will be a dose escalation crossover design study to assess the efficacy, safety
and tolerability of BLU-5937 in chronic cough patients, in addition to helping confirm the optimal dose regimen. A total of 50
patients with refractory unexplained chronic cough are expected to be enrolled in approximately 10 clinical sites located in the
United Kingdom and Unites States.

 

In addition, for 2019, the Company expects
to pursue BLU-5937 enabling activities to prepare the program for later stage clinical development and to develop the BLU-5937
program for potential expansion in other P2X3 indications.

 

Other

 

Preclinical studies demonstrated that BLU-5937
is a highly selective P2X3 antagonist exhibiting a potent anti-tussive effect without affecting taste perception and an excellent
safety profile. In a guinea pig cough model, BLU-5937 showed comparable anti-tussive efficacy to the current leading P2X3 antagonist
in development, Merck & Co’s gefapixant (also named AF-219 or MK-7264). In a rat taste model, BLU-5937 was not associated
with taste loss whereas, consistent with clinical trial data previously presented by Merck & Co, gefapixant led to significant
taste loss.

 

On July 19, 2018, the Company announced
that patent protection for BLU-5937 had been secured in all major pharmaceutical markets following the Japan Patent Office’s
issuance of a decision to grant Japanese Patent No. 2015-555508, which grants claims covering the composition of matter of BLU-5937
and related imidazopyridine compounds, in addition to pharmaceutical compositions comprising BLU-5937 and uses thereof, until 2034.
Equivalent patents with similar broad claims were granted by the European Patent Office (patent No. 2951177) in April 2018 and
by the U.S. Patent and Trademark Office and the Chinese Patent Office in 2017. The patents have an expiration date of 2034, excluding
any potential patent term extension. Patent applications with similarly broad claims are currently pending in other industrialized
nations.

 

On October 31, 2018, BELLUS Health announced
that the U.S. Patent and Trademark Office had issued U.S Patent No. 10,111,883, granting claims for the use of BELLUS Health's
lead drug candidate BLU-5937 for the treatment of chronic cough without affecting taste response. More generally, the patent entitled
 “Selective P2X3 Modulators” claims the use of imidazopyridine compounds that are selective for the P2X3 receptor as
a means of minimizing taste perturbation in patients treated for chronic cough. In addition to BLU-5937, the patent claims the
use of related selective imidazopyridine compounds and pharmaceutical compositions comprising BLU-5937. Patent No. 10,111,883 has
an expiration date of 2038, excluding any potential patent term extension. This new U.S. patent extends the patent protection of
BLU-5937 by an additional 4 years.

 

On September 25, 2018, the Company announced
the appointment of an international clinical advisory board (the “CAB”) which provides strategic guidance and support
to the BLU-5937 development program. The CAB is comprised of highly-respected clinical leaders whose work has influenced the treatment
and management of chronic cough. The Chair of the CAB is Dr. Jaclyn Smith, MB, ChB, FRCP, PhD, Professor of Respiratory Medicine
at the University of Manchester in the United Kingdom and an Honorary Consultant at the University Hospital of South Manchester
NHS Foundation Trust.

 

    	 	4	 

     

    

  

Chronic cough is a cough that lasts more
than eight weeks and is associated with significant adverse social, psychosocial and physical effects on quality of life. In October
2018, the Company commissioned Bluestar BioAdvisors LLC (formerly known as Torreya Insights LLC) to conduct a market assessment
through an evaluation of chronic cough epidemiology and pricing estimates. Based on primary and secondary research, the report
concludes that, in the United States alone, more than 26 million adults suffer from chronic cough and more than 2.6 million
of these patients have chronic cough lasting for more than a year. The number of treatment-refractory chronic cough patients expands
to 11.7 million when taking into account those patients with a cough duration between eight weeks and one year.

 

Other Development Programs

 

BELLUS Health has economic interests in
other partnered development stage programs, including revenue sharing and royalties on sales.

 

2017 Equity Offering

 

On December 12, 2017, the Company closed
an equity offering, issuing a total of 52,631,580 common shares at a price of $0.38 per share for aggregate gross proceeds
of $20 million (the “2017 Offering”). The 2017 Offering was subscribed in majority by institutional healthcare
investors and also included the participation by members of the senior management team and Board of Directors of the Company.

 

In addition, 1,806,735 broker warrants exercisable
for common shares were issued to the agents of the 2017 Offering. Each broker warrant entitles the agents to buy one common
share at a price of $0.38 per share for a period of 18 months from the closing of the 2017 Offering.

 

2017 Sale of Thallion 

 

On March 16, 2017, BELLUS Health entered
into a share purchase agreement (the “Share Purchase Agreement”) with Taro Pharmaceuticals Inc. (“Taro”)
for the sale of the Company’s wholly-owned subsidiary Thallion Pharmaceuticals Inc. (“Thallion”), including all
the rights to the drug candidate ShigamabTM. Taro acquired all issued and outstanding shares of Thallion for a total consideration
of $2.7 million, consisting of a cash payment of $2.3 million on closing and a deferred payment of $0.4 million, which was
received in January 2018. In addition, the Company is entitled to receive a portion of certain potential future post-approval revenues
related to the ShigamabTM program. A gain on sale of subsidiary in the amount of $1,944,000 was recognized in the consolidated
statement of loss for the year ended December 31, 2017.

 

Refer to section Contractual Obligations
for details of payments made to the CVR holders in accordance with the terms of the agreements of the 2013 Thallion acquisition
by BELLUS Health.

 

2017 Sale of Equity Interest in FB Health

 

On June 30, 2017, the Company sold its equity
interest in FB Health S.p.A (“FB Health”) for a potential total consideration of $2,536,000, consisting of an upfront
cash payment of $1,769,000 and a contingent revenue-based milestone payment of up to $767,000 (€518,000) to be determined
based on FB Health’s revenues for the twelve-month period ended June 30, 2018. The Company received an amount of $465,000
in November 2018 as payment of the contingent consideration receivable.

 

    	 	5	 

     

    

  

In the third quarter of 2018, prior to payment,
the Company adjusted the estimated fair value of the contingent consideration receivable to $465,000 in the consolidated statement
of financial position, based on available information representing management’s revised best estimate of the amount to be
received ($384,000 as at December 31, 2017). The change in fair value for the year ended December 31, 2018 amounted to $81,000,
presented in the consolidated statement of loss (2017 - nil).

 

Prior to the sale of the investment in FB
Health on June 30, 2017, the Company increased the fair value of its investment from $639,000 to $2,153,000, representing the estimated
fair value of the total consideration to be received. Total consideration consisted of $1,769,000 received in cash on closing and
the estimated fair value of the contingent consideration of $384,000 on the transaction date, determined based on management’s
best estimate of FB Health’s future revenues at that time. A realized gain on sale of investment in FB Health in the
amount of $1,909,000, being the difference between the fair value of the total consideration and the amount paid for the original
investment, was recognized by the Company in the consolidated statement of loss for the year ended December 31, 2017, following
the sale of the investment.

 

    	 	6	 

     

    

  

Selected Financial Information

 

(In thousands of dollars, except per share
data)

 

	 	 	Years ended December 31	 
	 	 	2018	 	 	2017	 	 	2016	 
	 	 	 	 	 	 	 	 	 	 
	Revenues	 	$	35	 	 	$	165	 	 	$	1,893	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Expenses:	 	 	 	 	 	 	 	 	 	 	 	 
	Research and development	 	 	7,185	 	 	 	3,610	 	 	 	1,515	 
	Research tax credits	 	 	(653	)	 	 	(289	)	 	 	(149	)
	 	 	 	6,532	 	 	 	3,321	 	 	 	1,366	 
	General and administrative	 	 	3,409	 	 	 	2,529	 	 	 	2,624	 
	Total operating expenses	 	 	9,941	 	 	 	5,850	 	 	 	3,990	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Results from operating activities	 	 	(9,906	)	 	 	(5,685	)	 	 	(2,097	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Finance income	 	 	746	 	 	 	80	 	 	 	806	 
	Finance costs	 	 	(5	)	 	 	(61	)	 	 	(922	)
	Net finance income (costs) 	 	 	741	 	 	 	19	 	 	 	(116	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Change in fair value of contingent consideration receivable	 	 	81	 	 	 	-	 	 	 	-	 
	Realized gain on sale of investment in FB Health	 	 	-	 	 	 	1,909	 	 	 	-	 
	Gain on sale of subsidiary	 	 	-	 	 	 	1,944	 	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Loss before income taxes	 	 	(9,084	)	 	 	(1,813	)	 	 	(2,213	)
	Deferred tax expense	 	 	-	 	 	 	61	 	 	 	15	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net loss for the year	 	$	(9,084	)	 	$	(1,874	)	 	$	(2,228	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net loss attributable to:	 	 	 	 	 	 	 	 	 	 	 	 
	Shareholders	 	$	(9,084	)	 	$	(1,874	)	 	$	(2,159	)
	Non-controlling interest	 	 	-	 	 	 	-	 	 	 	(69	)
	Net loss for the year	 	 	(9,084	)	 	 	(1,874	)	 	 	(2,228	)
	Loss per share – Basic and diluted	 	$	(0.08	)	 	$	(0.03	)	 	$	(0.04	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Financial Position:	 	 	 	 	 	 	 	 	 	 	 	 

 

	 	 	At December 31,	 	 	At December 31,	 	 	At December 31,	 
	 	 	2018	 	 	2017	 	 	2016	 
	Total assets	 	$	53,300	 	 	$	28,498	 	 	$	9,584	 
	Total non-current financial liabilities	 	$	Nil	 	 	$	Nil	 	 	$	104	 

 

    	 	7	 

     

    

  

RESULTS OF OPERATIONS

 

Year Ended December 31, 2018 Compared
to Year Ended December 31, 2017

 

For the year ended December 31, 2018, net
loss amounted to $9,084,000 ($0.08 per share), compared to $1,874,000 ($0.03 per share) for the previous year. Net loss for
2017 included a gain on sale of subsidiary in the amount of $1.9 million and a realized gain on the sale of the equity interest
in FB Health in the amount of $1.9 million. Excluding these gains, the increase in net loss is primarily attributable to higher
research and development expenses.

 

Revenues amounted to $35,000 for
the year ended December 31, 2018, compared to $165,000 for the previous year. Revenues in 2017 are mainly attributable to a service
agreement with Taro following the sale of the Company’s wholly-owned subsidiary, Thallion, to Taro in March 2017.

 

Research and development expenses,
net of research tax credits, amounted to $6,532,000 for the year ended December 31, 2018, compared to $3,321,000 for the previous
year. The increase is primarily attributable to higher expenses incurred in relation to the development of BLU-5937, the Company’s
lead drug candidate for chronic cough, including the clinical Phase 1 study completed by the Company in 2018.

 

General and administrative expenses
amounted to $3,409,000 for the year ended December 31, 2018, compared to $2,529,000 for the previous year. The increase is mainly
due to higher stock-based compensation expense in relation to the Company’s stock option plan and deferred share unit plans.

 

Net finance income amounted to $741,000
for the year ended December 31, 2018, compared to $19,000 for the previous year. The increase is primarily attributable to higher
interest income due to the Company’s increased cash, cash equivalents and short-term investments position following the 2017
Offering as well as to the foreign exchange gain that arose from the translation of the Company’s net monetary assets denominated
in US dollars.

 

Change in fair value of contingent consideration
receivable amounted to an increase of $81,000 for the year ended December 31, 2018, compared to nil for the previous year.
The contingent consideration receivable is related to the sale of the Company’s equity interest in FB Health in June
2017, as discussed previously.

 

Realized gain on sale of investment in
FB Health amounted to $1,909,000 for the year ended December 31, 2017 and is related to the sale of the Company’s
equity interest in FB Health in 2017, as discussed previously.

 

Gain on sale of subsidiary amounted
to $1,944,000 for the year ended December 31, 2017 and is related to the sale of Thallion in March 2017, as discussed previously.

 

As at December 31, 2018, total assets
amounted to $53,300,000, compared to $28,498,000 as at December 31, 2017. The increase is primarily due to the funds received from
the 2018 Offering, offset by funds used to finance the Company’s operating activities. Total non-current financial liabilities
amounted to nil as at December 31, 2018 and December 31, 2017.

 

    	 	8	 

     

    

 

Year Ended December 31, 2017 Compared
to Year Ended December 31, 2016

 

For the year ended December 31, 2017, net
loss amounted to $1,874,000 ($0.03 per share), compared to $2,228,000 ($0.04 per share) for the previous year. The decrease
in net loss is primarily attributable to the gain on sale of subsidiary in the amount of $1.9 million and the realized gain on
sale of equity interest in FB Health in the amount of $1.9 million, offset by lower revenue recognized in 2017 as well as
higher research and development expenses.

 

Revenues amounted to $165,000 for
the year ended December 31, 2017, compared to $1,893,000 for the previous year. Revenues for 2016 included those in relation to
agreements with a partner for the development of KIACTATM for AA amyloidosis, terminated since then.

 

Research and development expenses,
net of research tax credits, amounted to $3,321,000 for the year ended December 31, 2017, compared to $1,366,000 for the previous
year. The increase is attributable to expenses incurred in relation to the development of BLU-5937, for which an exclusive worldwide
license to develop and commercialize was entered into in February 2017. Expenses for 2016 included those in relation to the development
of ShigamabTM, which was sold to Taro in March 2017 as part of the sale of the Company’s wholly-owned subsidiary Thallion.

 

General and administrative expenses
amounted to $2,529,000 for the year ended December 31, 2017, compared to $2,624,000 for the previous year.

 

Net finance income amounted to $19,000
for the year ended December 31, 2017, compared to net finance costs of $116,000 for the previous year. The increase in net finance
income is primarily attributable to lower foreign exchange loss in 2017 that arose from the translation of the Company’s
net monetary assets denominated in US dollars, due to the appreciation of the US dollar compared with the Canadian dollar in 2017.

 

Realized gain on sale of investment in
FB Health amounted to $1,909,000 for the year ended December 31, 2017 and is related to the sale of the Company’s
equity interest in FB Health in June 2017, as discussed previously.

 

Gain on sale of subsidiary amounted
to $1,944,000 for the year ended December 31, 2017 and is related to the sale of Thallion in March 2017, as discussed previously.

 

As at December 31, 2017, total assets
amounted to $28,498,000, compared to $9,584,000 as at December 31, 2016. The increase is primarily due to funds received from the
2017 Offering, the sale of Thallion and the sale of the Company’s equity interest in FB Health, offset by funds used to finance
the Company’s operating activities. Total non-current financial liabilities amounted to nil and $104,000 as at December 31,
2017 and December 31, 2016, respectively.

 

    	 	9	 

     

    

 

Quarter Ended December 31, 2018 Compared
to Quarter Ended December 31, 2017 (Unaudited)

 

For the three-month period ended December
31, 2018, net loss amounted to $2,630,000 ($0.02 per share), compared to $1,605,000 ($0.02 per share) for the corresponding
period the previous year. The increase in net loss is primarily attributable to higher research and development expenses in relation
to the development of BLU-5937, partially offset by a foreign exchange gain.

 

Research and development expenses,
net of research tax credits, amounted to $2,268,000 for the three-month period ended December 31, 2018, compared to $792,000
for the corresponding period the previous year. The increase is attributable to expenses incurred in relation to the development
of BLU-5937, including the clinical Phase 1 study completed by the Company in 2018.

 

Net finance income amounted to $500,000
for the three-month period ended December 31, 2018, compared to $16,000 for the corresponding period the previous year. The
increase is mainly attributable to a foreign exchange gain that arose from the translation of the Company’s net monetary
assets denominated in US dollars.

 

Quarterly Results (Unaudited)

(in thousands of dollars, except per
share data)

 

	 	 	 	 	 	 	 	 	Basic and diluted	 
	 	 	 	 	 	Net (loss)	 	 	(loss) earnings	 
	Quarter	 	Revenues	 	 	income	 	 	per share	 
	 	 	 	 	 	 	 	 	 	 
	Year ended December 31, 2018	 	 	 	 	 	 	 	 	 	 	 	 
	Fourth	 	$	9	 	 	$	(2,630	)	 	$	(0.02	)
	Third	 	 	9	 	 	 	(3,047	)	 	 	(0.03	)
	Second	 	 	8	 	 	 	(1,564	)	 	 	(0.01	)
	First	 	 	9	 	 	 	(1,843	)	 	 	(0.02	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Year ended December 31, 2017	 	 	 	 	 	 	 	 	 	 	 	 
	Fourth	 	$	22	 	 	$	(1,605	)	 	$	(0.02	)
	Third	 	 	93	 	 	 	(1,680	)	 	 	(0.03	)
	Second	 	 	41	 	 	 	267	 	 	 	Nil	 
	First	 	 	9	 	 	 	1,144	 	 	 	0.02	 
	 	 	 	 	 	 	 	 	 	 	 	 	 

 

The variation of the net (loss) income of
a quarter compared to the corresponding quarter of the previous year are explained by the following elements.

 

The increase in net loss for the fourth
quarter of 2018 is primarily attributable to higher research and development expenses, partially offset by a foreign exchange gain.
The increase in net loss for the third quarter of 2018 is primarily attributable to higher research and development expenses and
stock-based compensation expense. The increase in net loss for the second quarter of 2018 is primarily attributable to the non-recurrence
of the realized gain on the sale of the equity interest in FB Health of $1.9 million recorded in the second quarter of 2017. The
increase in net loss for the first quarter of 2018 is primarily attributable to higher research and development expenses in addition
to the non-recurrence of the gain on the sale of Thallion of $1.9 million recorded in the first quarter of 2017.

 

    	 	10	 

     

    

 

Related Party Transactions 

 

Dr. Francesco Bellini is the Chairman of
the Board of Directors and provides ongoing advisory services to the Company under the terms of a consulting and services agreement
between the Company and Picchio International Inc. (“Picchio International”), wholly-owned by Dr. Francesco Bellini
and his spouse. Picchio International receives a monthly fee of $20,833, plus the reimbursement of applicable expenses for services
rendered under the agreement. The agreement has a one-year term renewable for successive one-year terms. The Company recorded fees
and expenses under the consulting and services agreement of $381,000 for both of the years ended December 31, 2018 and 2017.

 

FINANCIAL CONDITION

 

Liquidity and Capital Resources

 

As at December 31, 2018, the Company had
available cash, cash equivalents and short-term investments totaling $48,906,000, compared to $23,888,000 as at December 31, 2017.
For the year ended December 31, 2018, the net increase in cash, cash equivalents and short-term investments amounted to $25,018,000,
compared to $17,054,000 for the previous year. The Company’s working capital amounted to $48,148,000 as at December 31, 2018,
compared to $23,860,000 as at December 31, 2017. The net increase in the cash position and working capital for the year ended
December 31, 2018 is primarily attributable to funds received from the 2018 Offering, offset by funds used to finance the Company’s
operating activities.

 

The other significant changes in the Company’s
financial position as at December 31, 2018, compared to the financial position as at December 31, 2017, are
as follows:

 

		-	The decrease in Trade and other receivables is mainly due
to the amounts received in 2018 in relation to the in-licensing of the BLU-5937 program from NEOMED and the sale of Thallion in
2017.

		-	The decrease in Contingent consideration receivable is
attributable to the proceeds received in 2018 in relation to the sale of the Company’s equity interest in FB Health in 2017.

		-	The increase in Prepaid and other assets is mainly due
to payments made in relation to the BLU-5937 Phase 2 clinical study.

		-	The increase in Trade and other payables reflects the Company’s
increased operations in 2018.

 

Based on management’s estimate and
current level of operations, the Company believes that the current liquidity position is sufficient to finance its operations for
more than two years.

 

The Company does not have any debt nor does
it have pre-arranged credit facilities or other sources of financing cash flows.

 

The Company is subject to a number of risks
associated with the conduct of its drug development programs and their results, the establishment of strategic alliances and the
successful development of new drug products and their marketing. The Company has incurred significant operating losses and negative
cash flows from operations since inception. To date, the Company has financed its operations primarily through public offerings
of common shares, private placements, the issuance of convertible notes, assets sales and the proceeds from research tax credits.
The ability of the Company to ultimately achieve future profitable operations is dependent upon the successful expansion and development
of its project pipeline, obtaining regulatory approval in various jurisdictions and successful sale or commercialization of the
Company’s products and technologies, which is dependent on a number of factors outside of the Company’s control.

 

    	 	11	 

     

    

 

Refer to Financial Condition – Contractual
Obligations and Financial Risk Management – Liquidity Risk sections for further details on liquidity and capital resources
of the Company.

 

Financing and Investing Activities

 

On December 18, 2018, the Company completed
the 2018 Offering by issuing 36,842,105 common shares from treasury at a price of $0.95 per share for aggregate gross proceeds
of $35 million. In addition, 1,450,264 broker warrants exercisable for common shares were issued to the agents. Each
warrant entitles the holders to buy one common share at a price of $0.95 per share for a period of 18 months from the
closing of the 2018 Offering.

 

On September 12, 2018, upon the exercise
of 700,000 broker warrants issued in connection with the 2017 Offering, the Company received $266,000 and issued 700,000 common
shares from treasury.

 

During 2018, cash and cash equivalents amounting
to net $17,651,000 were invested in short-term investments with initial maturities greater than three months and less than a year
($11,880,000 in 2017).

 

On December 12, 2017, the Company completed
the 2017 Offering by issuing 52,631,580 common shares from treasury at a price of $0.38 per share for aggregate gross
proceeds of $20 million. In addition, 1,806,735 broker warrants exercisable for common shares were issued to the agents. Each
warrant entitles the holders to buy one common share at a price of $0.38 per share for a period of 18  months from the
closing of the 2017 Offering.

 

On February 28, 2017, the Company paid $3.2
million in relation to the BLU-5937 license obtained from NEOMED, consisting of $1.7 million in cash and $1.5 million in equity
with the issuance of 5,802,177 common shares from treasury ($0.2585 per share), as discussed in the Business Overview section.

 

On March 16, 2017, the Company sold its
wholly-owned subsidiary, Thallion, to Taro for total consideration of $2.7 million, consisting of a cash payment of $2.3 million
on closing and a deferred payment of $0.4 million, which payment was received in January 2018, as discussed in the Business Overview
section.

 

On June 30, 2017, the Company sold its equity
interest in FB Health for a potential total consideration of $2,536,000, consisting of an upfront cash payment of $1,769,000 and
a contingent revenue-based milestone payment of up to $767,000 (€518,000), to be determined based on FB Health’s revenues
for the twelve-month period ended June 30, 2018. The Company received an amount of $465,000 in November 2018 as payment of the
contingent consideration receivable. Refer to the Business Overview section for additional details.

 

At December 31, 2018, the Company is contingently
liable for a letter of credit in the amount of $50,000. Cash is pledged under this letter of credit and is presented as restricted
cash under non-current Other assets in the consolidated statement of financial position as at December 31, 2018.

 

Other 

 

As at February 20, 2019, the Company
had 157,389,686 common shares outstanding and 174,844,685 common shares on a fully diluted basis, including 15,248,000 stock options
granted under the stock option plan (of which 3,655,000 stock options were granted on February 20, 2019) and 2,206,999 warrants
issued in relation to the 2018 and 2017 Offerings.

 

During the year ended December 31, 2018,
4,300,000 stock options were granted (2,885,000 in 2017), nil stock options were forfeited (290,000 in 2017) and nil stock options
expired (90,000 in 2017).

 

    	 	12	 

     

    

 

Contractual Obligations 

 

As at December 31, 2018, BELLUS Health’s
minimum future contractual obligations are principally for payments in relation to operating leases, consulting fees for Picchio
International, trade and other payables and contracts for research and development activities. Future contractual obligations by
year of maturity are presented below.

 

	Contractual obligations	 	 	 	 	Less than	 	 	 	 
	(in thousands of dollars)	 	Total	 	 	1 year	 	 	2 years	 
	 	 	 	 	 	 	 	 	 	 
	Operating leases	 	$	164	 	 	$	151	 	 	$	13	 
	Consulting fees	 	 	250	 	 	 	250	 	 	 	—	 
	Trade and other accrued liabilities	 	 	2,716	 	 	 	2,716	 	 	 	—	 
	Contracts for research and development activities	 	 	6,785	 	 	 	4,959	 	 	 	1,826	 

 

On August 15, 2013, BELLUS Health acquired
all of the issued and outstanding common shares of Thallion in exchange for cash on closing of transaction and the issuance of
one contingent value right (“CVR”) per common share to Thallion’s shareholders, with an expiration date of August 14,
2028, to be paid upon the settlement of the amounts described below.

 

The CVRs issued to Thallion’s shareholders
entitle the holder thereof to: (i) its pro rata share of 100% of any additional purchase price consideration to be received in
relation to a 2009 sale transaction by Thallion, (ii) its pro rata share of 5% of the ShigamabTM revenue generated or received
by BELLUS Health, capped at $6,500,000, and (iii) its pro rata share of 100% of any net proceeds generated from the licensing,
selling or otherwise commercializing of (a) diagnostic products or services using certain Caprion Proteomics Inc. products, and
(b) all issued patents or pending patents pertaining to such Caprion Proteomics Inc. products, in respect of which Thallion has
an ownership interest or monetary entitlement.

 

The amount to which the holders of CVRs
may be entitled can be reduced for potential contingent liabilities owing by Thallion (including, but not limited to, in respect
of the indemnity agreement entered into in relation to the 2009 sale transaction by Thallion, accounts payable or litigation).

 

In relation to (i) above, BELLUS Health
paid in March 2017 a net amount of $577,152 ($0.01609 per CVR) to the CVR holders in relation to the 2009 sale transaction by Thallion.

 

In relation to (ii) above, the Company paid
in April 2017 and in January 2018 net amounts of $94,550 ($0.00263 per CVR) and $14,721 ($0.00041 per CVR), respectively, to the
CVR holders in connection with the sale of the Company’s wholly-owned subsidiary Thallion, including all the rights to the
drug candidate ShigamabTM, to Taro in March 2017. Taro acquired all issued and outstanding shares of Thallion for a
total consideration of $2.7 million, consisting of a cash payment of $2.3 million on closing and a deferred payment of $0.4 million
upon the completion of a pre-established milestone, which payment was received in January 2018.

 

The CVRs also entitled the holder thereof
to receive Thallion’s income tax credits deducted in the 2013 Thallion Statement of Net Cash in the event that they were
not claimed by tax authorities after their audit, or their assessment period expired (the “Income Tax Credits”). As
they were not claimed nor assessed, BELLUS Health paid on January 25, 2019 a net amount of $134,149 ($0.00374 per CVR) to the CVR
holders.

 

    	 	13	 

     

    

  

All payments made to CVR holder were in
accordance with the terms of the agreements of the 2013 Thallion acquisition by BELLUS Health.

 

The Company expects that there will be no
additional payment to CVR holders.

 

The Company is potentially liable in relation
to the following indemnity agreement:

 

In March 2017, the Company entered into
a Share Purchase Agreement with Taro for the sale of the Company’s wholly-owned subsidiary Thallion, including all the rights
to the drug candidate ShigamabTM. The Company agreed to indemnify Taro, subject to certain conditions and limitations,
for losses which it may suffer or incur, arising out of any debts, liabilities, commitments or obligations of any nature resulting
from any matters, actions, events, facts or circumstances related to the activities or affairs of Thallion, which occurred prior
to the effective time of the Share Purchase Agreement. No indemnity provision has been recorded by the Company as at December 31,
2018 and 2017 for this matter as the Company does not expect to make any payments under this indemnity agreement.

 

The Company has a letter of credit issued
in connection with a lease agreement in the amount of $50,000. Cash is pledged under the letter of credit and is presented as restricted
cash under non-current Other assets in the consolidated statement of financial position as at December 31, 2018.

 

The Company has entered into a number of
other agreements, which involve future commitments, including agreements with Parteq Research and Development Innovations, the
federal Ministry of Industry (Technology Partnerships Canada Program) and NEOMED. Refer to note 17 to the consolidated financial
statements for the year ended December 31, 2018 for details.

 

The Company has not engaged in commodity
contract trading or off-balance sheet financing, other than in relation to operating leases.

 

FINANCIAL RISK MANAGEMENT

 

This section provides disclosures relating
to the nature and extent of the Company’s exposure to risks arising from financial instruments, including credit risk, liquidity
risk, foreign currency risk and interest rate risk, and how the Company manages those risks.

 

Credit Risk

 

Credit risk results from the possibility
that a loss may occur from the failure of another party to perform according to the terms of the contract. Financial instruments
that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents,
short-term investments and trade and other receivables. The Company invests cash mainly with major North American financial institutions.
Cash equivalents and short-term investments are comprised of fixed income instruments with a high credit ranking (not less than
A-1) as rated by Standard and Poor’s. The Company has investment policies that are designed to provide for the safety and
preservation of principal, the Company's liquidity needs and yields that are appropriate.

 

As at December 31, 2018, the Company’s
maximum credit exposure corresponded to the carrying amount of these financial assets.

 

    	 	14	 

     

    

  

Liquidity Risk

 

Liquidity risk is the risk that the Company
will not be able to meet its financial obligations as they fall due. The Company requires continued access to capital markets to
support its operations, as well as to achieve its strategic plans. Any impediments to the Company’s ability to access capital
markets, including the lack of financing capability or an adverse perception in capital markets of the Company’s financial
condition or prospects, could have a materially adverse effect on the Company. In addition, the Company’s access to financing
is influenced by the economic and credit market environment.

 

The Company manages liquidity risk through
the management of its capital structure, as outlined in note 20 to the consolidated financial statements for the year ended December
31, 2018 (Capital Disclosures). In addition, the Company manages liquidity risk by continuously monitoring actual and projected
cash flows. The Board of Directors reviews, approves and monitors the Company’s annual operating and capital budgets, as
well as any material transactions.

 

Foreign Currency Risk

 

Foreign currency risk is the risk that the
fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Foreign
currency risk is limited to the portion of the Company’s business transactions denominated in currencies other than Canadian
dollars. The Company’s exposure relates primarily to changes in the Canadian dollar versus the US dollar exchange rate. For
the Company’s foreign currency transactions, fluctuations in the respective exchange rates relative to the Canadian dollar
will create volatility in the Company’s cash flows and the reported amounts for revenue and expenses in income. Additional
variability arises from the translation of monetary assets and liabilities denominated in currencies other than the Canadian dollar
at the rates of exchange at each reporting date, the impact of which is reported as a foreign exchange gain or loss in income.

 

The Company’s objective in managing
its foreign currency risk is to minimize its net exposures to foreign currency cash flows, by transacting with third parties in
the Company’s functional currency to the maximum extent possible and practical and holding cash, cash equivalents and short-term
investments as well as incurring borrowings in its functional currency. The Company holds a portion of its cash, cash equivalents
and short-term investments in US dollars to meet its liquidity needs in US dollars, but does not use derivative financial instruments
to reduce its foreign exchange exposure. Note 21 (d) to the consolidated financial statements for the year ended December 31, 2018
provides indication of the Company’s significant foreign exchange currency exposures as at that date.

 

Interest Rate Risk

 

Interest rate risk is the risk that the
fair value or future cash flows of a financial instrument will fluctuate because of changes in market rates. The Company’s
financial instruments exposed to interest rate risk are cash and cash equivalents, short-term investments and restricted cash.
Management believes that the risk that the Company will realize a loss as a result of the decline in the fair value of its cash
equivalents and short-term investments is limited because these investments have short-term maturities and are generally held to
maturity. The capacity of the Company to reinvest the short-term amounts with equivalent returns will be impacted by variations
in short-term fixed interest rates available in the market.

 

The Company has had no interest rate hedging
activities during the current year.

 

    	 	15	 

     

    

 

DISCLOSURE CONTROLS AND PROCEDURES

 

Disclosure controls and procedures are designed
to provide reasonable assurance that information required to be disclosed by the Company in its reports filed with securities regulatory
authorities is recorded, processed, summarized and reported within prescribed time periods and is accumulated and communicated
to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.

 

The Company’s Chief Executive Officer
and its Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures designed to
ensure that information required to be disclosed in the reports filed or submitted under securities legislation is recorded, processed,
summarized and reported within the time periods specified by applicable securities legislation. The design of any system of controls
and procedures is based in part upon certain assumptions about the likelihood of certain events. There can be no assurance that
any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. The Company’s
Chief Executive Officer and its Chief Financial Officer are assisted in this responsibility by the Company’s disclosure committee,
which is composed of members of senior management. Based on an evaluation of the Company’s disclosure controls and procedures,
the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures
were effective as of December 31, 2018.

 

INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Management’s Annual Report on Internal
Control Over Financial Reporting

 

Internal control over financial reporting
(“ICFR”) is designed to provide reasonable assurance regarding the reliability of the Company’s financial reporting
and the preparation of financial statements for external purposes in accordance with IFRS. Management, including the Company’s
Chief Executive Officer and its Chief Financial Officer, is responsible for establishing and maintaining adequate ICFR. The design
of any system of controls and procedures is based in part upon certain assumptions about the likelihood of certain events. There
can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless
of how remote. Management assessed the effectiveness of the Company’s ICFR as of December 31, 2018 based on the framework
established in Internal Control – Integrated Framework (2013) by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). Based on this assessment, the Company’s Chief Executive Officer and its Chief Financial
Officer concluded that the Company’s ICFR were effective as of December 31, 2018. The Company’s assessment is
not subject to an attestation report of the Company’s auditors regarding ICFR.

 

Changes in Internal Controls Over Financial
Reporting

 

In accordance with the Canadian Securities
Administrators’ Multilateral Instrument 52-109, the Company has filed certificates signed by the Chief Executive Officer
and the Chief Financial Officer, that, among other things, report on the design of disclosure controls and procedures and the design
of internal control over financial reporting.

 

There have been no changes in the Company’s
ICFR during the quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect its
ICFR.

 

    	 	16	 

     

    

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of the consolidated financial
statements in conformity with IFRS requires management to adopt accounting policies and to make certain judgments, estimates and
assumptions that the Company believes are reasonable based upon the information available at the time these decisions are made.
These accounting policies, judgments, estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure
of contingent liabilities at the date of the financial statements, and the reported amounts of revenues, expenses and cash flows
during the reporting periods. By their nature, these judgments are subject to an inherent degree of uncertainty and are based upon
historical experience, trends in the industry and information available from outside sources. On an ongoing basis, management reviews
its estimates and actual results could differ from estimates.

 

The Company’s significant accounting
policies are described in note 3 to the consolidated financial statements for the year ended December 31, 2018. Management considers
that the following accounting policies and estimates are more important in assessing, understanding and evaluating the Company’s
consolidated financial statements.

 

In-process research and development asset:
The in-process research and development (“IPR&D”) asset is accounted for as an indefinite-lived intangible asset
until the project is completed or abandoned, at which point it will be amortized or impaired, respectively. The Company accounts
for subsequent research and development costs associated with the acquired IPR&D asset consistent with the research and development
policy in note 3 (d) to the consolidated financial statements. The Company assesses at each reporting date whether there is an
indication that the asset may be impaired. Irrespective of whether there is any indication of impairment, the IPR&D asset is
tested for impairment annually by comparing its carrying amount with its recoverable amount.

 

Stock-based compensation: The Company
follows the fair value-based method to account for options granted to employees, whereby compensation cost is measured at fair
value at the date of grant and is expensed over the award’s vesting period with a corresponding increase to equity. The fair
value of each option granted is estimated on the date of grant using the Black-Scholes pricing model, which requires certain assumptions,
including the future stock price volatility and expected time to exercise. Expected volatility is estimated by considering historic
average share price volatility. For stock options with graded vesting, the fair value of each tranche is recognized over its respective
vesting period. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service vesting
conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that
meet the related service conditions at the vesting date. When stock options are exercised, the Company issues new shares. The proceeds
received, together with the related portion previously recorded in other equity, are credited to share capital. Changes to any
assumptions, or the use of a different option pricing model, could produce different fair values for stock-based compensation,
which could have a material impact on the Company’s income.

 

Note 2 (d) to the consolidated financial
statements provides additional information regarding the use of estimates and judgements in the application of accounting policies.

 

    	 	17	 

     

    

 

CHANGES IN ACCOUNTING POLICIES 

 

Changes in significant accounting policies
in 2018

 

On January 1, 2018, the Company adopted
the following new accounting standards and interpretations issued by the IASB, for which the application did not have a material
impact on the audited consolidated financial statements for the year ended December 31, 2018:

 

		(a)	IFRS 2, Share-Based Payment;

 

		(b)	IFRS 9 (2014), Financial Instruments; and

 

		(c)	IFRS 15, Revenue from Contracts with Customers.

 

Further information on these accounting
changes can be found in note 4 (a) to the December 31, 2018 audited consolidated financial statements.

 

New accounting standard and interpretations
not yet adopted

 

Leases

 

In January 2016, the IASB issued IFRS 16,
Leases, which will replace IAS 17, Leases and the related interpretations. This standard introduces a single lessee accounting
model and requires all leases of more than 12 months to be reported on a company’s statement of financial position as assets
and liabilities, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing
its right to use the underlying asset and a lease liability representing its obligation to make lease payments. This standard substantially
carries forward the lessor accounting requirements of IAS 17, while requiring enhanced disclosures to be provided by lessors. Other
areas of the lease accounting model have also been impacted, including the definition of a lease. Transitional provisions have
been provided.

 

The new standard is effective for annual
periods beginning on or after January 1, 2019. The Company will adopt IFRS 16 using the modified retrospective transition method,
with the cumulative effect of initially applying the standard recognized as an adjustment to opening retained earnings at date
of initial adoption. The Company does not expect that the adoption of the standard will have a material effect on the consolidated
financial statements, other than that its operating leases will need to be recognized in its consolidated statement of financial
position on initial adoption of IFRS 16.

 

The nature of expenses related to those
leases will now change because the Company will recognize a depreciation charge for right-of-use assets and interest expense on
lease liabilities. Previously, the Company recognized operating lease expense on a straight-line basis over the term of the lease,
and recognised assets and liabilities only to the extent that there was a timing difference between actual lease payments and the
expense recognized.

 

Based on the information currently available, the Company expects
that the right-of-use asset and lease liability on January 1, 2019 will be between $100,000 and $164,000.

 

    	 	18	 

     

    

  

RISKS AND UNCERTAINTIES

 

Since its inception in 1993, BELLUS Health
has incurred significant operating losses. The Company’s drug candidates are in development and none have yet been approved
for commercialization by regulatory authorities in any jurisdiction. The Company’s business entails significant risks, including
the ability to expand and develop its project pipeline, costs and time involved in obtaining the required regulatory approvals,
the adequacy of patent protection, the uncertainties involved in clinical testing, the availability of capital to continue development
and commercialization of drugs, and competition from pharmaceutical and biotechnology companies.

 

Significant funding is required for research
and development, clinical trials, marketing, commercial manufacturing of drugs and the establishment of sales and marketing teams
that may be necessary for the launch and sales of new drugs. In addition, major financial resources are necessary until such time
as the drugs are commercialized and sold successfully, and sales are sufficient to generate profits. The Company may seek to raise
additional funds through public or private financing, collaborations agreements with other companies, or financing from other sources.
However, there can be no assurance that these financing efforts will be successful or that the Company will continue to be able
to meet its ongoing cash requirements. It is possible that financing will not be available or, if available, may not be on favourable
terms.

 

The availability of financing will be affected
by the results of scientific research and clinical development, the Company’s ability to obtain regulatory approvals, the
market acceptance of the Company’s drugs, the state of the capital markets generally (with particular reference to pharmaceutical,
biotechnology, nutraceutical and medical companies), the status of strategic alliance agreements, and other relevant commercial
considerations.

 

Drug research and development involves a
high degree of risk, and returns to investors are dependent upon successful development and commercialization of the Company’s
drug candidates. A setback in any of the Company’s clinical trials may cause a drop in the Company’s stock price. Difficulties
encountered in enrolling patients in the Company’s clinical trials could delay or adversely affect the trials. There can
be no assurance that development of any drug candidate will be successfully completed or that regulatory approval of any of the
Company’s drug candidates under development will be obtained. Furthermore, there can be no assurance that existing drugs
or new drug candidates developed by competitors will not be more effective, or more effectively marketed and sold, than any that
may be developed by the Company. There can be no assurance that the Company’s future potential drugs will gain market acceptance
among physicians, patients, healthcare payers, the medical community and consumers. In
addition, given the very high costs of development of drug candidates, the Company anticipates having to partner with pharmaceutical
companies to develop and/or bring drugs candidates to market. The terms of such partnership arrangements along with the related
financial obligations cannot be determined at this time and the timing of completion of the development and/or approval of such
drug candidates will likely not be within the Company’s control.

 

The Company
is heavily dependent on licensed intellectual property. If the Company was to lose its rights to licensed intellectual property,
it would not be able to continue developing or commercializing BLU-5937. If the Company breaches any of the agreements under which
it licenses the use, development and commercialization rights to BLU-5937 or any other drug candidate or technology from third
parties or if certain insolvency events were to occur, it could lose license rights that are critical to its business.

 

    	 	19	 

     

    

 

Because
of the length of time and expense associated with bringing new drug candidates through development, obtaining regulatory approval
and bringing drugs to market, the Company places considerable importance on obtaining and maintaining patent protection and safeguarding
trade secret protection for significant discoveries. There can be no assurance that any pending patent application filed by the
Company will mature into an issued patent. Furthermore, there can be no assurance that existing or pending patent claims will offer
protection against competition, or will not be designed around or infringed upon by others. Commercial success will also depend
in part on the Company not infringing patents or proprietary rights of others. Patent litigation is costly and time consuming and
may subject the Company to liabilities.

 

The Company is currently dependent on third
parties for a variety of functions and may enter into future collaborations for the development, manufacturing and commercialization
of drugs. There is no assurance that the arrangements with these third parties will provide benefits the Company expects. There
can also be no assurance that the Company will be successful in manufacturing, marketing and distributing drugs, or that the Company
will be able to make adequate arrangements with third parties for such purposes. There can be no assurance that the Company will
generate significant revenue or achieve profitability.

 

The Company may be required to make payments
under the indemnity agreement in relation to the sale of Thallion in 2017.

 

A detailed discussion on the Company’s
risks and uncertainties can be found in the Company’s public filings including the Annual Information Form available on SEDAR
at www.sedar.com.

 

    	 	20	 

     

    

 

FORWARD-LOOKING STATEMENTS 

 

Certain statements contained in this MD&A,
other than statements of fact that are independently verifiable at the date of this report, may constitute “forward-looking
statements” within the meaning of Canadian securities legislation and regulations. Such statements, based as they are on
the current expectations of management, inherently involve numerous important risks, uncertainties and assumptions, known and unknown,
many of which are beyond the Company's control. This forward-looking information may include among other things, information with
respect to the Company’s objectives and the strategies to achieve these objectives, as well as information with respect to
the Company’s beliefs, plans, expectations, anticipations, estimates, and intentions. Forward-looking statements generally
can be identified by the use of conditional or forward-looking terminology such as “may”, “will”, “expect”,
 “intend”, “estimate”, “anticipate”, “plan”, “foresee”, “believe”
or “continue” or the negatives of these terms or variations of them or similar terminology. Refer to the Company’s
public filings with the Canadian securities regulatory authorities, including the Annual Information Form, for a discussion of
the various risk factors that may affect the Company’s future results. Such risks factors include but are not limited to:
the ability to expand and develop its project pipeline, the ability to obtain financing, the impact of general economic conditions,
general conditions in the pharmaceutical industry, changes in the regulatory environment in the jurisdictions in which the Company
does business, stock market volatility, fluctuations in costs, changes to the competitive environment due to consolidation, achievement
of forecasted burn rate, potential payments/outcomes in relation to indemnity agreements and contingent value rights, achievement
of forecasted pre-clinical and clinical trial milestones and that actual results may vary once the final and quality-controlled
verification of data and analyses has been completed. In addition, the length of the Company’s drug candidates’ development
process, their market size and commercial value, as well as the sharing of proceeds between the Company and its potential partners
from potential future revenues, if any, are dependent upon a number of factors. Consequently, actual future results and events
may differ materially from the anticipated results and events expressed in the forward-looking statements. The Company believes
that expectations represented by forward-looking statements are reasonable, yet there can be no assurance that such expectations
will prove to be correct. The reader should not place undue reliance, if any, on any forward-looking statements included in this
report. These forward-looking statements speak only as of the date made, and the Company is under no obligation and disavows any
intention to update publicly or revise such statements as a result of any new information, future events, circumstances or otherwise,
unless required by applicable legislation or regulation. The forward-looking statements contained in this report are expressly
qualified by this cautionary statement.

 

    	 	21

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00299-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00299-of-00352.parquet"}]]