Message to Shareholders

Transcription

1 Annual Report 2003

2 Profile The exponential increase in the molecular diagnostics sector in the past three years combined with the lack of highly accurate cancer diagnostic tests in general create immediate opportunities for DiagnoCure (TSX: CUR). The company s mission is to be a world leading developer and provider of innovative, high value diagnostics to detect early stage cancer. The development of the upm3 TM test for the detection of prostate cancer was completed and sales in the United States under the ASR format were commenced by Bostwick Laboratories of Richmond, Virginia, in October This test, which detects the presence of the PCA3 gene and which is the most specific of all genes associated with prostate cancer identified to date, should constitute an important breakthrough in the improvement of prostate cancer diagnostics. In November 2003, DiagnoCure announced that it had granted to Gen-Probe an exclusive worldwide licence for the development and commercialization of diagnostic products incorporating the PCA3 gene for prostate cancer technology in consideration for upfront, milestone and royalty payments. DiagnoCure s first marketed product, ImmunoCyt / ucyt+, is an immunocytofluorescence test designed for the detection of bladder cancer cells in urine which is based on monoclonal antibodies. The Company s direct promotional efforts in the United States in 2003 were successful in that ImmunoCyt TM / ucyt+ TM sales doubled from the previous year. DiagnoCure also expanded its international network by signing distribution agreements in Australia, Italy, the Netherlands, South Korea and Brazil. The Company also announced the recent acquisition of the assets of SAMBA Technologies, specialized in digital imaging and information technology. In addition to widely broadening its development potential for new applications of cancer diagnostic immunoassays, this acquisition will facilitate the introduction of an automated version of the ImmunoCyt TM / ucyt+ TM test. As regards the lung cancer project, the Company diligently continued the evaluation of many molecular markers in the context of developing a prototype detection test. DiagnoCure has since commenced testing a few potentially interesting markers on bronchial and expectoration samples. In order to further develop its portfolio of diagnostic products, the Company initiated in 2003 the development of a molecular test for the detection of kidney cancer. This test complements well the urology cancer portfolio developed by DiagnoCure.

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4 Page 4 Message to Shareholders Dear Shareholders, 2003 was a year of important accomplishments. The cornerstone of this success was the significant milestones that were achieved due to our development efforts on upm3 TM, our test for the detection of prostate cancer. Upon completion of the first generation of the upm3 TM test, we initiated sales in the United States through the network of Bostwick Laboratories. Shortly after our financial year-end, and after having initiated discussions with several potential partners, we concluded an agreement with Gen-Probe Inc. (NASDAQ: GPRO) granting them an exclusive worldwide license on the PCA3 technology for prostate cancer diagnostics. Our efforts in the lung cancer project progressed very well in that we evaluated numerous potential molecular markers from which a few will be validated for the development of a prototype assay in Our direct promotional efforts in the United States for ImmunoCyt TM / ucyt+ TM, our test for the detection of bladder cancer, resulted in the sales doubling from the previous year. Because we were convinced that an automated version of our test would meet the needs of the market as well as conferring a significant competitive advantage, we prioritized our efforts during the past year on this project and, last December, we acquired the assets of SAMBA Technologies SARL, a company specialized in image analysis. Since our goal is to be recognized as a world leading developer and provider of innovative, high value-added diagnostic tests for the early detection of cancer, we initiated the research and development work on a molecular test for the detection of kidney cancer. We also began discussions with several companies and institutions aimed at establishing partnerships and collaborations in an effort to diversify our product portfolio and accelerate our growth. UPM3 In addition to the preclinical results of a Québec study on 443 patients, a recent study by Dr Schalken s group from Nijmegen University in the Netherlands, published in the European Urology journal in March 2003, indicated high levels of specificity and sensitivity that were very similar to our results. These results were presented to a select panel of opinion leaders during the annual American Urology Association (AUA) in Chicago in the spring of Their extremely favorable reception and support convinced us to initiate sales of the upm3 TM test in the United States under the Analyte Specific Reagent (ASR) format. The Company entered into an agreement with Bostwick Laboratories whereby they launched an in-house version made with the upm3 TM ASR for prostate cancer in the United States. This collaboration will, in addition to validating this test, provide the opportunity to introduce and increase the awareness to clinicians of the existence of a complementary alternative to the PSAbiopsy combination. The enthusiasm and collaboration of Dr David Bostwick, a recognized worldwide expert in prostate cancer, has had a significant impact on the success to date of the upm3 TM test. As regards the licensing of the PCA3 technology, the negotiations and discussions spanned the entire year. In the end, the intrinsic qualities of Gen-Probe convinced us to pursue discussions with them over other companies. Specifically, their successful track record, their reputation, quality of technology, global presence as well as their vision and focus were important characteristics that we had identified in an ideal partner. The total consideration amounting to $ 10.5 million US, comprising an upfront, milestone and contract development payments as well as royalties of 16% on cumulative end-user net sales above $ 50 million was an exceptional package given the enormous market potential in prostate cancer diagnostics. Gen-Probe respected and understood our objectives, which were to assure that the development of the PCA3

5 Message to Shareholders Page 5 technology would occur in a diligent manner and in collaboration with us. We are proud to have entered into this strategic alliance, which will exploit the synergy between the two companies. LUNG CANCER Approximately 1.3 million new cases worldwide are diagnosed each year, which represents 14% of all new cancer diagnoses and which has a mortality rate above 90%. DiagnoCure must act diligently to address this problem. Our partnership with Compugen Inc. launched a research and development effort, which resulted in identifying several interesting potential molecular markers. However, none of these markers met our requisite technical criteria and, as a result, the parties mutually agreed to terminate the agreement. Two consecutive clinical protocols were initiated with Hôpital Laval in Québec and, on the basis of additional selected and validated molecular markers, we anticipate the development of a prototype test and perform a pilot study in the coming year. IMMUNOCYT / UCYT+ Following the termination of the distribution agreement with Dako Corporation in 2002, we adopted a transition plan for the direct marketing and sales of our test for the detection of bladder cancer in the United States. The sales of ImmunoCyt TM / ucyt+ TM increased during each of the successive quarters of fiscal 2003 and, cumulatively, doubled for the year. We are very satisfied with these results as well as the valuable experience acquired during the past year and are now prepared to conclude a new distribution agreement in the United States in 2004.The Company also expanded its distribution network by signing agreements with new distributors in Australia, Italy, the Netherlands, South Korea and Brazil. Last year s priority for ImmunoCyt TM / ucyt+ TM was the automation of the test. This project was initiated at the end of 2002 through an agreement with Molecular Diagnostics, Inc. Thereafter, the software development portion of the agreement was transferred directly to SAMBA Technologies SARL. The development of the first phase of the software for image and data management has been completed and shall officially be launched at the USCAP (United States and Canadian Academy of Pathology) congress to be held in March The demand for the manual version of diagnostic tests will continue to dramatically erode. Because of this evolving market reality, we are confident that the automated version of ImmunoCyt TM / ucyt+ TM will increase product sales through increased market share. The emerging trend toward automated diagnostic tests was also a driving force behind the acquisition, at the end of 2003, of the assets of SAMBA Technologies SARL in France. The integration of this company, which has specialized in image analysis and telemedicine during the past 25 years, will help us to considerably extend the scope of our activities and pursue our mission to develop new cancer diagnostic tests as well as assure the priority of development of the ImmunoCyt TM / ucyt+ TM automation and requisite technical support.

6 Page 6 Message to Shareholders KIDNEYCANCER Last year, we initiated this project by commencing the review of potential markers for the detection of kidney cancer. Renal cell carcinoma is the sixth leading cause of cancer death, and, as is the case with other cancers in general, must be detected at an early stage since the probability of cure is directly related to its early detection. We have implemented a protocol at Hôtel-Dieu de Québec hospital to collect cancerous tissue samples to assist us in identifying and validating potential molecular markers. BUSINESS DEVELOPMENT At the beginning of 2003, the Board of Directors created a committee to oversee strategic partnerships and alliances. We recognize that the growth of the Company will not only occur through the internal development of diagnostic tests, but also through alliances, partnerships and acquisitions. In this context, we have been very active during the past year. We have initiated discussions with several diagnostic companies regarding the possibility of acquisition, some of which are still ongoing. We have also commenced discussions and negotiations to establish partnerships and collaborations within the scope of our strategic plan. We firmly believe that these efforts, as was the case with Gen-Probe and SAMBA Technologies, will contribute to the acceleration of our strategic growth. CONCLUSION As part of the stock market resurgence, our market capitalization increased more than 500% during the last four months of Strict adherence to our cancer diagnostic focus in combination with a rigorous management of our operating costs has carried us through these past two difficult years while having achieved the above-mentioned results and success. Consequently, in 2003, we altered our corporate mindset from one of survival towards one of growth. We are enthusiastic and excited about the potential for accomplishing our objectives, which will undoubtedly have a positive impact on the valuation of the Company. We take this opportunity to acknowledge the commitment and dedication of the DiagnoCure team in all aspects of our operations. Finally, we wish to thank our shareholders for their confidence and assure them that our strategic decisions will always take into consideration their best interests. Pierre Lapalme Chairman of the Board Pierre Désy President and Chief Executive Officer

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8 Page 8 Our Corporate Strategy MOLECULAR DIAGNOSTICS VALUE CHAIN DEVELOPMENT PROCESS RESEARCH Marker discovery / genes, proteins, monoclonal antibodies OTHERS: Partnership(s) In-licensing Purchase DEVELOPMENT Target(s) identification and validation Prototype assay Clinical pilot study ASR test development ASR clinical trials DIAGNOCURE S COMPETITIVE ADVANTAGES ASR manufacturing ASR sales to reference labs COMMERCIALIZATION IVD test development IVD Clinical trials IVD Manufacturing FDA filing and approval OTHERS: Partnership(s) Out-licensing Distribution Marketing and sales

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10 Page 10 Our Products Product Development Status Identification of markers Prototype Test Pilot Study Test Development Preclinical Study ASR Commercialization * Clinical Studies FDA Approval IVD Commercialization ** ImmunoCyt TM / ucyt+ TM upm3 TM Lung Cancer Kidney Cancer * ASR (Analyte Specific Reagent): Commercialization of test components for sale by reference laboratories under their label and responsibility ** IVD (in vitro Diagnostic): Commercialization of the test for direct sale by DiagnoCure and/or its partners upm3 TM for the Detection of Prostate Cancer Prostate cancer is the most frequent cancer in men. More than 230,110 new cases are expected to be diagnosed in 2004 in the United States alone. Specifically, with an estimated 29,900 deaths in 2004, prostate cancer is the second leading cause of cancer deaths in men, surpassed only by lung cancer. Prostate cancer can, however, be treated in a highly effective manner when localized in the prostate and accounts for 33% of all male cancers and 10% of all male cancerrelated deaths. The usual screening method for prostate cancer is a combination of a digital rectal examination and of the measurement of the prostate-specific antigen (PSA) in the blood. It is estimated that approximately 40 million serum PSA tests worldwide are performed each year, representing a market of approximately US $ 1.5 billion worldwide. In 2000, the FDA approved the routine screening for prostate cancer in men over age 50, which represents approximately 35 million people in the United States. As a result, the market for prostate cancer diagnostic testing is expected to grow considerably within the aging populations. upm3 TM is a non-invasive gene-based test which detects the PCA3 gene. Tests based upon the detection of genes are developed in order to detect diseases earlier, more easily and in a cost efficient manner. The test enables the detection of PCA3 RNA expression in prostate cells that are present in the urine of the population at risk. upm3 TM uses an amplification technique to detect the presence of the PCA3 gene.

11 Our Products Page 11 Based on the preclinical results obtained in 2002 from a DiagnoCure-sponsored study on 443 patients, it appears that the upm3 TM test provides more accurate information than the PSA test allowing for a potentially better detection of prostate cancer. The test specificity combined with its accuracy might allow for a more accurate identification of patients at high risk of prostate cancer. Global results indicated a sensitivity of 67%, a specificity of 89% and a predictive value of 75% compared with the 38% predictive value for PSA. The results are particularly outstanding for PSA levels between 2.5 and 4.0 ng/ml, with a sensitivity of 74% and a specificity of 91%, whereas PSA is estimated negative and would have little usefulness due to its very low specificity. In addition, the European Urology journal (44, 2003, 8-16) published, in March of 2003, an article written by Dr. Schalken s group on a European clinical study of 108 men. Although this study was performed on a different technology platform, the results were similar to those from the Company s study and demonstrated that if a PCA3 test were negative for prostate cancer, there would be a 90% chance that a subsequent biopsy would be negative. Therefore, the DiagnoCure upm3 TM test may prove to be an ideal complement to the existing prostate cancer diagnostic tools. During the search for a commercial partner in the past year, DiagnoCure actively developed upm3 TM and initiated the process for commercialization of a first generation non-invasive version of the product as an Analyte Specific Reagent (ASR) in the United States. As a result, DiagnoCure entered into an agreement with Bostwick Laboratories of Richmond, Virginia, whereby Bostwick began offering an in-house version, made with the upm3 TM ASR for prostate cancer, in the United States by October Dr. Bostwick is recognized worldwide as a leading expert in prostate cancer pathology and his laboratory is a leading private anatomic pathology reference laboratory in the United States. Bostwick Laboratories focuses on the diagnosis of urological cancers with a primary interest in prostate cancer. The introduction of the upm3 TM ASR represents the first commercially available urine-based genetic test for prostate cancer and should constitute an important breakthrough in the improvement of prostate cancer diagnostics. DiagnoCure, in November 2003, signed a license and collaboration agreement with Gen-Probe Inc. (NASDAQ: GPRO) to develop an innovative urine test to detect the PCA3 gene for prostate cancer. Under the terms of the agreement, Gen-Probe paid DiagnoCure an upfront US $ 3 million fee, and agreed to future fees and contract development payments of up to US $ 7.5 million over the next three years. Gen-Probe received exclusive worldwide rights to the PCA3 gene for detection of prostate cancer, and will pay DiagnoCure royalties of 8% on cumulative end-user net product sales of up to $ 50 million, and, thereafter, royalties of 16% on cumulative end-user net sales above $ 50 million. Gen-Probe is a global leader in nucleic acid testing and believes that the development of a test to detect the PCA3 gene in urine on its proprietary APTIMA technology will accelerate its entry into the cancer screening market. In 2004, the Company intends to continue studies on the PCA3 gene by, amongst others, evaluating the prognostic value of detecting the PCA3 gene expression to identify prostate cancer in patients with negative biopsies and a positive upm3 TM test. DiagnoCure holds the exclusive worldwide license to all diagnostic and therapeutic applications of the PCA3 gene technology and the Company intends to enter into a partnership or a strategic alliance for the use of the PCA3 gene technology for therapeutic applications.

12 Page 12 Our Products Lung Cancer Cancer of the lung is the most common cancer and currently the leading cause of cancer death, accounting for 1.32 million cases worldwide and almost a million deaths in In 2004, in the United States, it is estimated that a 173,700 individuals will be diagnosed with lung cancer, accounting for 14% of all cancer diagnoses. An estimated 160,440 (68,500 women and 91,940 men) will die from lung cancer in 2004, accounting for about 28% of all cancer deaths. The Company estimates the total world market to be approximately US $ 2 billion. Approximately 85 to 90 percent of lung cancer cases are the result of tobacco smoking. In today s clinical practice, physicians study the patient's personal and family medical histories, smoking history and work history and perform a thorough physical examination. Other diagnostic procedures can include chest X-rays; CAT (computer-assisted tomography) and MRI (magnetic resonance imaging), which both use computerized pictures to develop threedimensional images of the lung tumor; and nuclear medicine scans which use low-level radioactivity to identify abnormalities in other parts of the body. Removal and microscopic examination of sputum and tumor cells from the lung and of tissue from the breathing tube, procedures known as sputum cytology and biopsy, can also be useful in making a diagnosis. X-rays, CAT and MRI can reveal the size, shape and location of the lung tumor. Sputum cytology and biopsy can determine whether the lung tumor is cancerous. Lung cancers are of two types, small-cell lung cancer (SCLC) or non small-cell lung cancer (NSCLC). SCLC accounts for approximately 20% of the cases. It is the most aggressive and has the worst prognosis. In light of the above currently available testing methods, survival rate depends on the staging at which the disease is detected. Thus, the five-year survival rate decreases rapidly reaching less than 2% with a stage 4 cancer whereas the two-year survival rate for SCLC is only 15 to 30%. The Company believes this is an excellent example of the inadequacy of the present diagnostic methods for detecting lung cancer and thus the urgent need for an effective detection test. At the same time, this data clearly illustrates the impact and benefit of early diagnosis of lung cancer and how this plays a critical role in the treatment of the cancer and the prognosis for the patient. The DiagnoCure molecular-based lung cancer test will attempt to detect changes at the cellular level prior to the onset of symptoms thereby increasing long-term survival rates. In 2002, DiagnoCure entered into an agreement with Compugen, Ltd. (Nasdaq: CGEN) for the co-development and commercialization of a molecular diagnostic test for lung cancer. The objective of this collaboration was to develop a nucleic acid probe-based diagnostic kit for early detection of lung cancer, namely at a stage when the disease can be treated, controlled and, possibly, cured. During the past year, Compugen provided a limited number of Lung Cancer Markers (LCMs), which were evaluated. None of the LCMs demonstrated the requested sensitivity and specificity for the development of prototype assay. Because Compugen was unable to provide additional satisfactory LCM, the parties mutually agreed to terminate their collaboration in DiagnoCure implemented two consecutive clinical protocols by drawing on its experience within its clinical trial network. The first protocol was accepted by the ethics committees of two Quebec hospitals whereby DiagnoCure has, to date accessed a bank comprising a total of 124 tumor and normal tissue samples to screen the candidate markers. The company continued to pursue the evaluation of other potential candidate markers for the development of a prototype

13 Our Products Page 13 assay. As a result, three potentially interesting markers for lung cancer and one marker of normal lung cells were identified, which are being considered for the development of a prototype nucleic acid-based assay using the BOOM, NASBA and BEACONS technology. To evaluate these markers for the prototype, the Company has completed a second protocol for the collection of a total of 100 blood, bronchial aspirate and expectoration samples from patients at high risk of being diagnosed with lung cancer. Preclinical results are expected by summer of ImmunoCyt TM / ucyt+ TM for the Detection of Bladder Cancer Bladder cancer is the most common tumor of the urinary system. It is estimated that 60,240 new cases of bladder cancer will be diagnosed with an estimated 12,710 deaths in 2004 in the United States. More than 90% of patients diagnosed with bladder cancer are treated with surgery, either alone or in combination with chemotherapy, immunotherapy or radiation treatment. Following surgery, patients for the most part are monitored quarterly for recurrence by cystoscopy and/or urinary cytology. The probability of recurrence of bladder cancer within five years after initial treatment is between 50% and 70%, with the majority of recurrence occurring within the first year. Cystoscopy is an invasive procedure that involves the examination of the bladder wall with a cystoscope, a slender fiber optic tube with a light and lens. The cystoscope is inserted through the urethra and into the bladder in order for the urologist to view the inside of the bladder. This enables the urologist to search for protruding tumors or other unusual-looking growths that may be cancerous. While cystoscopy is effective inside the bladder in identifying protruding cancers, it has limitations since certain types of tumors are more difficult to view. This implies that cancer cannot be ruled out based on the absence of a visible tumor. Urinary cytology is the microscopic analysis of cells collected from a urine sample. This histopathologic examination and cystoscopy are the actual gold standards for bladder cancer diagnosis. However, the interpretation of the results of the urinary cytology is subject to human error and its overall clinical sensitivity for all stages and grades of bladder cancer has an average of approximately 38%, thus missing 60% to 70% of cancers. Moreover, urinary cytology is less effective because of its low sensitivity in detecting the least aggressive forms of bladder cancer, which represent the largest portion of patients. Although urinary cytology lacks in sensitivity, it has a very high specificity and therefore is an excellent complement to DiagnoCure s test. Approximately nine million urinary cytologies will take place worldwide this year, representing a market, for bladder cancer tests, of approximately $ 250 million. ImmunoCyt TM / ucyt+ TM is a non-invasive test that detects superficial bladder cancer. DiagnoCure s test enables the visualization of monoclonal antibody reactivity with tumor antigens expressed by cancer cells collected from urine using a fluorescence microscope. The Company s test, authorized for a 510(k) by the FDA for commercialization in the United States, is indicated for use as an aid in the management of bladder cancer in conjunction with urinary cytology and cystoscopy. High sensitivity and high specificity, which would result in the ideal test, can be obtained by combining the highly sensitive ImmunoCyt TM / ucyt+ TM test with traditional highly specific urinary cytology. ImmunoCyt TM / ucyt+ TM alone has a high sensitivity of 94% and when combined with cytology has a sensitivity of 98%. This high sensitivity has lead several physicians to use ImmunoCyt TM / ucyt+ TM, combined with urinary cytology, to replace in some cases cystoscopy such as in follow-up protocols of low grade transitional cell carcinoma.

14 Page 14 Our Products Since last year, in the context of DiagnoCure s US marketing transition plan, sales and marketing activities have been focused on private laboratories described as reference laboratories. Major reference laboratories such as LabCorp, AmeriPath, Inc., Bostwick Laboratories and Molecular Oncology continued to increase their ImmunoCyt TM / ucyt+ TM use during 2003 as reflected in the sales revenues which doubled from 2002 to Moreover, new laboratories have included ImmunoCyt TM in their diagnostic arsenal and received their ImmunoCyt TM / ucyt+ TM Qualification, for example Pathology Inc., Acupath Laboratories and Shands Jacksonville. Other laboratories have requested product training and qualification for which they should be certified by the first quarter of Since DiagnoCure does not intend to distribute directly the test in the US on a permanent basis, these interesting results, combined with the automated version of ImmunoCyt TM / ucyt+ TM, which is progressing very well, should provide a solid foundation upon which to establish a new distribution partnership for the USA. The automation of the ImmunoCyt TM / ucyt+ TM test is a critical requirement for increasing sales through increased market share. The developmental efforts, which were initiated last year, should enable the introduction of an automated version of the test in the spring of In December 2003, DiagnoCure acquired the assets of SAMBA Technologies, SARL. SAMBA, specialized in image analysis and information management, had been DiagnoCure s partner for the software development component of the automation of ImmunoCyt TM / ucyt+ TM since May Samba s products are already operational in numerous cancer centers and pathology reference laboratories throughout Europe and North America. This acquisition creates numerous possibilities for new applications in cancer diagnostic immunoassays as well as facilitates and assures the software development project for the automation of ImmunoCyt TM / ucyt+ TM. Sales and Marketing activities in the bladder cancer market have resulted in brand and Company recognition, which was virtually non-existent prior to As a result of these activities, the Company has expanded its international network by signing distribution agreements in new markets like Australia, Italy, the Netherlands, South Korea and Brazil. In addition to these new markets, the test is distributed in the following countries: Algeria, Belgium, Denmark, Finland, France, Morocco, Norway, Portugal, Spain, Sweden and Tunisia. Both the Alcoa and Alcan projects to evaluate ImmunoCyt TM / ucyt+ TM in the medical follow-up of worker populations are progressing well and on schedule. The product robustness and reliability of ImmunoCyt TM / ucyt+ TM continue to be confirmed by many new studies. Indeed, five years after its market introduction, more than 10 studies involving approximately 2,000 patients were completed by leading pathologists and urologists and have been published in renowned medical journals or presented at their respective congresses, confirming the value of ImmunoCyt TM / ucyt+ TM in their management of bladder cancer.

15 Our Products Page 15 Kidney Cancer The Company s primary focus will be Renal Cell Carcinoma (RRC), which is the most common tumor of the kidney in adults. RCC is the sixth leading cause of cancer death. In 2001, the number of deaths worldwide from kidney cancer was expected to exceed 100,000. RCC is twice as common in men as in women and accounts for approximately 3% of adult malignancies and 90-95% of neoplasms arising from the kidney. The probability of cure for RCC is related directly to the stage or degree of tumor dissemination, so the approach is curative for early stage disease. For example, the five-year survival rates for patients with stage IV disease are low (0-20%). It is characterized by a lack of early warning signs, diverse clinical manifestations, resistance to radiation and chemotherapy, and infrequent but reproducible responses to immunotherapy agents such as interferon alpha and interleukin (IL)-2. Although kidney cancer is a small market in comparison to other cancers the Company is presently developing, it is important in that it will complete its urology cancer portfolio, having developed urine-based tests for bladder cancer, ImmunoCyt TM /ucyt+ TM and for prostate cancer, upm3 TM. In September of 2003, DiagnoCure initiated this project by commencing the review of the potential markers for the development of a prototype test for the detection of kidney cancer. The Company s tumor marker discovery program, which is focused on Renal Cell Carcinoma, utilizes bioinformatics methods as data-mining tools for various Expressed Sequence Tag (EST) libraries. This ongoing extensive search has, to date, yielded approximately forty preliminary potential markers. In parallel to the continuous search process, the Company has begun evaluating these preliminary markers for their potential inclusion in a prototype assay.

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17 Page 18 Management s Discussion and Analysis of Financial Condition and Results Operations The following comments should be read in conjunction with the audited consolidated financial statements and accompanying notes that have been prepared in accordance with Canadian generally accepted accounting principles. Overview DiagnoCure, founded in 1994, is a world leading developer and provider of innovative high value-added diagnostic tests for the early detection of cancer. Specifically, the company specializes in the development of cancer diagnostic kits incorporating gene and monoclonal antibody markers. The first non-invasive test the Company developed was based on proprietary monoclonal antibodies designed to detect bladder cancer, which is presently commercialized under the brand name of ImmunoCyt TM in the United States and ucyt+ TM in the rest of the world. This year, DiagnoCure completed the development of upm3 TM, a non-invasive test for the detection of prostate cancer, and initiated the commercialization in the United States under the Analyte Specific Reagent (ASR) format based on the PCA3 gene technology for which the Company holds exclusive worldwide diagnostic and therapeutic rights HIGHLIGHTS DiagnoCure completed the development of the upm3 TM test for the detection of prostate cancer and, thus, achieved an important milestone in the Company s business plan by commencing, in October 2003, sales of the test in the United States under the ASR format through the network of Bostwick Laboratories of Richmond, Virginia. DiagnoCure s test, which detects the presence of the PCA3 gene and which is the most specific of all genes associated with prostate cancer identified to date, should constitute an important breakthrough in the improvement of prostate cancer diagnostics. The upm3 TM test, which was evaluated through a multicenter clinical study on 443 patients, indicated a positive predictive value of 75% and a negative predictive value of 84% on men with a PSA level of 2.5 ng/ml and over. In addition, the European Urology journal (44, 2003, 8-16) published, in March 2003, an article written by Dr. Schalken s group on a European clinical study of 108 men. Although this study was performed on a different technology platform, the results were similar to those from the preceding study and demonstrated that if a PCA3 test were negative for prostate cancer, there would be a 90% chance that a subsequent biopsy would be negative. The Company also witnessed in 2003 a major achievement by the doubling of the sales of the ImmunoCyt TM / ucyt+ TM test for the detection of bladder cancer. DiagnoCure s promotional efforts, within the context of the transition plan following the premature termination of the distribution agreement with a US distributor, were successful. Since DiagnoCure does not intend to distribute directly the test on a permanent basis, these results, combined with the automated version of ImmunoCyt TM / ucyt+ TM, which is progressing very well, should provide a solid foundation upon which to establish a new distribution partnership for the USA. DiagnoCure also increased its market penetration potential with the signature of distribution agreements in Italy, the Netherlands, South Korea, Australia and Brazil. Last March, DiagnoCure was granted ISO certification, which is now a prerequisite prior to receiving from Health Canada the necessary authorization for the commercialization of new diagnostic products.

18 Management s Discussions and Analysis of Financial Condition and Results of Operations Page 19 As regards the lung cancer project, the Company diligently continued the evaluation of many molecular markers in the context of developing a prototype detection test. DiagnoCure has since commenced the validation a few potentially interesting markers on a total of 100 blood, bronchial aspirate and expectoration samples from patients at high risk of being diagnosed with lung cancer. The Company intends to develop a prototype and to conduct a pilot study in In order to expand the portfolio of diagnostic products, DiagnoCure initiated, during the last quarter of 2003, the development of a molecular test for the detection of kidney cancer by using bioinformatics tools as a search method within the expressed sequence libraries. This future test will complement the product line developed by DiagnoCure in the field of urological cancers. SUBSEQUENT EVENTS In November 2003, DiagnoCure announced that it had granted to Gen-Probe (NASDAQ: GPRO) an exclusive worldwide licence for the development and commercialization of diagnostic products incorporating the PCA3 gene for prostate cancer technology in consideration for the payment, over the next three years, of up to US $ 10.5 million, including milestone and contract development payments and an upfront fee of US $ 3 million. The Company will also receive royalties of 16% of the cumulative net product sales to end-users after receiving royalties of 8% on the first $ 50 million of cumulative net product sales to end-users. This partnership with Gen- Probe, a world leader in nucleic acid based tests, could allow upm3 TM to become the first genetic detection test used as a complement to the existing prostate cancer diagnostic tools. On December 19 th, 2003, the Company also announced the acquisition of the assets of SAMBA Technologies SARL, specializing in digital imaging and information technology. SAMBA s products were already operational in numerous cancer centres and pathology reference laboratories throughout Europe and North America. In addition to widely broadening its development potential for new applications in cancer diagnostic immunoassays, this acquisition will enable DiagnoCure to accelerate the introduction of an automated version of its ImmunoCyt TM / ucyt+ TM test in the spring of 2004 which should have a positive impact on product sales OBJECTIVES In the spring of 2004, DiagnoCure is expected to successfully complete the development of a prototype test for the detection of lung cancer in accordance with the protocols and studies described above and, thereafter, start a pilot study in the summer of Positive results for this first study would pave the way for the completion of the development of a detection test by the fall of 2004 and, the Company believes, potentially, the commercialization of an ASR format test by the end of The Company also intends to commence working on the development of new cancer tests for the diagnosis of breast cancer and, possibly, cervical cancer. Finally, DiagnoCure intends to establish new strategic alliances and licensing agreements with other biotechnology and pharmaceutical companies and institutions in order to enhance the commercialization of the Company s technologies and, possibly, those of its partners.

19 Page 20 Management s Discussion and Analysis of Financial Condition and Results Operations OPERATING RESULTS Revenues for 2003 totalled $775,486 compared with $1,319,666 in During the year ended October 31, 2002, the Company and a distributor privately decided to put an end to their distribution agreement and the Company was paid an amount of $866,658. Sales for ImmunoCyt TM / ucyt+ TM and upm3 TM ASR reagents were $637,780 in 2003 compared to $312,761 for 2002, an increase of 104%. Interest income went from $140,247 for 2002 to $137,706 for 2003, a decrease of $2,541. Operating expenses increased slightly from $3,970,312 in 2002 to $4,004,502 in 2003, primarily as a result of the following: Research and development expenses, net of investment tax credits, decreased by $107,291, from $1,594,966 in 2002 to $1,487,675 in This decrease in research and development expenses is attributable to the abatement in investments on the upm3 test for prostate cancer. General and administrative expenses decreased from $1,108,118 for the year 2002 to $939,719 for the year This decrease of $168,399 is attributable to the reduction of professional and corporate communication fees. Selling and business development expenses increased by $364,362 during the year, from $583,481 for 2002 to $947,843 for This increase is attributable to the increased investment for the promotion of the ImmunoCyt TM / ucyt+ TM test and the business development plan for the commercialization of the upm3 TM ASR test. Manufacturing costs decreased from $366,785 in 2002 to $339,758 for This decrease is attributable to a more efficient management of human and material resources in the production of our products. Depreciation of tangible and intangible capital assets decreased $40,808, from $307,855 in 2002 to $267,047 in This decrease is due to the complete depreciation of certain pieces of equipment during fiscal year Based on the above, for year ended October 31, 2003, DiagnoCure recorded a net loss of $3,229,016 or $0,11 per share, compared with $2,650,646, or $0.10 per share for the year ended October 31, Total Assets and Shareholders Equity Total assets totalled $5,279,716 as at October 31, 2003, compared with $8,384,596 as at October 31, This decrease is due mainly to the use of funds for operating activities during the year. The book value per Common Share is $0.16 as at October 31, 2003 compared to $0.27 per Common Share as at October 31, Since the inception of the Company, approximately $16,200,000 has been invested in research and development activities, before investment tax credits.

20 Management s Discussions and Analysis of Financial Condition and Results of Operations Page 21 Cash Position and Financing Sources Cash flows used for operating activities amounted to $2,801,854 for the year 2003 compared with $2,360,515 for the year 2002, an increase of $441,339. This difference is due to the increase of the net loss in 2003, which resulted from the payment received by DiagnoCure in the amount of $866,658 from DAKO Corporation in Investing activities generated cash flows of $1,921,115 in 2003 following the use of investments for a total of $2,021,181 to finance operating activities. During the year 2002, investing activities required an amount of $5,689,589, attributable to temporary investments of $5,456,506. DiagnoCure also acquired tangible capital assets in order to improve the equipment used for the research and development and production activities and continued upgrading its computers to remain in line with technological advances. Acquisition of tangible and intangible assets amounted to $103,076 for the year 2003 compared with $233,083 for Cash used by financing activities totalled $2,462 during the year. This amount corresponds to the balance on long-term debt which became payable in February No other debt was incurred during In 2002, the amount generated for financing activities amounted to $7,724,202 following the issuance of common shares in December 2001 for a gross product of $8,662,501. As at October 31, 2003, cash, cash equivalents and temporary investments were $4,141,186 compared with $7,045,568 as at October 31, DiagnoCure invests its cash reserves in liquid, high-grade investments with varying terms to maturity (generally not exceeding 12 months), selected with regard to the expected timing of operating and capital expenditures and prevailing interest rates. DiagnoCure s funding needs may vary depending upon a number of factors. The Company s funding requirements for the next years will depend on its ability to generate revenues from sales and to form strategic partnerships, as well as on the scope and progress of its research and development activities. Risk factors The company s activities are submitted to some risk factors that generally affect biopharmaceutical companies. The profitability of the company will depend upon its ability to successfully develop its products and technologies, to preserve its intellectual property rights, to maintain its highly qualified personnel, to conclude strategic alliances, research and development partnerships, strategic out-licensing agreements, to obtain satisfactory results as regards clinical studies and to obtain regulatory approvals required to commercialize its products. This process required important financial income. Therefore, the company s ability to obtain necessary liquidities to finance its activities is essential to assure future success and is as such a risk factor.

21 Page 22 Management s Discussion and Analysis of Financial Condition and Results Operations Quarterly results Unaudited Quarters ended Jan. 31 April 30 July 31 Oct. 31 Jan. 31 April 30 July 31 Oct. 31 Total Income 158, , , ,074 52, , ,482 1,012,959 Net profit (net loss) (870,884) (848,594) (697,262) (812,276) (944,883) (975,477) (993,690) 263,404 Net profit (net loss) per share (0.03) (0.03) (0.02) (0.03) (0.04) (0.03) (0.03) 0.01 Cautionary Statement Management s comments and analysis are intended to facilitate understanding of the audited consolidated financial statements and accompanying notes and should therefore be read in conjunction with that information. The comments and analysis may include objectives, projections, estimates, expectations and forecasts of the Company or management that are forward-looking. Positive or negative verbs such as to believe, plan, estimate, expect and evaluate, or similar expressions, are used to identify forward-looking statements. The Company cautions readers that, by their very nature, forward-looking statements involve major risks and uncertainties such that the Company s activities or results could differ significantly from those indicated, whether explicitly or implicitly.

22 Management s Responsibility for Financial Reporting Page 23 The consolidated financial statements of DiagnoCure Inc. and all the information in this annual report are the responsibility of management and have been approved by the Board of Directors. It is management s responsibility to make sound and informed decisions to ensure the application of the appropriate accounting methods and principles. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. Financial information presented in this annual report is consistent with that in the consolidated financial statements. DiagnoCure Inc. maintains systems of internal accounting and administrative controls which, in management s opinion, provide reasonable assurance that the financial information is accurate, relevant and reliable and that the Company s business is conducted efficiently and in an orderly manner. The Board of Directors ensures that management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements. The Board carries out this responsibility through its Audit Committee. The Audit Committee members are outside directors; they meet with management and the external auditors to discuss internal controls over the financial reporting process, auditing matters and financial reporting issues to satisfy itself that each party is properly discharging its responsibilities, and to review the consolidated financial statements and the external auditors report. The consolidated financial statements for the years ended October 31, 2003 and 2002 have been audited by Ernst & Young LLP, the external auditors appointed by the shareholders, in accordance with Canadian generally accepted auditing standards. Moreover, the auditors have access to the Audit Committee at all times. Pierre Désy President and CEO Quebec, Canada February 25, 2004

23 Page 24 Consolidated Financial Statements AUDITORS REPORT To the Shareholders of DiagnoCure Inc.: We have audited the consolidated balance sheets of DiagnoCure Inc. as at October 31, 2003 and 2002 and the consolidated statements of operations, deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at October 31, 2003 and 2002 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Québec City, Canada December 18, 2003 Chartered Accountants

24 Consolidated Financial Statements Page 25 DiagnoCure Inc. CONSOLIDATED BALANCE SHEETS As at October $ $ ASSETS Current assets Cash and cash equivalents 390,881 1,274,082 Temporary investments [note 4] 3,750,305 5,771,486 Accounts receivable [note 5] 174, ,126 Investment tax credits receivable [note 10] 219, ,362 Prepaid expenses 85,189 97,971 Total current assets 4,620,128 7,558,027 Property, plant and equipment [note 6] 555, ,824 Intangibles [note 7] 103, ,745 5,279,716 8,384,596 LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities Accounts payable and accrued liabilities 604, ,746 Current portion of long-term debt [note 8] 2,462 Total current liabilities 604, ,208 Shareholders equity Capital stock [note 9] 35,219,926 35,219,926 Contributed surplus [note 9] 1,301,050 1,301,050 Deficit (31,845,604) (28,616,588) 4,675,372 7,904,388 5,279,716 8,384,596 Commitment [note 15] Subsequent events [note 16] See accompanying notes On behalf of the Board: Pierre Désy Director Yves Fradet Director

25 Page 26 Consolidated Financial Statements DiagnoCure Inc. CONSOLIDATED STATEMENTS OF DEFICIT For the years ended October $ $ Deficit, beginning of year (28,616,588 ) (24,842,851 ) Add Net loss (3,229,016) (2,650,646) Common share issue expenses [note 9] (1,123,091) (3,229,016) (3,773,737) Deficit, end of year (31,845,604) (28,616,588) See accompanying notes

26 Consolidated Financial Statements Page 27 DiagnoCure Inc. CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended October $ $ Revenues Sales 637, ,761 Interest 137, ,247 Gain from cancellation of an agreement [note 11] 866, ,486 1,319,666 Operating expenses [note 14] Research and development expenses 1,741,801 1,904,290 Investment tax credits (254,126) (309,324) 1,487,675 1,594,966 General and administrative expenses 939,719 1,108,118 Selling and business development expenses 947, ,481 Manufacturing costs 339, ,785 Financial expenses 22,460 9,107 Depreciation of property, plant and equipment 247, ,845 Amortization of intangibles 19,317 18,010 4,004,502 3,970,312 Loss before income taxes (3,229,016) (2,650,646) Provision for income taxes [note 12] Net loss (3,229,016) (2,650,646) Basic and diluted loss per share [note 9] (0.11 ) (0.10 ) Weighted average number of common shares outstanding 29,050,712 27,423,926 See accompanying notes