Condensed Interim Consolidated Financial Statements (Unaudited) Aeterna Zentaris Inc. As at

Condensed Interim Consolidated Financial Statements

Aeterna Zentaris Inc.

As at June 30, 2018 and for the three-month and six-month periods ended June 30, 2018 and 2017

(presented in thousands of US dollars)

Commitments and contingencies (note 16)

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

Approved by the Board of Directors

_____________________________

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

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

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

1 Summary of business and basis of preparation

Aeterna Zentaris Inc. ("Aeterna Zentaris" or the "Company") is a specialty biopharmaceutical company engaged in developing and commercializing novel pharmaceutical therapies. On December 20, 2017, the FDA granted marketing approval for Macrilen (macimorelin) to be used in the diagnosis of patients with adult growth hormone deficiency ("AGHD"). On January 16, 2018, the Company through Aeterna Zentaris GmbH entered into a license and assignment agreement with Strongbridge Ireland Limited ("Strongbridge") to carry out development, manufacturing, registration and commercialization of Macrilen (macimorelin) in the United States and Canada (the "Strongbridge License Agreement").

Basis of presentation

These unaudited condensed interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") applicable to the preparation of interim financial statements, including IAS 34, Interim Financial Reporting. These unaudited condensed interim consolidated financial statements should be read in conjunction with the Company's annual consolidated financial statements as at and for the year ended December 31, 2017.

The accounting policies in these condensed interim consolidated financial statements are consistent with those presented in the Company's annual consolidated financial statements, except for the adoption, of IFRS 9, Financial Instruments ("IFRS 9"), and IFRS 15, Revenue from Contracts with Customers ("IFRS 15"), effective January 1, 2018. See note 3 for the impact of the adoption of IFRS 9 and IFRS 15.

The other standards did not have any significant impact on the Company's accounting policies and did not result in retrospective adjustments upon adoption.

These unaudited condensed interim consolidated financial statements were approved by the Company's Board of Directors on August 9, 2018.

These unaudited condensed interim consolidated financial statements were prepared on a going concern basis.

2 Critical accounting estimates and judgments

The preparation of condensed interim consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of the Company's assets, liabilities, revenues, expenses and related disclosures. Judgments, estimates and assumptions are based on historical experience, expectations, current trends and other factors that management believes to be relevant at the time at which the Company's condensed interim consolidated financial statements are prepared.

Management reviews, on a regular basis, the Company's accounting policies, assumptions, estimates and judgments in order to ensure that the condensed interim consolidated financial statements are presented fairly and in accordance with IFRS. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

Critical accounting estimates and assumptions, as well as critical judgments used in applying accounting policies in the preparation of the Company's condensed interim consolidated financial statements, were the same as those found in note 3 to the Company's annual consolidated financial statements except for significant judgments under IFRS 15 relating to revenue recognition (see note 4 - Licensing arrangement)

3 Summary of significant accounting policies

A) Impact of adoption significant new IFRS standards in 2018

The following new IFRS standards have been adopted by the Company from January 1, 2018

IFRS 9 Financial instruments

IFRS 9 Financial Instruments ("IFRS 9") replaces the provisions of IAS 39 Financial Instruments: Recognition and Measurement ("IAS 39") that relate to the recognition, classification and measurement of financial assets and financial liabilities, de-recognition of financial instruments, impairment of financial assets and hedge accounting.

The adoption of IFRS 9 on January 1, 2018 resulted in changes in accounting policies, however there were no adjustments to the amounts recognized in these interim consolidated financial statements. The Company has applied the changes in accounting policies retrospectively; however in accordance with the transitional provisions in IFRS 9, comparative figures have not been restated.

The Company's financial assets are mainly comprised of cash and cash equivalents, trade and other receivables, and restricted cash equivalents, which are classified and accounted for under IFRS 9 at amortized cost. Financial liabilities are mainly comprised of payables and accrued liabilities, which are accounted for at amortized cost, and warrant liabilities, which is a derivative that is accounted for at fair value through profit and loss (FVTPL).

The impairment of financial assets, including trade and other receivables, is now assessed using the simplified method of the expected credit loss model: previously, the incurred loss model was used. The impact of applying the expected credit loss model was not material.

The Company applied the modified retrospective method upon adoption of IFRS 9 on January 1, 2018. This method requires the recognition of the cumulative effect of initially applying IFRS 9 to retained earnings and not to restate prior years. The application of this new standard has no impact on deficit.

IFRS 15 Revenue from contracts with customers

Effective January 1, 2018, the Company has adopted IFRS 15 Revenue from Contracts with Customers ("IFRS 15"). This new standard was applied using a modified retrospective approach. The adoption of IFRS 15 did not have a significant impact on the timing or measurement of the Company's revenue and no adjustment to the opening balance of deficit as at January 1, 2018 has been recorded as result of adopting IFRS 15.

The impacts of adoption of the new standard are summarized below:

The Company's revenue consists of licensing fees representing non-refundable payments received at the time of executing the license agreement are recognized as revenue upon execution of the license agreements when the Company has no significant future performance obligation and collectability of the fees is probable. Under IFRS 15, the Company determines whether the Company's promise to grant a license provides its customer with either a right to access the Company's intellectual property ("IP") or a right to use the Company's IP. Revenue from a license that provides a customer the right to use the Company's IP is recognized at a point in time when the transfers to the licensee is completed and the license period begins. Revenue from a license that provide access to the Company's IP over a license term is considered to be a performance obligation satisfied over time and, therefore, revenue is recognized over the term of the license arrangement.

Revenue consists also of royalty income from the out-licensing of IP, which is recognized as earned and from manufacturing and other services, where revenue is recognized when control transfers to the third party and the Company's performance obligations are satisfied. The adoption of IFRS 15 did not significantly change the timing or amount of revenue recognized from these manufacturing and other services arrangements, nor did it change accounting for these royalty arrangements, as the standard's royalty exception is applied for IP licenses.

Furthermore, the Company receives milestone payments related to the out-licensing of IP. IFRS 15 did not significantly change the timing or amount of revenue recognized under these arrangements.

The Company applied the modified retrospective method upon adoption of IFRS 15 on January 1, 2018. This method requires the recognition of the cumulative effect of initially applying IFRS 15 to retained earnings and not to restate prior years. The application of this new standard effective January 1, 2018 had no impact on opening retained earnings.

The Company's updated accounting policies, effective January 1, 2018, upon adoption of IFRS 9 and IFRS 15 are as follows:

Financial instruments

Financial assets at FVTPL: Financial assets carried at FVTPL are initially recorded at fair value and transaction costs are expensed in the statement of income (loss). Realized and unrealized gains and losses arising from changes in the fair value of the financial assets held at FVTPL are included in the statement of income (loss) in the period in which they arise.

Financial liabilities at FVTPL: Warrant liabilities are classified as financial liabilities that are required to be measured at FVTPL. These financial liabilities are initially recognized at fair value, and transaction costs directly attributable to issuing the warrants are expensed in the statement of income (loss). Financial liabilities that are required to be measured at FVTPL have all fair value movements, including those related to changes in the credit risk of the liability, recognized in the statement of income (loss).

Financial assets at fair value through other comprehensive income (FVTOCI): Investments in equity instruments at FVTOCI are initially recognized at fair value plus transaction costs. Subsequently they are measured at fair value, with gains and losses arising from changes in fair value recognized in other comprehensive income (loss) in the period in which they arise.

Financial assets at amortized cost: A financial asset is measured at amortized cost if the objective of the business model is to hold the financial asset for the collection of contractual cash flows, and the asset's contractual cash flows are comprised solely of payments of principal and interest. They are classified as current assets or non-current assets based on their maturity date, and are initially recognized at fair value and subsequently carried at amortized cost less any impairment.

Impairment of financial assets at amortized cost: The Company recognizes a loss allowance for expected credit losses on financial assets that are measured at amortized cost.

The following table shows the classification of the Company's financial assets under IFRS 9:

Financial asset/liability IFRS 9 Classification

Cash and cash equivalents Amortized cost

Trade and other receivables Amortized cost

Warrant liability (derivative) FVTPL

Payable and accrued liabilities Amortized cost

License fees representing non-refundable payments received at the time of executing the license agreements. The Company's promise to grant a license provides its customer with either a right to access the Company's IP or a right to use the Company's IP. Revenue from a license that provides a customer the right to use the Company's IP is recognized at a point in time when the transfers to the licensee is completed and the license period begins. Revenue from a license that provides access to the Company's IP over a license term is considered to be a performance obligation satisfied over time and, therefore, revenue is recognized over time the term of the license arrangement.

Royalty and milestone revenue

Royalty income earned through a license is recognized when the underlying sales have occurred. Milestone income is recognized at the point in time when it is highly probable that the respective milestone event criteria are met, and the risk of reversal of revenue recognition is remote. Other revenue also includes revenue from activities such as manufacturing or other services rendered, to the extent such revenue is not recorded under net sales, and is recognized when control transfers to the third party and our performance obligations are satisfied.

B) Accounting standards adopted without impact

In November 2016, the IFRS Interpretations Committee issued an Interpretation on how to determine the date of the transaction when applying IAS 21, The Effects of Changes in Foreign Exchange Rates. The Interpretation applies where an entity either pays or receives consideration in advance for foreign currency-denominated contracts. The Interpretation provides guidance for when a single payment/receipt is made, as well as for situations where multiple payments/receipts are made. The Company adopted this interpretation during the quarter ended March 31, 2018. The adoption of this interpretation did not have a significant impact on the Company's condensed interim consolidated financial statements.

In December 2016, IFRIC 22, Foreign Currency Transactions and Advance Consideration ("IFRIC 22"), was issued. IFRIC 22 addresses how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) and on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency. The Company adopted this interpretation during the quarter ended March 31, 2018. The adoption of this interpretation did not have a significant impact on the Company's condensed interim consolidated financial statements.

C) Accounting standards not yet adopted

In January 2016, IFRS 16 Leases ("IFRS 16") was issued by the IASB. It replaces IAS 17 Leases for reporting periods beginning on or after January 1, 2019. It can be applied before that date by entities that also apply IFRS 15. IFRS 16 sets out a comprehensive model for the identification of lease arrangements and their treatment in the financial statements of both lesses and lessors. IFRS 16 applies a control model for the identification of leases, distinguishing between leases and service contracts on the basis of whether there is an identified asset controlled by the customer. The Company will adopt this standard in January 2019. The adoption of this standard is not expected to have significant impact on the Company's consolidated financial statements.

4 Licensing arrangement

Strongbridge License Agreement

On January 17, 2018, the Company received an upfront cash payment of $24.0 million from Strongbridge. Under the terms of the license agreement, and for as long as Macrilen (macimorelin) is patent-protected, the Company will be entitled to a 15% royalty on annual net sales up to $75.0 million and an 18% royalty on annual net sales above $75.0 million. Following the end of patent protection in United States or Canada for Macrilen (macimorelin), the Company will be entitled to a 5% royalty on net sales in that country.

In addition, the Company will also receive one-time payments from Strongbridge following the first achievement of the following commercial milestone events:

$4.0 million on achieving $25.0 million annual net sales,

$10.0 million on achieving $50.0 million annual net sales,

$20.0 million on achieving $100.0 million annual net sales,

$40.0 million on achieving $200.0 million annual net sales, and

$100.0 million on achieving $500.0 million annual net sales.

Upon approval by the FDA of a pediatric indication for Macrilen (macimorelin), the Company will receive a one-time milestone payment of $5.0 million from Strongbridge.

Strongbridge agrees to fund 70% of the costs of a worldwide pediatric development program to be run by the Company with customary oversight from a joint steering committee. The joint steering committee will be comprised of four persons, two of whom will be appointed by each of Strongbridge and the Company.

The Strongbridge License Agreement will expire at the end of a defined royalty period in each of the United States and Canada (the "Territory"), at which time the license that the Company granted to Strongbridge will become irrevocable, fully paid-up, perpetual and royalty-free in such country.

Strongbridge has the right to terminate the Strongbridge License Agreement if: (i) there is a safety concern related to Macrilen (macimorelin), (ii) upon withdrawal of regulatory approval for Macrilen (macimorelin) in the U.S. that is believed to be permanent, (iii) upon two hundred and seventy (270) days' prior written notice, (iv) or if the Company commits a material breach of any terms of the Strongbridge License Agreement that it fails to cure within 90 days after receiving written notice of the breach. The Company has the right to terminate the Strongbridge License Agreement if Strongbridge commits a material breach of any term of the Strongbridge License Agreement that it fails to cure within 90 days after receiving written notice of the breach. If the breach relates to Canada then the Company shall only have the right to terminate the Strongbridge License Agreement in relation to Canada. If the breach relates to the United States, then the Company shall have the right to terminate the Strongbridge License Agreement in its entirety.

Accounting for the Strongbridge License Agreement

IFRS 15 requires the Company to use a 5-step approach to evaluating, the timing and amount of revenue to be recognized with contracts with customers. In order to determine the amount and timing of recognition of revenue with respect to payments received from Strongbridge the Company had identified several distinct performance obligations it has under the Strongbridge License Agreement, which includes: (i) the sale of a "right to use" license of Macrilen (macimorelin) for adult indication for diagnosing growth hormone deficiency and any other future indication in USA and Canada; (ii) the sale of a "right to use" license for a pediatric indication of Macrilen (macimorelin) in the USA and Canada which is contingent upon FDA approval; and (iii) interim supply arrangement provided by the Company for the sale of ingredients or finished product in the manufacturing of Macrilen (macimorelin). In respect to the pediatric indication, management has determined that Strongbridge and the Company have entered into a collaboration arrangement to share in the development costs (risks and benefits) associated with this indication.

The Company estimated that the aforementioned $24.0 million together with the royalty and the one-time payments following the first achievement of the commercial milestone events represents the stand alone selling price of the "right to use" license for MacrilenTM (macimorelin) for adult indication and consequently the full amount of the $24.0 million upfront payment has been recognized as revenue upon the execution of the Strongbridge License Agreement and the transfer of license to Strongbridge (distinct performance obligation). The Company will recognize revenue related to the other milestone payments, interim supply arrangement and royalties when the related performance obligations have been fulfilled, as described in the IFRS 15 accounting policy under note 3.

5 Payables and accrued liabilities

6 Provision for restructuring costs

In July 2017, the Company's subsidiary located in Germany, Aeterna Zentaris GmbH, and its Works Council approved the Company's restructuring program (the "2017 German Restructuring"), creating a constructive obligation from that date. The 2017 German Restructuring is a consequence of the negative Phase 3 clinical trial results of ZoptrexTM announced on May 1, 2017 and the related impact on the Company's product pipeline. This is also part of the continued strategy to transition Aeterna Zentaris into a commercially operating specialty biopharmaceutical organization focused on the development and commercialization of MacrilenTM (macimorelin). The goal of the 2017 German Restructuring is to reduce to a minimum the Company's R&D activities and is expected to result in the termination of approximately 24 employees of the German subsidiary.

The Company started implementing the 2017 German Restructuring in the fourth quarter of 2017, with staff departures expected to be completed over a period of approximately 18 months. Total initial restructuring costs associated with the 2017 German Restructuring include severance accruals and other directly related costs ($2,002,000) and an onerous lease provision ($1,113,000), for a total of ($3,115,000). For the six months ended June 30, 2018, $1,476,000 of severance and other costs and $210,000 of onerous lease provisions were utilized. In addition, a reversal of $214,000 due to changes in assumptions for severance and $97,000 of currency exchange adjustments were recorded.

The changes in the Company's provision for restructuring costs can be summarized as follows: