CONFIDENTIAL SEPARATION AGREEMENT AND GENERAL RELEASE

Exhibit 10.7

Gillis Separation Agreement

CONFIDENTIAL SEPARATION AGREEMENT AND GENERAL RELEASE

     This CONFIDENTIAL SEPARATION AGREEMENT AND GENERAL RELEASE (this “Agreement”) is entered into as of this 22nd day of August 2007, by and between Scott H. Gillis (hereinafter “MR. GILLIS”), NUCRYST Pharmaceuticals Inc., a Delaware Corporation, and NUCRYST Pharmaceuticals Corp., an Alberta corporation (hereinafter collectively referred to as “NUCRYST”).

     WHEREAS, MR. GILLIS has been employed by NUCRYST in the Commonwealth of Massachusetts pursuant to that certain Employment Agreement (the “Employment Agreement”), dated as of the 6 ^th day of December 1999, made by and between MR. GILLIS and Westaim Biomedical Inc., the predecessor corporation to NUCRYST; and

     WHEREAS, MR. GILLIS executed an Employee Confidentiality Agreement (the “Confidentiality Agreement”), dated as of the 6th day of December 1999, made by and between MR. GILLIS and Westaim Biomedical Inc., the predecessor corporation to NUCRYST; and

     WHEREAS, both the Employment Agreement and the Confidentiality Agreement contain post-employment restrictions; and

     WHEREAS, NUCRYST has decided to make a management and board leadership change, and NUCRYST and MR. GILLIS desire to terminate amicably MR. GILLIS’S employment with NUCRYST and MR. GILLIS wishes to resign from the board of directors as part of this change in strategic direction; and

     WHEREAS, MR. GILLIS is entitled to certain amounts and benefits provided in his Employment Agreement upon the termination of his employment in the absence of this Agreement; and

     WHEREAS, in this Agreement, in consideration of the mutual promises contained herein, NUCRYST has offered MR. GILLIS certain separation payments and benefits in lieu of, and greater than, the amounts and benefits provided under the Employment Agreement;

     IT IS HEREBY AGREED by and between MR. GILLIS and NUCRYST as follows:

     1. The following provisions describe the termination of MR. GILLIS’S employment with NUCRYST and the transition of his duties and responsibilities:

          a. MR. GILLIS acknowledges and agrees that his employment with NUCRYST will be permanently and irrevocably severed including, but not limited to, resigning from the board of directors of NUCRYST, effective August 22, 2007 (“Termination Date”), and that NUCRYST has no obligation, contractual or otherwise, to hire, rehire or re-employ MR. GILLIS in the future. The Termination Date shall be the date of the “qualifying event” under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) and, except as detailed in this Agreement, MR. GILLIS’S eligibility to participate in NUCRYST’S benefits programs ends on the Termination Date. MR. GILLIS will receive wages for all work performed by him from the last pay period prior to August 22, 2007 through the Termination Date, and all unused vacation pay, if any, less any applicable payroll withholdings, in a paycheck to be issued to him on the next regular pay date on or after his Termination Date. MR. GILLIS’S rights and obligations with regard to any vested Options and/or vested Restricted Stock Options he may have as of the Termination Date, including his right to exercise any of those vested Options

and/or Restricted Stock Options after the Termination Date, shall be governed by the terms and conditions set forth in: the 1999 Stock Option Agreement, executed by MR. GILLIS on December 6, 1999 (the “1999 Option Agreement”); the 2002 letter amendment to the 1999 Option Agreement, executed by MR. GILLIS on May 20, 2002 (the “Amendment to the 1999 Option Agreement”); the 2002 Stock Option Agreement, executed by MR. GILLIS on February 6, 2002 (the “2002 Option Agreement”); the 2003 Stock Option Agreement, executed by MR. GILLIS on February 28, 2003 (the “2003 Option Agreement”); the 2007 Stock Option Award Agreement, executed by MR. GILLIS on May 18, 2007 (the “2007 Option Agreement”); and, the Restricted Stock Unit Award Agreement, executed by MR. GILLIS on May 18, 2007 (the “RSU Agreement”). For the purposes of MR. GILLIS’S right to exercise any of those vested Options and/or Restricted Stock Options, the provisions relating to termination for reasons other than Just Cause shall apply.

          b. MR. GILLIS agrees that for the six (6) month period of time from his Termination Date on August 22, 2007 to February 22, 2008 (the “Transition Period”), he will use good faith, reasonable efforts to achieve an orderly transition of his duties, that he will cooperate with NUCRYST’s transition efforts and that he will make himself available as requested by NUCRYST for consultation with NUCRYST regarding matters which arise out of or relate to his duties and responsibilities with NUCRYST.

     2. MR. GILLIS, on behalf of himself, his heirs, executors, administrators, and/or assigns, for and in consideration of the undertakings of NUCRYST set forth herein, and intending to be legally bound, does hereby release and forever discharge NUCRYST Pharmaceuticals Corp., Westaim Biomedical Inc. and The Westaim Corporation, together with their parent and subsidiaries, affiliates, predecessor and successor corporations and business

entities, joint ventures, and partners, past, present and future, and its and their agents, directors, officers, employees, stockholders, investors, insurers and reinsurers, assigns, representatives, and attorneys, past, present and future, and its and their assigns, heirs, executors, and administrators, past, present, and future (collectively, the “Releasees”), of and from any and all legally waivable causes of action, suits, debts, complaints, claims and demands whatsoever in law or in equity, whether known or unknown, suspected or unsuspected, which MR. GILLIS, or his heirs, executors, administrators, and assigns, ever had or now has against each or any of the Releasees, from the beginning of time to the date of execution of this Agreement, including, without limitation, any and all claims relating to MR. GILLIS’S employment with NUCRYST or the termination of that employment, including, without limitation, claims under the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act, Title VII of the Civil Rights Act of 1964, Section 1981 of the Civil Rights Act of 1870, the Americans with Disabilities Act, the Family Medical Leave Act, the Employee Retirement Income Security Act, M.G.L. c. 151B, and any and all other federal, state or local statutory or common law claims, now or hereafter recognized, including but not limited to, any claims for economic loss, compensatory damages, punitive damages, liquidated damages, attorneys’ fees, expenses and costs. MR. GILLIS represents that he does not have any lawsuits, claims, or charges pending against any of the Releasees.

     3. MR. GILLIS acknowledges and agrees that in the absence of this Agreement, upon the Termination Date he would be solely entitled to the amounts and benefits provided for under the terms of the Employment Agreement. In lieu of the amounts and benefits provided under the Employment Agreement, and in full consideration of MR. GILLIS’s execution of this Agreement, and his agreement to be legally bound by its terms, NUCRYST agrees to make the

following payments and fulfill the following promises after receipt by NUCRYST of MR. GILLIS’S signature on this Agreement, and after the expiration of the revocation period set forth in paragraph 13(e) when this Agreement becomes final and binding:

          (a) pay MR. GILLIS a lump sum payment of $295,000.00, less applicable tax withholding and deductions within thirty (30) days after the expiration of the revocation period set forth in paragraph 13(e);

          (b) pay MR. GILLIS the lump sum amount of $150,000.00, less applicable tax withholding and deductions, within thirty days after the expiration of the Transition Period provided that MR. GILLIS fulfills his promises and obligations as set forth in paragraph 2(b) herein with regard to the Transition Period, as well his other undertakings in this Agreement, including but not limited to his continuing obligation to abide by Sections 9 and 10 of the Employment Agreement and the post-employment restrictions contained in the Confidentiality Agreement, and his obligations under paragraph 10 of this Agreement; MR. GILLIS understands and agrees that he will not be entitled to receive the payment set forth in this paragraph 3(b) if he fails to fulfill his promises and obligations as set forth in paragraph 2(b) herein with regard to the Transition Period, as well his other undertakings in this Agreement, including but not limited to his continuing obligation to abide by Sections 9 and 10 of the Employment Agreement and the post-employment restrictions contained in the Confidentiality Agreement, and his obligations under paragraph 10 of this Agreement;

          (c) reimburse MR. GILLIS for the after-tax cost of the COBRA premium payments incurred by MR. GILLIS in connection with his group medical insurance coverage during the 18-month period following the Termination Date; provided that MR. GILLIS elects to continue his group medical insurance coverage pursuant to COBRA and executes this

Agreement; and provided, further, that NUCRYST’s obligation to reimburse MR. GILLIS shall cease as of the date MR. GILLIS becomes eligible to receive health insurance coverage from another employer or recipient of MR. GILLIS’s services (and provided, further, that such entitlement shall be determined without regard to any individual waivers or other similar arrangements); NUCRYST will make such reimbursement upon proof of payment;