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Æterna Zentaris (NASDAQ:AEZS)

Q2 2013 Earnings Call

August 09, 2013 8:30 am ET

Executives

Paul Burroughs - Director of Communications

David Alan Dodd - Chief Executive Officer, President and Director

Dennis Turpin - Chief Financial Officer and Senior Vice President

Analysts

Boris Peaker - Oppenheimer & Co. Inc., Research Division

Philippa Flint - Bloom Burton & Co., Research Division

Operator

Good morning, my name is Matthew, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Aeterna Zentaris Second Quarter 2013 Financial and Operating Results. [Operator Instructions] Paul Burroughs, Director of Communications, you may begin your conference.

Paul Burroughs

Thank you. Good morning, everyone. Welcome to our 2013 second quarter financial and operating results conference call. With me today are David Dodd, President and CEO; Paul Blake, Chief Medical Officer; and Dennis Turpin, Chief Financial Officer.

Please take note that during this call, we'll be making forward-looking statements regarding future events and the performance of Aeterna Zentaris that involve risks and uncertainties that could cause actual events and results to differ materially. These risks are described in further detail in the company's press releases and reports filed with the U.S. and Canadian securities regulatory authorities. These forward-looking statements represent the company's judgment as of today, Friday, August 19 (sic) [August 9], 2013, and the company disclaims any intent or obligation to update these forward-looking statements unless we're required to do so by applicable law or by securities regulatory authority. However, we may choose to update, and if we do so, we will disseminate the updates to the investing public.

It's now my pleasure to introduce the President and CEO of Aeterna Zentaris, David Dodd.

David Alan Dodd

Thank you, Paul, and good morning, everyone, and thank you for your interest. Been very exciting and significant progress made in the company over the last several months and I'm very happy to be here today to provide you an update and then to answer any questions you may have.

Having been here now slightly more than 100 days, I can tell you this organization is primarily and solely committed to progress and success. Employees are all committed to building value for shareholders and showing that we can be a competitive organization in the marketplace as a specialty biopharmaceutical company focused on oncology and endocrinology.

Over the last past several months, we focused internally on our organizational effectiveness and been reviewing the organization on how we might result in a stronger, more competitive organization better utilizing the resources we have. We continue to do that and, as changes and announcements may occur, we'll announce those going forward.

We've also been very active in the area of business development, a topic I had spoken about since joining the company. And there, we have been quite busy looking at opportunities that we can bring in, products that will enable us to begin to immediately generate revenues and cash and move the company into more operating status. Those activities continue and we have several promising opportunities under evaluation right now.

Within the areas of our primary and major development programs, our zoptarelin doxorubicin, or previously known as AEZS-108, or I would refer to as our ZoptEC trial, our Phase III program in endometrial cancer. There we are focused on providing the most advanced LHRH receptor targeting product in clinical development.

We've opened 11 sites to date, 4 in the U.S., 7 in Israel. We are ironing out our last regulatory and contracting details for the Canadian sites. We have been successful in the VHP, voluntary harmonization procedure, process in the EU with now 2 national approvals, in Austria and the U.K., just occurring within the last week. We recently announced the first patient dosing, formally kicking off this program. We're now concentrated on establishing our solid infrastructure to enhance and increase the patient enrollment. We have 2 additional patients who are scheduled for dosing right now.

We have previously announced the signing of the co-development and profit-sharing agreement with Ergomed as our CRO, who will contribute 30% of the cost of this trial up to a maximum of $10 million. I just want to remind you that the clinical program compares zoptarelin doxorubicin to doxorubicin alone as second-line treatment for women with endometrial cancer resistant to platinum/taxane-based chemotherapy. We will have approximately 500 patients in 100 to 125 sites located in North America, Europe and other countries such as Israel.

As you know, endometrial cancer is a very important and critical unmet medical need, very large market opportunity. It's the most invasive gynecologic cancer in women, with 95,000 new cases expected in North America and Europe just this year alone, with about 1 out of 5, or 20%, experiencing recurrent disease. There's no approved drug product in the U.S. for this. We hold worldwide rights to our compound and yet we're continuing to have discussions with potential partnerships and that will continue to be an option that we will consider seriously.

Remember that our Phase II trials, I'd like to comment on those, with this exciting compound in multiple cancers. The encouraging final data for dose-finding [ph] portion of our Phase I and II trial in prostate cancer, they were reported at the ASCO meeting in June. The results demonstrated promising antitumor activity in heavily pre-treated patients with castration- and taxane-resistant prostate cancer. The drug was well tolerated.

The Phase II portion is ongoing with 8 patients recruited so far. This trial is expected to involve up to 37 patients.

In addition, the Phase II trial in triple-negative breast cancer, currently 7 patients are enrolled in this trial. That's as an update from 6 at the last conference call.

Our Phase II trial in bladder cancer with 2 sites open, University of Pennsylvania and Miami. So this compound, which we're very excited about, continues on its successful path towards clinical development.

I'd like to comment on macimorelin acetate, or AEZS-130. That is our old diagnostic for adult growth hormone deficiency. Now let me just comment that this is, as you'll recall, it's an orphan-drug status. It's a drug that, when ingested, induces the secretion of growth hormone, which enables, through a testing manner, for a clinician to conduct a confirmatory test of growth hormone deficiency. This is very critical because, should one decide to then treat with growth hormone, we're talking about an annual expense of $10,000 or more. So it's very important to have such a confirmatory measure out in the market. Today there is no such product approved.

We have finalized our clinical portion of the NDA submission. We're very excited about that. We have finalized our commercial supply agreement, which had been an open issue the last time we spoke. And we're about to complete the quality agreement, which will then enable us to go forward with the NDA submission. We anticipate this to occur and be completed by the end of the summer.

I'll remind you that the advantages of our product versus the current test that's used, which is the insulin tolerance test. Recall that the insulin tolerance test, or ITT, is not indicated for this and yet it's been the only product that's available that has been able to be used.

Our product is an oral administration. The competitor is delivered peritoneally, either IV or IM. Ours is a very simple process: one ingest -- one fasts overnight, one ingests the drug, pass [indiscernible] over a 75-minute period depending on the physician's decision to do 1, 2 or 3 blood draws and the patient goes back to work.

Under an ITT, you have a situation where it's contraindicated for several populations because it induces hypoglycemia. For the people with coronary artery disease, they're contraindicated, those with a history of seizures and also the elderly. This includes the population that, in fact, ought to be administered this test. It requires close medical monitoring and supervision. It can take up to 4 hours, full half day, to complete this test, which literally then knocks out an entire day of work.

Ours is safe and well tolerated and it comes in at a much less billing cost, we anticipate, than one will see with the ITT.

There's a good market opportunity here for this drug. There are 40,000 diagnostic tests annually today for adult growth hormone deficiency, just alone in the U.S., and 36,000 in Europe annually.

More importantly is the opportunity to recognize that people who suffer traumatic brain injuries, which are approximately 215,000 adults in the U.S. annually, 1 out of 5 of those end up being classified as a moderate to severe injury. Those patients are recommended to have a test for adult -- for growth hormone deficiency at periods 3, 6 and 12 months post-injury and all. That provides a tremendous expansion opportunity for the use of macimorelin acetate, adding up to another 120,000 additional tests.

This does not require additional clinicals, this is within the initial indication. It really is a challenge, however, to go out through medical marketing and make sure that, that medical community becomes aware that there is now a confirmatory opportunity with this drug of ours.

We also will go forward in the near future with laying out plans to do trials to validate the dosing for the pediatric population. In doing this, we open up an opportunity that literally adds another 160,000 annual test opportunity for this product.

So you can see this drug has an exciting opportunity just within the area of growth hormone deficiency. The commercialization and launch plans are being finalized and, as we've mentioned before, we plan to go forward with this on our own.

In addition, macimorelin acetate is in an investigator-initiated, placebo-controlled trial for cancer-induced cachexia. This is an ongoing Phase II trial funded the DeBakey VA Center, under a CRADA between our company and that center. This trial will involve 18 to 26 patients and, to date, 7 patients have completed the protocol.

Cachexia is an involuntary weight loss of at least 5% of the pre-illness body weight over a period of the previous 6 months. What's more important is that cancer-induced cachexia affects about 1 million cancer patients in North America annually, representing about 20% of all cancer deaths, and there's no approved treatment for this condition. As you might imagine with these numbers, this is a very exciting opportunity for us to be pursuing and all.

Let me now mention our product AEZS-120, which is novel oral tumor vaccine candidate for prostate cancer. We previously announced that we have filed a CTA, or the Clinical Trial Application, in Denmark to be able to start this trial. That was done in May. All the material for clinical use has been produced, has been released. We've fully completed the preclinical program. And I'm happy to report that we have also now received the regulatory and ethics committee approvals in Denmark to proceed.

The initiation of the Phase I trial will start very soon. We're waiting the last element, which is approval from the Danish environmental authorities, in order to proceed. As soon as that's done, we'll move into the clinical phase of the development of this exacting compound.

Cetrotide, which as we had -- previously had mentioned, we are focused on the transferring of the manufacturing rights or the manufacturing of that to Merck Serono. That's on track. We will expect that will be completed by October 1 of this year. And I remind you that, in doing that, we will receive a $3.2 million one time payment. That would occur around the November time frame. And we'll also continue to receive payments to assist Merck Serono throughout a 36-month transition period, where we will assist them in the ongoing manufacturing and analytical work in support of that.

Finally, I just want to mention that we're very proud that the class action lawsuit, which had previously been filed against the company and certain of our officers in the U.S. District Court for the Southern District of New York, was entirely dismissed with prejudice and without leave to amend. No payment was made by the company to the plaintiff or his counsel in connection with this lawsuit.

So let me just summarize and say that times are very exciting at Aeterna Zentaris now. We're making significant progress on moving forward. Of the 5 milestones we have spoken of the last call we had, we achieved 4 of them. The one outstanding indeed, was the fact that we have not yet submitted the NDA for macimorelin acetate but that will be done in the near future and we anticipate that, that will be done by the end of this summer. And we'll continue to do several things: Keep you updated on our critical programs; keep you updated on our milestones; and we'll be absolutely transparent on whether or not we meet them or not; and as we -- if we miss them, we'll let you know and we'll let you know why and when we will meet them.

With that, I would like to turn our -- the call over to our CFO, Dennis Turpin, for a report on our financial activities and progress. Dennis?

Dennis Turpin

Thank you, David. First, let me update you on our cash position.

Cash and cash equivalent totaled $25.3 million as of June 30, 2013. Including net proceeds from our recent offering completed on July 30, 2013, we had a pro forma cash of $32.3 million, which enables us to continue to move our key product candidates through the pipeline.

Regarding our burn rate. Cash flow used in our operating activities were $9.2 million for the quarter ended June 30, 2013, compared to $6.5 million of cash flows used during the same period in 2012. The increase in our cash used in operating activities is mainly related to higher disbursement with respect to our SG&A expenses. This is related to the departure of our former CEO, to an increase in trade and other receivables related to the Cetrotide business and other current assets, partially offset by lower trade accounts payable settlements. We expect net cash used in operating activity to decrease in the second half of 2013 as compared to the first half of the year.

Taking into account our Cetrotide transactions, our co-development and revenue-sharing agreement with Ergomed, as well as the initiation of Phase III trial with AEZS-108 in endometrial cancer, the discontinuance also of perifosine Phase III program and the recent change to our management, we continue to expect that our overall operating burn in 2013 will be close to $26 million.

Now more details about our results of the second quarter. Revenues were $30.1 million for the quarter compared to $7.5 million for the same period in 2012. The increase is largely attributable to the acceleration of the recognition of previously deferred revenues received in connection with the 2008 sale of the Cetrotide royalty stream.

R&D costs were $5.3 million for the quarter, as compared to $5.2 million for the same period in 2012. SG&A were $5.8 million (sic) [$5.9] million for the quarter, compared to $3.6 million for the same period last year. The increase is mainly related to the termination benefits granted to the company's former CEO and to the related noncash, share-based compensation costs.

Net income was $9.3 million as compared to $4.5 million for the same period in 2012. This significant increase is due largely to the significant increase in royalty revenues, which is noncash, partly offset by lower net finance income, which is also noncash, as well as by higher SG&A.

Thank you for your attention. Now, David.

David Alan Dodd

Thank you, Dennis. Now every one of my colleagues and I will be happy to answer your questions and close it up. I'll turn the call over to the operator for instructions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Boris Peaker with Oppenheimer.

Boris Peaker - Oppenheimer & Co. Inc., Research Division

My question is for David. I just kind of want to ask a global question. Because you've been here for, as you mentioned, over 100 days and I'm sure you're familiarized with the program. I just want to get a sense of, with all the programs that you guys have ongoing, which ones do you view as high priority in making capital allocations decisions? And which ones could be potentially delayed in a context where you might not be able to advance everything at the speed that you may desire?

David Alan Dodd

Thank you, Boris. The ones I spoke of are the high priority ones, all of which we expect to fund. So the -- starting in the probably order of activity, not necessarily order of potential market value, but the filing of the NDA and the subsequent commercialization of macimorelin acetate is extremely important. We believe that's an exciting opportunity. It's a good drug. It's a drug that has several legs on it from evaluation initially, to be able to enable clinicians to conduct a confirmatory test and diagnosis of growth hormone deficiency, but then moving in to it being a treatment for a huge problem of cancer-induced cachexia. So that is a project that we're fully committed to and excited about. Following that is our ZoptEC trial, basically the development of zoptarelin doxorubicin. It's a very exciting compound, built on a concept that, if it's validated, then it's a great opportunity to be able to treat many cancers that to date have not been successfully treatable. And from a valuation that is an enormous opportunity because of the magnitude of the need out there. So we're fully committed to that and excited about that and into this trial now and gung ho and not looking back. I'll also say that AEZS-120, although early, is our most exciting compound, especially from my perspective, having been in the vaccine industry before, to look at a product that is a true vaccine, not a immunotherapy, that is built around a carrier that is very well characterized, defined, has been in about 350 million, 400 million doses so far, this salmonella carrier. So from a characterization and sort of a regulatory standpoint, it's a very well-known, non-scary type of carrier and yet to have a product that could go out there and actually be a vaccine for prostate cancer opens up a tremendous opportunity and would be a very important contribution to health care worldwide. So these 3 programs are our priorities as a company. And I would say, following that are our activities, which -- and almost in addition to that because they're done simultaneously, is the activity we have underway to identify on-the-market products that we can bring forward and begin to generate revenues and cash as an operating company. We realize that is critical for us to achieve, obviously to contribute to reducing our burn rate and, perhaps more importantly, to begin to define and brand this company as an operating company and as a basically specialty biopharmaceutical company. So we're quite active in that regard, also.

Boris Peaker - Oppenheimer & Co. Inc., Research Division

Now for macimorelin, just curious what you think a reasonable price is? I just want to get a sense of the market and how much that could offset some of your burn once it does come to market.

David Alan Dodd

Well I don't talk about the price and partly because we haven't finalized that. But even if we had, I would not because I wouldn't tip my hand. I would say this, that between -- if one looks at -- now the insulin tolerance test is not indicated as a confirmatory test. There simply -- there's nothing out there and yet it's used today and people would prefer -- in our concept testing and market research, it's clear the endocrinologist have a much greater interest in the profile of our product concept versus what they have available today. It's a tight market. There are approximately 30 centers that do a growth hormone deficiency diagnosis in the United States. So one does not need to have masses of people to sell this. And as you know, endocrinologists as a specialty, it's not a large number of people. But even more so, the target centers come down to about 30, so it's a tight group in which to commercialize. I would give you this guidance, though, that if one looks at what the current cost or sales price of an insulin tolerance test is to an office versus their billing cost, you'll see a spread of fivefold, which then suggested to us that, with a preferred features and benefits profile, we have quite a bit of room to be able to go in there on a pricing and yet still come in at a lower billing cost and so be able, from a reimbursement standpoint, provide significant value to the marketplace while also delivering to a physician a safer, quicker, less-involved type of test. And for the patient, we have recently spoken with people who just hate going through the 4-hour period of that parenteral IV process and all and so they look forward to something they can simply fast and take orally and then have their test done. So we see it as a niche market but as a real market opportunity. And I know you'd like me to say we're considering a certain price we're just not. We'll announce that when we launch the product and I'm sure between now and then there'll be -- in each quarter we'll give a little more guidance.

Boris Peaker - Oppenheimer & Co. Inc., Research Division

Well, in terms of -- when you said that the cost -- the billing for the insulin intolerance, what is that right now?

David Alan Dodd

Well, depending on -- it's in the thousands of dollars. That's the billing. Yes, the billing is in the thousands of dollars. The direct cost is in the hundreds. So you get an idea there.

Operator

[Operator Instructions] Your next question comes from the line of Philippa Flint with Bloom Burton.

Philippa Flint - Bloom Burton & Co., Research Division

A question in regards to your planned commercialization of macimorelin. Can you talk a little bit about your plans for hiring, timing costs and how many reps you plan to launch with once you get approval?

David Alan Dodd

Sure. Philippa, I'll intentionally not be specific for competitive reasons but I'll give you the guidance. If there are 30 core centers we're going to be targeting and there's less than 5,000 endocrinologists, in total, we'll be targeting, it does not require a lot of sales reps. Some of our other discussions we're having now also are built around the concept of -- to ensure that we have more than one product in the bag of those reps when they're going out there so that they're spending their time efficiently as sales reps. In general, I would use -- if you're building a model, I would use a cost of $200,000 a year for a sales rep. That would -- that should cover the cost of that. There are not -- samples will not be utilized, so the largest out-of-the-pocket expense one normally has in launching a pharmaceutical product, we will not have to deal with. And so it will be other associated costs, so you could add to that a cost of around $50,000, and that's probably still a little high but that would be a good, fully loaded cost of the reps and all. And you could work your own thoughts in terms of a workload model to see how many would it take to do combination of 30 centers in an intense manner and also to deal with less than 5,000 targeted endocrinologists and all. So the overall is a pretty tight budget and a very focused but tight commercialization plan.

Philippa Flint - Bloom Burton & Co., Research Division

Okay, that's great. Quick question for Dennis. In terms of the Cetrotide recognition, can we expect -- I think it's about $11 million remaining to be recognized? Is that going to all come in Q3?

Dennis Turpin

Yes, we expect that the remaining deferred revenue, the balance, will be recognized as of September 30. Almost -- in fact, it will be October 1. And the amount -- do you want to know the amount of deferred revenues?

Philippa Flint - Bloom Burton & Co., Research Division

That would be great. I think it's about $11 million. If you could confirm?

Dennis Turpin

Yes, it's short-term, $11.8 million.

Philippa Flint - Bloom Burton & Co., Research Division

Okay. So you'll see that in Q3?

Dennis Turpin

Yes. And Philippa, just one more precision. We do not expect to have any more deferred revenues to recognize related to Cetrotide after September 30. And we do not expect also to have manufacturing and cost of sales related to Cetrotide after September 30.

Philippa Flint - Bloom Burton & Co., Research Division

And you'll just have the agreement -- revenues from your transfer agreement?

Dennis Turpin

Exactly. We'll have some service to be provided to our partner.

Operator

[Operator Instructions] We have no further questions at this time. I'll turn the call back over to Mr. David Dodd for any closing remarks.

David Alan Dodd

Thank you. We appreciate everyone's interest in the company. And again, we look forward to keeping you updated as we continue to progress the developments here and we'll make the announcements accordingly. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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