AEterna Zentaris' Pipeline Giving It A Lift As A Bottom Bounce Trade

| About: AEterna Zentaris, (AEZS)

There is no doubt AEterna Zentaris, Inc. (NASDAQ:AEZS) has had a rocky 2012.

But as our readers know, one of our favorite times to buy and trade stocks is when they have hit technical bottoms. So if we're going to consider AEZS as a candidate for a "bottom bounce," then it's time to let go of the past disappointment and take a fresh look at the company's future.

The stock is rebounding off of its year low as the company takes steps to shore up its capital structure with a 6 for 1 reverse split. This action will allow the company to stay NASDAQ compliant and maintain its listing in good standing, but the reverse split also will adjust the share count to a manageable 18.7 million shares from 112.4 million shares. With this action, imminent product news flow and an exciting pipeline of products in development and clinical trials that are undervalued by the investment community, there is a lot to like at these price levels.

From a technical standpoint, we can see some support, and a couple of reasons to think that the bulls may start to reject the lower prices, thereby turning the tide in the other direction.


AEZS lost over 75% of its value in April 2012 when results of the company's drug Perifosine, which was licensed to Keryx (KERX), failed to show survival improvement in metastatic colorectal cancer in its Phase III study. Now that 6 months have gone by and the stock price has moved up from the year low of $0.38, it is time to give AEZS another look. AEterna Zentaris is not a one trick pony, and the company has a deep pipeline of drugs and a plethora of upcoming news that could add significant value to the company.

Over the next two to three quarters AEZS is expected to have several news events in many of their products. Here are some of the larger near-term events that could positively impact the company's valuation:

Q4 2012

The company recently presented a poster at the 32nd Congress of the Societe Internationale d'Urologie, on the preclinical data of its oral prostate cancer vaccine candidate AEZS-120. AEZS also stated they would be filing a Clinical Trial Application (CTA) in Europe in the 4Q of 2012.

Q1 2013

AEZS expects to reach the Interim Analysis of Perifosine's Phase 3 clinical trial for Relapsed and Refractory Multiple Myeloma. The trial began in December of 2009, and AEZS decided to move ahead with this trial after it received the rights of Perifosine back from Keryx earlier this year, based on the strength of the Phase I/II trial results. The full trial is expected to be approximately 400 patients in 10 countries, including 40 to 50 sites in the U.S. The primary endpoint of the trial is progression free survival, with secondary endpoints of overall survival, overall response rate and safety. About 265 events, categorized as disease progression or death, will trigger data to be unblinded.

The Interim Analysis of safety, efficacy and futility is scheduled after 80 events. The management expects this threshold to occur in the first quarter of 2013. If positive activity trends are identified, the trial can continue to add patients. If this occurs, the stock should have a positive reaction.

On Tuesday, analysts at Maxim sent clients an initiation report covering AEterna Zentaris with a BUY recommendation and a $9 price target for recently discounted shares. Given the historical data and the current design and execution of the phase III trial in multiple myeloma, the banking firm's research team believes perifosine has a strong probability of meeting its SPA-approved primary endpoint. The analyst wrote:

"We are initiating coverage of AEterna Zentaris with a Buy rating and a 12-month price target of $9.00. We believe that Aeterna Zentaris is misunderstood as a result of the failed trial that partner Keryx (KERX-$2.78.NR) experienced with perifosine in colon cancer (the "X-PECT" trial). Data from phase I/II trials in multiple myeloma (NYSE:MM) suggest that perifosine is an active molecule in this hematological malignancy. It is not uncommon in the cancer research paradigm to see a compound fail in one trial and then succeed in another when dosing and other parameters are varied, as was the case with Avastin (by Roche-RHHBY, $49.41, NR) and Nexavar (by Onyx-ONXX, $89.70, NR). "

Q1 2013

AEZS is expected to file a New Drug Application (NDA) "early next year" for its candidate AEZS-130. The company describes AEZS-130 as follows:

"AEZS-130, a ghrelin agonist, is a novel orally-active small molecule that stimulates the secretion of growth hormone. The company has completed a Phase III trial for use as an oral diagnostic test for AGHD. AEZS-130 has been granted orphan drug designation by the FDA for use in this indication. AEZS-130 is also in a Phase 2A trial as a treatment for cancer induced cachexia."

On September 26th, the company received notification from the FDA that Fast Track designation had not been granted for this indication of AEZS-130. Juergen Engel, PhD, President and CEO of AEterna Zentaris stated, "Although the FDA's decision will not allow us to submit our New Drug Application on a rolling basis, it should not affect the timing of our filing of the NDA for AEZS-130, which is expected early next year, nor should it affect the potential of obtaining priority review. We are actively pursuing our strategy to advance AEZS-130 towards regulatory approval for AGHD, as it could become the first orally administered test in this indication."

The company has nearly $40 million in cash and no debt, but analysts note that it has a healthy burn rate ($34M over the last 12 months), and while we aren't advocating a long term investment here quite yet, there are some reasons to think this may be a good time to buy while there is blood in the streets and trade the stock as investors should see share price increase as AEZS-130 moves through the approval process in anticipation of the potential final approval.

Other Upcoming Events

A Phase 3 clinical trial is planned for AEZS-108 in recurrent endometrial cancer, which effects about 20% of the woman with endometrial cancer. There is currently no approved drug for this indication in the U.S. or most of Europe.

AEZS is expected to initiate a Phase II clinical trial for AEZS-108 for triple-negative breast cancer.

Pipeline

AEterna Zentaris has a compound library of about 120,000 compounds to draw from moving forward. The company currently has 5 indications in preclinical studies, with AEZS-120 moving into phase 1 trials and one product in Phase I trials. AEZS also has 4 candidates in Phase 2 trials and two candidates in Phase III trials. Several of the candidates have multiple indications in clinical studies. Several of the early candidates are funded in part or in whole by partners and government grants, so the company will not see a large draw down on cash while advancing these products. The depth of AEterna Zentaris' pipeline should give investors comfort that they are getting value for their investment as the company moves forward on its many drug candidates.

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AEterna Zentaris has a market cap around $57.87M million at the current price per share levels. They have a cash position of $39.8 million as of the end of the June 2012 quarter, which is about two-thirds of the market cap. This cash position ensures that AEZS should be able to fulfill their near-term goals.

To us, it looks like the market is only valuing AEZS-130, which expected to have its NDA filed in the first quarter 2013. This means everything else in the pipeline is, in essence, free. If AEZS-130 is approved, the shareholders will see a nice ROI. But, if anything else works, for example, strong Perifosine interim data, or one of the other formulations in the pipeline moves into Phase III or gets a global partner. AEZS could be a home run for long-term investors.

Furthermore it is not out of the question to expect positive results from Perifosine as AEZS is collaborating with a Japanese partner, Yakult Honsha, and in June 2012 they initiated a Phase I clinical trial in Japan in Multiple Myeloma of Perifosine in combination with Velcade. This is similar to the ongoing U.S. trial. Yakult Honsha would not have made this investment without compelling data, given the recent history of Perifosine's colorectal cancer trial.

Roth Capital Partners initiated coverage of AEZS with a Buy rating on September 20, 2012. The analyst Joseph Pantginis, Ph.D. states in the report, "With three products in late stage development and a number of upcoming catalysts, we believe that AEZS shares are undervalued, at these levels."

Investors would be wise to take another look at AEterna Zentaris and its upcoming news flow. If the Company performs on its objectives over the next two to three quarters, the stock will be well on its way to the lofty price target and expectations set by Roth Capital and Maxim.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.