AEterna Zentaris: A Slow Bleed After Vexing Q1 Earnings

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About: Aeterna Zentaris Inc. (AEZS), Includes: NVO, SBBP
by: Biologics
Summary

AEterna Zentaris announced a huge miss on their Q1 earnings but the market didn't have a strong reaction to the bad news. I believe the investors are waiting for news.

The share price has been fading off the 52-week high in April and is approaching the 200-day moving average. Can the share price make a rebound?

I discuss some contentious downside scenarios that could be the cause for the weak earnings and protracted EU partnership deal.

I take a look at the charts and layout my plan for AEZS for the remainder of 2019.

AEterna Zentaris (AEZS) recently reported an abysmal Q1 earnings report that revealed the company only received $0.04 million in royalty revenue, which was a bit of a headscratcher seeing that the expected revenue was over $4 million. One would think there would be a strong sell-off when a company reports 1/100th of the forecasted revenue, but AEZS has been showing more of slow bleed rather than a flush. Overall, the share price has hovered over $3.00 since the company announced a European approval for its adult growth hormone deficiency "GHD" drug, Macrilen (macimorelin). My suspicion is that many investors are holding onto their shares due to AEZS’s press release announcing that the board of directors are in the process of reviewing strategic opportunities for the company with Torreya, which could lead to a sale of the company.

I have already sold off a large portion of my position once AEZS dropped below $4.75. Then again, once it fell through the 50-day moving average and through long-term uptrend lines. Now, the share price is hovering around the 200-day moving average and has me debating whether to add or to sell some more. In my previous article, I that stated I was looking to buy some more at the 200-day, but unfortunately, the overall market has me reassessing all my speculative stock positions and AEZS is one of them. I intend to discuss my plan for my AEZS position and provide some potential scenarios that investors should consider when managing their own position. In addition, I take a look at the charts to identify if there is hope or gloom in the technicals.

Q1 Earnings Farce

The company had a net loss of $4.9 million. At the end of Q1, it had $11.4 million in cash and cash equivalents. Returning to the earnings miss, AEZS reported only $40K in royalties, which is significantly less than the $200K recorded in Q4. Who estimated $4 million? Perhaps Seeking Alpha got that wrong? The annual revenue is estimated to be over $40 million, so I don’t see the estimated $4 million to be a misprint. Nevertheless, the company’s commercial partner, Strongbridge Biopharma (SBBP), was not able to deliver strong sales of Macrilen in Q1 compared to Q4. Why the massive drop? Was it because of the Novo Nordisk (NVO) deal?

The bad Q1 earnings could be due to Strongbridge and Novo Nordisk getting on the same page, or perhaps the strategic alternatives endeavors are causing Strongbridge to put the brakes on moving Macrilen. Regardless, it appears this was a decision by one of the parties and no one is providing a reason why.

Potential Downside Scenarios

The board of directors and Torreya might take a long time to finalize their strategic alternatives, which can be rough on the share price as investors grow impatient. This wouldn’t be too big of a deal if the company didn’t desperately need revenue to prevent another offering or taking on debt. If Strongbridge and Novo Nordisk continue to record weak Macrilen sales, AEZS could be in trouble with only $11.4 million in the bank. With AEZS recording a net loss of ~$5 million, investors will start doing the math and will most likely look to take profits before the company is forced to fund-raise. The company needs Strongbridge’s sales reps to push Macrilen, and the strategic alternative team needs to be successful in the near future.

A potentially controversial issue is that Strongbridge and Novo Nordisk are trying to avoid hitting a milestone payment with Novo Nordisk writing the check. A more controversial potential scenario is that Strongbridge and Novo Nordisk are sandbagging Macrilen sales to pressure a cheap sale of the company or better a European deal. Indeed, I am speculating with both of these scenarios, but some of the recent biotech M&A deals have been announced when the target company is at a point of weakness. For example, Tesaro (TSRO) was acquired by GlaxoSmithKline (GSK) after reporting weak trial data. Another example is Roche (OTCQX:RHHBY) buying Spark Therapeutics (ONCE) following a huge miss after its Q4 earnings report. Of course, I would like to assume everything is going to plan, but I also can’t be naïve and expect a big pharma to play nice in a negotiation knowing the company needs cash.

Investors should consider these scenarios or at least take heed that this process could be protracted for more than just banging out finer details.

Charts Reveal Strategic Sellers

AEZS is a nano-cap stock, which requires a cautious approach when executing buys and sells. Despite the fact you might be convinced that AEZS is a buy, you could be hitting the Buy button at the worst of times. I suggest investors study the charts extensively and stick to a specific buy price for this ticker. Let's review the charts to pinpoint some key areas for investors.

Looking at the daily chart (Figure 1) from my initial article, we can see the stock made a substantial move subsequent to the Novo Nordisk and Strongbridge deal.

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Figure 1: AEZS Daily December (Source: Trendspider)

The share price continued to rise over the coming weeks and settled above $4.00. The share price eventually broke above the upper trend lines on the March daily chart (Figure 2) and ripped to a new 52-week high of $5.57.

https://static.seekingalpha.com/uploads/2019/3/27/48523746-15536999388213472.jpg

Figure 2: AEZS Daily March (Source: Trendspider)

Looking at the recent daily chart (Figure 3), we can see the share price fall off and smash through the 50-day and uptrend lines.

Figure 3: AEZS Daily (Source: Trendspider)

However, the selling pressure seems to have eased up over the past week, with the share price holding around the 200-day moving average and with the RSI hovering just above the oversold area. I am going to keep an eye on this $3.00 range to see if this turns into a support area.

Figure 4: AEZS Hourly (Source: Trendspider)

Looking at the hourly chart (Figure 4), I noticed a large amount of selling occurring every 7-8 days once the share price broke down through $5.00. It looks as if someone is either dumping or potentially shorting this off the highs. I can't say for certain that this is shorts taking advantage of the low buying volume, but the timing is too perfect for me to say this is coincidental. Until that seller - or sellers - stops, I forecast a continuation to the downside until positive news brings back the buyers and bumps the sellers.

Investors looking to initiate or add to a position might want to wait for the share price to break out of this downtrend before pressing the Buy button. It is a long way down to the 52-week low of $1.29, and there is little support between $3.00 and $2.00. I am not saying it will go there, but the overall market has me holding off on a buy for the time being.

Is AEZS Still A Buy?

In previous AEZS articles, I have given the stock a price target of $4.65 and $7.00 a share. The $7.00 price target was based on the cash position and that AEZS will sign an EU partnership deal comparable to the Strongbridge-NVO deal that brings in a $100 million upfront payment. The company still has no debt and could be cash-flow positive over the next two years.

Figure 5: AEZS Annual Earnings Estimates (Source: Seeking Alpha)

Despite the terrible Q1 earnings, the company is still estimated to have an annual revenue of $40.76 million (Figure 5) with a market cap of about ~$48 million that still makes this a bargain buy. That would be a forward price-to-sales of ~1.17x, which is significantly under the biotech sector's current price-to-sales of about 6x. Usually, biotech companies with such valuations don’t go unnoticed, so I have to suspect the Street is guessing AEZS will fall short of that initial estimate.

Now, let’s return to the charts above. In general, the stock is still bullish over the past twelve months and has some big news pending. Considering that, I should be pointing to a buy. However, the recent ER and the prolonged wait for a strategic alternative has negated that bullish momentum. The share price is falling and could drop through the 200-day moving average, which would establish a bearish trend on the daily chart. This has prompted me to have a neutral stance on the stock, despite my bullish outlook for the company in the long term.

Conclusion

What’s my plan? My previous plan was to rely on catalysts and earnings reports to add to my position, but due to the lack of revenue without a huge sell-off, I am going to return to the technicals to help manage my AEZS position. Although I have reduced my position size substantially, I am still willing to buy some more AEZS in this bearish market as long as the share price is able to hold above the 200-day moving average. Hopefully, the overall market can find some support in the coming days to allow this to happen.

I cannot rely on the fundamentals and the potential for a transformational change from a partnership or buyout. Closing deals can take an extended period of time, and the results might not be as blockbuster as some expect. The bankroll is going to continue to thin out, so I have to believe the company will deliver on a deal before the checks start to bounce and do good by investors. Nevertheless, I will liquidate my position if the company fails to secure a deal that provides an upfront payment or non-dilutive funding before the end of Q3 in anticipation of a large investor fallout.

Disclosure: I am/we are long AEZS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.