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AEterna Zentaris: Uncovering The Next Dominant Cancer Company

|Includes: AEterna Zentaris, Inc. (AEZS), ARIA, DNDN, GSK, KERX

The oncology focused companies, led by Dendreon (NASDAQ:DNDN) and Human Genome (NASDAQ:HGSI) have become the biotechnology and drugs sector’s hottest new fad, stealing the spotlight and making once average Joes trading in the $2 range, into, now, Hollywood stock market Broadway stars. With their names forged in stone for us to forever gaze upon the opportunity that could been, many were left looking forward and wondering who will steal the limelight and win the Oscar for the sexiest investment for 2010. So without further ado, ladies and gentlemen, grab your drink, get your popcorn, and let’s get this show started.

Stepping first onto the stage is a small company by the name of Keryx (NASDAQ:KERX), who began to pick up steam, gaining well over 122% year-to-date, as investors began to realize the potential of its so called “flagship product” perifosine. It is currently being tested under two Phase 3 indications for multiple myeloma and advanced colorectal cancer, with both clinical trials due to be completed in the second half of 2011. Notice that the quotations in between the words flagship product, that’s not a mistake, in fact, that’s the main reason why AEterna remains at the highly undervalued price per share of $1.25 versus Keryx’s $5.65. Somehow, some way, the investment community never caught onto perifosine the right way, and began to phatom a distorted picture of what it really is. This confusion won’t last long, as AEterna will be one of the premier companies to present at the highly coveted and prestigious ASCO (American Society of Clinical Oncology), during June 4th to 8th. Final results of a randomized phase II study of perifosine in combination with capecitabine (P-CAP) versus placebo plus capecitabine (CAP) in patients (pts) with second- or third-line metastatic colorectal cancer (mCRC) are to be Presented by Donald Richards.

What’s even more interesting is that Mr. Paul Blake, M.D., Senior Vice President and Chief Medical Officer at AEterna had the following comments to make with regards to the evaluation between the KERX and AEZS stock values. Noting the wide discrepancy between the respective market capitalization of Keryx and AEterna, he contends that “intrinsically, there isn’t any reason why we should be valued lower than Keryx, because we’re going to get more than half of whatever the eventual market for perifosine is.” Therefore, using the simple transitive property, overlooking economic conditions and external variables, with a 50% discounted evaluation and conservative analyst estimates, the AEZS stock should be trading at nearly $2.80 (representing a 100%+ gain from current levels) given KERX’s current $5.60 price per share. Interestingly enough, Roth Capital recently upgraded KERX to $7, and Rodman & Renshaw upgraded it to $6, leaving further anticipation as we wait on AEZS to receive its due credit. With 54 patents under its belt to protect its intellectual property (NYSE:IP), this shouldn’t take too long once the word on the street gets out.

Moving on, let’s highlight what makes AEterna a candidate to be the next dominant cancer company. Perifosine, is in fact, AEterna’s product, and not Keryx’s. It was merely licensed and given rights to Keryx for North America and Handok (Korea), all the while still entitling AEterna to 10%-11% of overall sales figures. The icing on the cake is that Keryx is funding all of the clinical trials leading up to the PDUFA, giving another edge to AEterna in the sense that they are essentially getting a free ride all the way up to marketing and sales.

Now here’s the kicker, AEterna currently still holds rights to perifosine outside of North America, which represents a market size virtually similar to the U.S.  Last week, the European Medicines Agency suggested that the data collected by Keryx should be sufficient to support registration of perifosine in Europe to treat multiple myeloma.  The EMA decision is a big win for AEterna, which will not have to spend any money conducting clinical trials in Europe and most likely Asia, if the U.S. trial is successful.

Dr. Juergen Engel, President and CEO of Æterna Zentaris stated, “We are very pleased with the outcome of our discussions with the European Medicines Agency so far. For the development of perifosine in multiple myeloma, we believe that the planned North American clinical program, which is sponsored by our partner Keryx, is sufficient to support an application for marketing authorization in Europe and the rest of the world. We are looking forward to the outcome of our discussions with the EMA which is expected during the third quarter of this year, regarding our development program in colorectal cancer.” This should bring a sigh of relief to current and future stockholders, as this dictates that more trials will not be needed in Europe for commercialization.

For those number crunchers out there, the global pharmaceutical market is forecast to grow to US$897 billion in 2011, an equivalent CAGR of 6.9% over the next five years. Experts and research analysts have projected that more than 65% of these figures will be due in part from the double-digit market growth in the European and Asian drug markets. Now think about these facts and statistics when you add up who will benefit more from perifosine’s potential FDA approval.

Fundamentally speaking, AEterna currently has a sound share structure with only 46.76M shares float, and of that 14% being held by institutional and mutual fund owners. The company’s biggest owners have also been adding to their positions throughout 2010, as seen by the data provided by MFFAIS.

In an industry where cash burn rate, research & development and other expenses almost always override companies into an insurmountable debt, AEterna has found a way to triumph this ideology. The company is sitting pretty with roughly $50M in cash (including the recent $15M offering leaving any doubts of future dilution to dissipate), cash burn rate of only $8M (based on 2009 to 2008 years), and only $300,000 in debt, paving the way for a potential blockbuster style pop in the price per share as the company’s clinical and oncology developments come into fruition. Essentially, what you get is a company that has a $90M market cap, while holding a clinical and oncologypipeline valued at more than $10B, given that they all reach positive marketing clearance from the FDA.

Back to Dendreon, and its flagship cancer vaccine provenge for the treatment of prostate cancer. The company’s positive outcome with the FDA shook the investment community, taking Wall Street by storm, leaving the doors wide open for a newcomer to take advantage of the spillover effect and step right up in becoming the new cherif in town. This is where AEterna takes charge once again with their similar vaccine to Dendreon’s provenge, in AEZS-120 (preclinical, estimated phase I to begin mid-to-end 2010). If this wasn’t enough to entice your interest, we move onto AEZS-129, a PI3K/Erk inhibitor which is targeting the same pathway to Ariad Pharmaceuticals’ ridaforolimus. (NASDAQ:ARIA) announced this week a big partnership on this drug with Merck valued at $50M, including additional milestone payments and royalties on global sales, leaving many to wonder, is AEterna quietly speaking with the industry’s bigger players on a similar type of deal?

When it comes to the clinical and oncology pipeline, AEterna simply dominates what Keryx has to offer in terms of market potential, nothing more needs to be said about that.

AEterna is also awaiting several key developments:

  1. Bone Marrow Cancer: Developing perifosine, the first-in-class oral AKT inhibitor. A Phase III study, the last stage before commercialization, is currently being conducted in the United States for myeloma, a form of bone marrow cancer. Perifosine has been granted a fast-track designation and orphan-drug designation by the FDA. Plan to update development and registration strategy for ex-North American territories in 2011.
  2. Colon cancer: Keryx is about to start a Phase III study with this same compound as Perifosine in metastatic colon cancer.
  3. Endometrial cancer and Ovarian cancer: AEZS-108. Conducting a Phase II study in Europe for endometrial cancer and ovarian cancer. They expect to disclose the final results by year end 2010.
  4. Bladder cancer, pancreatic cancer and prostate cancer: AEterna is also looking to possibly conduct other clinical studies in bladder cancer, and pancreatic cancer and refractory prostate cancer mid-to-end 2010.
  5. In vitro fertilization: In endocrinology, AEterna has already marketed a product for in vitro fertilization under the brand name Cetrotide(c). It is being marketed worldwide by Merck Serono, except in Japan, where it’s marketed by Nippon Kayaku and Shionogi. Update on sales figures could come in 2010.
  6. Growth hormone deficiency: The lead endocrinology compound in late-stage development is AEZS-130, which is in Phase III as a diagnostic test for growth hormone deficiency (GHD) could receive an update soon. They also have an orphan-drug designation for this drug in the United States. Currently in discussions with the FDA in order to find the best way to finalize this study for AEZS-130 and file for an approval at the end of 2010.
  7. Children diagnostic test: AEterna is also aiming for diagnostic use of AEZS-130 in children. The unique selling point of this project is that this will be the first oral diagnostic test, expect an update in 2010 to early 2011.
  8. Treat cachexia: AEZS-130 has shown to stimulate appetite and therefore could be used to treat cachexia, a condition which results in a severe reduction of muscle mass and weight loss in patients suffering from conditions such as chronic obstructive pulmonary disease, AIDS and certain cancers. Potential update in 2010.
  9. At the pre-clinical development stage, AEterna has some very unique molecules which are dual inhibitors of PI3K and Erk, two hot targets in oncology at present, and also a selective Erk inhibitor.
  10. Some of these early-stage projects as well as the more advanced ones will be the object of presentations at major conferences throughout 2010, such as the upcoming American Society of Clinical Oncology, ASCO, and American Association of Cancer Research meetings.
  11. AEterna has stated publicly that they are actively looking for partners to market their treatments outside of North America even as they await U.S. regulatory approvals. News could come at any time.

Technical Analysis

From a technical standpoint, AEZS couldn’t be more ready for a major rebound. Currently sitting on a “Cup with Handle” breakout pattern, all of the oscillators seem to be alligning at the right time. Relative Strength Index (RSI) is currently showcasing a neither overbought nor oversold stock, while making a move towards the critical 70 mark as the bulls begin to stampede past the bears. Major resistances exist at the $1.34, and $1.82 price per share levels, however, with dilution now out of the picture, these shouldn’t pose as roadblocks for much longer.

Buy volume indicated by the green bars seems to have returned after the company’s recent stock offering whereby they raised $15M from mid April to beginning of May. MACD divergence is currently negative, however rising on its way past the 0 mark which further reiterates the bullish forward going sentiment. Lastly, Full Stochastics displays a stock with oversold and undervalued oscillators awaiting a major rebound.

The Cup with Handle is a bullish continuation pattern that marks a consolidation period followed by a breakout. As the stock comes up to test the old highs, the stock will incur selling pressure by the people who bought at or near the old high. This selling pressure will make the stock price trade sideways (as seen from our current levels of $1.12 to $1.24) with a tendency towards a downtrend for four days to four weeks, after which it takes off. Below is an example of a cup and handle chart pattern resembling AEZS:

Cup and Handle

Disclosure: Long AEZS