Aeterna Zentaris Inc.
Q3 2015 Earnings Call Transcript

Published: 6 Nov 2015

[Operator:]

Good morning. My name is Tessa, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Aeterna Zentaris Third Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Ms. Brooke Geiger, you may begin your conference.

[Brooke Geiger:]

Thank you. Good morning and welcome, everyone. I am Brooke Geiger, Associate Director of Communications and Administration of Aeterna Zentaris. I am the leader of today’s call. With me are David Dodd, our Chairman, President and CEO; Keith Santorelli, our Vice President, Finance and Chief Accounting Officer; and Jude Dinges, our Chief Commercial Officer. Please take note that during this call, we will 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, November 06, 2015, 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 is now my pleasure to introduce the Chairman, President and CEO of Aeterna Zentaris, David Dodd.

[David Dodd:]

Good morning and thank you for joining us. Today I would like to update you regarding three significant successful recent events. The recommendation to continue our ZoptEC trial and endometrial cancer following the DSMBs final interim efficacy and safety review. Our successful commercial launch of Saizen and our success of virtually eliminate all of the highly-dilutive Series B Warrants. Let me first address the situation with respect to the Series B Warrants. I am pleased to report that soon thanks to the hard work of our team in Maxim Group, our advisors only approximately 800,000 Series B Warrants will remain outstanding, representing approximately 2.7% of the number originally issued. As a result, the highly-dilutive Series B Warrants have been virtually eliminated. However, the dilution from the exercise of the Series B Warrants left us with the capital structure that is unacceptable and must be corrected. The tool we’ve to improve our capital structure is a share consolidation which requires approval of the holders of our common shares. One of our primary motivations for effecting a share consolidation is to return the price of common share above $1 to maintain our NASDAQ listing. Therefore, we are seeking authority to effect a share consolidation at a ratio up to 100 to 1 for 1. We hope it isnot necessary to effect such a drastic share consolidation. In fact, based on our current share count and price, we believe a ratio of 60 to 1 or 80 to 1 should be sufficient. However, we are seeking the authority to consolidate at a greater ratio if necessary to preserve our listing. As a shareholder I intend to vote for the share consolidation and I urge all shareholders to do so as well. There is simply no other way to improve our capital structure. My colleagues and I have the highest confidence in the outlook for our company and our ability to achieve long-term growth success to shareholder value and competitive performance. Our commitment is to build a profitable growth oriented company delivering long-term value to our shareholders, employees, patients and healthcare providers. Two of the leading independent proxy research and advisory firms, Institutional Shareholders Services and Glass Lewis & Company recommend the shareholders vote for the share consolidation. And the supportive recommendation from ISS they note “stock consolidation while not immediately adding to shareholder value should enhance the long-term growth prospectus of the company by broadening its financing alternative. Continued low trading prices of the company shares can put them below investment grade for many institutions limiting the potential capital base for the company and its prospectus for raising new capital as needed.” We share this view and urge our fellow shareholders to vote in favor of the proposed share consolidation. Turning to the company’s fundamentals, we continue to make significant progress. The commercial efforts are encouraging, our promotion of EstroGel is picking up nicely with year-over-year growth and new prescriptions in our territories increasing at 8% compared to flat to declining performance by our competitors. During the third quarter, units of the product attributable to our efforts were 15% above our baseline for the period, compare this to our results in first quarter and second quarter in which we were 8% and 14% respectively above our baseline. The momentum is building. Likewise the results of our promotion of Saizen are promising. We achieved our internal forecast for new patient statements of medical necessity essentially new prescriptions during the first three months of the promotion approximately one-month ahead of schedule. This was achieved with an initial target base much less than we originally expected. We recently concluded our highly productive and collaborative meeting with our colleagues at EMD Serono, which is already led to a significant increase and the number of targets assigned to our team. Additional targets are forthcoming and we are confident that our promotion of Saizen will contribute to our results in coming quarter. While our commercial operation is not yet a meaningful contributor to our financial results, it is an important investment relative to the successful transformation of the company. With our sales force delivering increased growth for existing commercial partnerships, we are well positioned to in-license products from others or eventually to promote our own internally developed products. Having this demonstrated effective commercial operation best positions us for pursuing in-license and acquisition opportunities. We intend to continue with this investment in parallel with our continued efforts to successfully in-license and build a profitable portfolio. Turning now to our development programs, our confidence in the potential medical and commercial value of zoptarelin and doxorubicin, which we now refer to with the brand name Zoptrex continues to increase. During the quarter, internationally recognized LHRH research of Dr. Jacek Pinski of the University of Southern California, Norris Comprehensive Cancer Center presented the results of this Phase II clinical trial of Zoptrex in men with castration and taxane-resistant prostate cancer at the prestigious European Cancer Congress in Vienna, Austria. Dr. Pinski’s data indicated that the compound met its primary endpoint and demonstrated good tolerability. The primary endpoint was clinical benefit to find this remaining progression free by the Response Evaluation Criteria in Solid Tumors or RECIST and the prostate-specific antigen PSA after treatment for 12 plus weeks. We are encouraged with the Phase II results for Zoptrex and prostate cancer also, because LHRH receptors are expressed in a great number of cancers including prostate cancer, we believe the Zoptrex, which specifically targets those receptors, may represent a novel targeted treatment for men with this disease. After the end of the quarter on October 13, we announced the independent Data and Safety Monitoring Board recommended that the pivotal Phase III ZoptEC study with Zoptrex in women with advanced, recurrent or metastatic endometrial cancer continuous plan to completion. The DSMB’s decision follows its pre-specified final interim efficacy and safety review for the ZoptEC Phase III trial at approximately 192 events. This is very significant news, indicating that based upon a comprehensive review of the efficacy and safety data at this final interim stage. Zoptrex has the potential to outperform doxorubicin providing a new therapeutic alternative with improved survival and safety profile. Now does it mean that the compound will be approved by the FDA, but nothing can guarantee that the FDA will approve it, but it’s a very good step in that direction? Does it mean that it is a commercially viable product or not necessarily, but it’s a very strong signal that the potential is there. If approved Zoptrex would be the first approved therapy in the U.S. for treating women with advanced, recurrent or metastatic endometrial cancer. Today, there is no approved medical therapy for these patients. We look forward to continue progress in the final clinical development of Zoptrex over the next 12 months. We continue to refine our outlook and evaluation of this commercial and medical potential for this product focused on the initial indication in the U.S. There is significant medical need for such a product resulting in a highly significant commercial opportunity. We feel confident in not about the potential of Zoptrex that our commercial team has initiated commercial brand development for the product. We have selected Zoptrex as the brand name and have filed an application for our federal trademark registration for that name. We are now using Zoptrex in all relevant communications. Our commercial team is focused on accomplishing foundational brand development objections in advance of the completion of the ZoptEC trial. This includes a strong scientific understanding for Zoptrex explaining exactly how the compound has been bioengineered the bottom to the LHRH receptors. How Zoptrex works and why it is effective. In addition, we have begun to develop important relationships with key oncology opinion leaders and to brief them on the progress of the ZoptEC trial. Fortunately members of our team have a strong history and experience to successfully launching and commercializing products into oncology and other therapeutic areas. We are very excited about proceeding with the Zoptrex brand development. Regarding Macrilen, we previously announced the initiation of the confirmatory trial and we are currently straining for initial patients into the program. We look forward to providing updates on the progress of Macrilen development program with an anticipated completion by year end 2016. Focusing on our product development area; we are pleased with the success in selecting and advancing and optimized Erk-inhibitor compound for further development. We believe that our team and our efforts are currently among the leaders and identification of this type of compound as an important new type of potential cancer therapy. At the 2014 American Association for Cancer Research’s meeting, we presented an abstract of our work on our lead Erk-inhibitor molecule called AEZS-134. Our abstracts was selected by conference participants is one of the 11 high impact abstracts relative to the future oncology developments and hundreds of abstracts presented on the topic. As we previously noted we have continued work in our Erk-inhibitor program resulting in an optimized molecule AEZS-140 and back-up candidates. AEZS-140 and the back-up candidates demonstrate improved plans and exposure in rodents as well as enhanced anti-tumor efficacy in comparison to the previous lead compound, AEZS-134. Furthermore, AEZS-140 was profiled against several clinical stage Raf, Mek and Erk inhibitors and demonstrated very competitive activity. We intend to proceed with the development steps for AEZS-140 and the development compound, including in depth in vitro profiling and also, further in vivo tumor models. Simultaneously we are seeking proposals from parties who are interested in either co-developing or licensing the compounds. Indeed it is exciting to be part of the team of dedicated and extremely confident individuals who are committed to creating value for our shareholders and establishing the bases of a profitable growth oriented pharmaceutical company. Now, I turn the call over to Keith Santorelli, our Vice President, Finance and Chief Accounting Officer who will provide more information about our third quarter financial results.

[Keith Santorelli:]

Thank you, David, and good morning everyone. I’ll be providing a brief summary of some of the financial highlights from the third quarter. Most of what I would be covering has been presented in more detail and our consolidated interim and consolidated financial statements and MD&A for the third quarter of 2015 both of which were filed yesterday. First, as David indicated potentially significant further dilution that could have risen in connection with the exercise on an alternate cashless basis of our Series B Warrants has been significantly stems following the agreement entered into with the holders of substantially all of the remaining Series B Warrants as of November 1. As a result we expect - less than 3% of the original $29.8 million Series B Warrants that were issued in connection with our March financing will soon be extinguished. We believe that the agreement represents a positive step toward improving our capital structure and remove a good degree of uncertainty that otherwise management present leading up to our proposed share consolidation. By way of update as of close of business yesterday November 5, we had 632.7 million common shares outstanding. From an operating expense standpoint, our main operating activities during the most recent quarter included ongoing efforts associated with our clinical development initiative as well as to a lesser expense with our commercial operations and general and administrative activities. Total operating expenses amounted to $7.7 million and $25.5 million for the three months and nine months period ended September 30, 2015 respectively. Our total R&D costs were significantly lower in 2015 both on our quarter-to-date and a year-to-date basis as compared to last year. Most notably as a result of the scaling down of our R&D activities effected in connection with our resource optimization program which we announced in June of last year. Our pivotal Phase III ZoptEC trial continued to be the primary driver of our third-party R&D spend on both the quarter-to-date and year-to-date basis as compared to the same period last year. Although, our recently initiated Phase III program for Macrilen saw an uptick in efforts during the third quarter and we expect that trend to continue through the last quarter as related development initiatives continues to ramp up. Overall our expectation is that total R&D costs will now range between $20 million and $22 million for the whole of 2015. Switching now to our selling expenses, we continued during the quarter to incur costs related to contract sales force and our own management staff in support of our co-promotion agreement for EstroGel and Saizen. Overall, our year-to-date selling cost through the end of September were approximately $3.3 million higher than last year, which is due to the fact that the majority of our current sales force have been in place since late 2014 and therefore not to the equivalent number of periods in both years. More recently we expanded the number of sales reps to support our efforts related to the promotion of Saizen and in total we expect to see higher overall selling costs for the whole of 2015 as compared to last year. From G&A expense standpoint total third quarter year-to-date general and administrative expenses were largely in line with those incurred in the same period last year. So overall we expect that total full-year 2015 G&A expenses will be higher as compared to our annual 2014 result and this is largely due to the recording of a provision in the fourth quarter for severance payments and other directly related costs associated with the recently announced closure for our Québec City Office. Higher net finance costs contributed significantly to a higher quarter-to-date and year-to-date net loss as compared to the same period in 2014. These costs that comprised in large products by non-cash fair value adjustments that result from the periodic marking-to-market of our outstanding Share Purchase Warrant which are classified as a liability in our statement of financial position. From a cash flow standpoint we saw higher comparative cash used in operations during the nine-month period ended September 30, 2015, resulting in large product from higher severance payments made earlier this year in connection with our resource optimization program and we ended the third quarter with a cash and cash equivalent balance of $38.3 million. As we continue to advance our clinical programs and commercial activities in the last quarter and also in light of severance payment that have or will be made in connection with the restructuring of our finance and accounting group. We expect that cash used in operations will range from $37 to $39 million for the whole of 2015. I should also note that the payments made pursuant to the agreements with the participating Series B Warrants holders, which amounted to approximately $2.9 million are excluded from this estimate given that we believe that those cash disbursements will be recorded with in financing activities in the periods of payment. And with that, I will turn the presentation back to David.

[David Dodd:]

Thank you, Keith. My colleagues and I will now answer your questions therefore I am turning the call over the operator for instructions on the question-and-answer period.

[Operator:]

[Operator Instructions] Your first question comes from the line of Swayampakula Ramakanth from H.C. Wainwright. Please go ahead

[RK:]

Good morning David. This is RK from H.C. Wainwright. How are doing?

[David Dodd:]

Good morning, RK.

[RK:]

So regarding the share consolidation how things change if it is a 1

[David Dodd:]

Sure, I really follow what you are seeking?

[RK:]

I mean with the dilution at this point is that enough for you to get about the $1 that you are looking for or how do you come up with that that’s what I am just trying to understand.

[David Dodd:]

Yes, so we expect by going through the share consolidation that the end result and we’ve analyzed this in great detail RK looking at all of the host of other share consolidation of similar companies yet this year that have occurred in biotechnology and pharmaceuticals now have look a historical patterns in all and we anticipate and as we look at several progress that we feel are important to look at, obviously with the share prices at the time of the consolidation. What the result of target share price would be as well as the result and share count would be in all. And also the historical sort of regression that one might see going over a period of 30 days following the share consolidation and taking all that into account is what guides us and will determine the eventual decision on what that ratio should be. But that's how we have come up with and we’re able to communicate a tighter bracketing of 60 to 1, 80 to 1 at this particular point.

[RK:]

Okay. And then going on to the revenues between Saizen and EstroGel, so have you seen anything meaningful in terms of sales through Saizen or is most of this coming from EstroGel?

[David Dodd:]

Most of what is currently is all from EstroGel, we are sized and we are only into the end of the first three months. Remember, we don’t book sales on any of this and yet what we have been able to track is the statements of medical necessity in this category or the equivalent of a new prescription. So a physician, when a physician or endocrinologist gets to the determination, the final determination that this particular page of this patient requires growth hormone supplementation they then submit and we’ll write-off and sign-off which is the equivalent of the new prescription to the statement of the medical necessity. That then goes into the system to then be processed by the payers and if necessary they may need to be an adjudication of that. So what we did at the very beginning and in developing this agreement with EMD Serono is we have developed and we have – but we don’t publish them, but we have forecast that we attract on both within our own cells as well as within EMD Serono, based upon that, we are at a higher level of performance and achievements not only on statements of medical necessity, but what gets translated. There’s usually about a two month period approximately maybe a little bit, sometimes more like six weeks between the submission of the statement of medical necessity and the patient actively starting on the product. So we started to selling right at the end of July, if you recall July 27, so essentially the first week of August and within the first two months that we are able to see we had achieved what we had provided to EMD Serono for the first three months in all, translating those into actual patients at all and it goes to the process. So at this point, we are ahead of schedule, but there has been no booking of any revenue just because that lead like phenomenon. And I will just say in general this is an element that one would always have frustration of a co-promotion agreement, we are not booking sales and not controlling all the other elements from a commercial standpoint and that’s why I underscore and emphasize that our goal is obviously to have products, which we are fully managing and setting the pricing and setting the management and the reimbursement access and that is always been our intent. However, this enables us by having our sales operation out there that when we are in discussions with parties about licensing their commercial product or taking a product they may have recently had an approval 505(b)(2) type format, it becomes competitively very important to have an established commercial organization. And to demonstrate on the basis that we are increasing in the marketplace the value to our partners who are able to demonstrate for EstroGel, significant increases in new prescriptions when that market is declining in general, declining at about 4% and we are showing increases at the 8% level, that’s on a apples-to-apples comparison within our territories only measuring what we’re doing it all. And when we now look on the early indications out of – from size and it’s even more promising and more impressive because there we are seeking to triple, approximately triple the number of targets we currently have as when we are working quite a bit as you might imagine with EMD Serono to go through the process of obtaining targets, qualifying those targets and adding those to our sales force. So it’s somewhat detail, but speaking and answering your question so just a co-promotion it becomes very important for us to ensure that we communicate, we are not just out selling and booking prescriptions in the shipping products, we have nothing to do with those items. Ours all the element to sort of pull it through so that our partners whose products will book higher sales, ship higher products and will earn the commission. The unfortunate and the challenging part for all of us on this call is we don’t see immediate response and there is truly a live period for seeing revenues. Right, I hope that’s helpful.

[RK:]

That’s quite clear. On EstroGel so if it’s also a one quarter lag, the booking I mean the revenues that you recognized now is one quarter ago. So you have visible - do you have visibility for what happened in the last three months for which we have not really seen the numbers, but how are the trends are they at least qualitatively are they expecting I mean – are they meeting your expectation or actually beating your expectations?

[David Dodd:]

Qualitatively they look very good, they are not meeting our expectations because we didn’t anticipate that the market would be negative this year and the market has been going negative at all and yet we have a baseline and we earned our commission revenue by how we perform relative to baseline. We are able – and have been able to report that in the third quarter we are 15% above the baseline. So the number of new prescriptions or units well I should say that are above our baseline we then receive rather significant payment on the gross profit at the level and just to reiterate in the first quarter of this year we were 8% above the baseline and second quarter we were 14% above baseline and third quarter we were 15% above baseline. Now, we have expectations to see a significant much greater increases above baseline, the challenge we’ve been having is that the market is declining that does not provide the level of opportunities we had otherwise expected. The other challenge which we knew and continue is that keep in mind the relative value of a patient own EstroGel is a little over $100 a month contrast with size and where the relative value of the patient on size and it’s $2000 to $3000 a month. That doesn't mean we will not sell one and sell the other because they are different targets and we are – it’s critical for us to perform on both, but it does mean that on a relative basis for every incremental increase we receive on size of its certainly will generate significantly more value to us than what we might see otherwise coming from EstroGel.

[RK:]

So what is impacting the EstroGel market that it is declining, what are the factors that’s…

[David Dodd:]

The major market are non-formal alternatives, there are cycles in this market and I have probably 30 years of history dealing in this market and there have been several cycles if one goes back frankly to the mid-70s people originally became very scared about cancer and AstraZen. The market went down 10 years later, evidence came out by incorporating the projection a law in conjunction with AstraZen for women who had the intact uterus, it actually was demonstrated to be protective that became the basis for a decade of very high growth in the marketplace. And then we saw subsequent to that in the late 1990s the women’s health initiative in the early 2000 that came out and that is just put a damper on the market and at the same time we’ve seen [none for mono] alternatives coming out and quite a bit of what I would say sort of consumer related products that are non-prescription also demonstrative in terms of safety and efficacy in all that. It provides many alternatives and patients are basically try many different things so market is down now largely because of alternatives that are out there and there is not the basis of knowledge and building knowledge that we saw certainly in the early 1990s that we’re driving extremely high growth in this marketplace.

[RK:]

Okay and then the last question from me is on ZoptEC on the trial, so now that the DSMB given you the green light to go ahead what’s the next catalyst on the study and when will it be here?

[David Dodd:]

Okay. So the DSMB after – they did a thorough comprehensive review of all the efficacy and safety data at a 192 events, they looked at it in comparison of doxorubicin and they provided us the recommendation to continue the trial to completion of this plan. And the next event so to speak that we will be able to talk about will be within the next 12 months I mentioned this is my comments and all when we’ll report the completion of the trial and following the completion of the trial there will be a time period in which obviously the data analyze that will probably be six to eight weeks somewhere around that period and we will then announce the - what we see as the topline final results. So we anticipate all of that within the next 12 months.

[RK:]

Thank you, David.

[David Dodd:]

You’re welcome.

[Operator:]

Your next question comes from the line of Jason Kolbert from Maxim Group. Please go ahead.

[Unidentified Analyst:]

Hi guys, this is [Gabriel Joe] on behalf of Jason Kolbert.

[David Dodd:]

Hi, Gabriel.

[Unidentified Analyst:]

Hi, my question is can you please walk us through the timeline for data and the endpoint for the ZoptEC Phase III trial? Thank you.

[David Dodd:]

Sure, the timeline for data is following this final interim analysis, the next step will be within the next 12 months when we will announce the completion of the trial and then following that we will announce the topline results of the trial. And we anticipate all of that will occur within the next 12 months. In the interim there are no scheduled other points of analysis this was all built-in upfront so the point was or that the plan was to conduct the initial interim analysis, which was utility analysis and announced that in April of this year, which we did and then to follow that by the final interim efficacy and safety analysis. We originally follow that would be year end, but we progress much better with this trial and we’ve now announced that on October 13 and we are pleased that the recommendation was to continue to full completion and we’ve tried our best to communicate what are the significance of that is that our comments today and previously. And so the next point will be within the next 12 months when we will announce completion of the trial and then follow that by an announcement of the results of the trial.

[Unidentified Analyst:]

Okay great thank you.

[David Dodd:]

You’re welcome. End of Q&A

[Operator:]

[Operator Instructions] There are no further questions at this time. I turn the call back over to the presenters.

[David Dodd:]

Thank you and thank you for your continued support of interest in the transformation of Aeterna Zentaris. Despite the various challenges that have and continue to confront us our progress continues and our outlook is strong and promising. During the third quarter we successfully addressed several challenging issues, while still progressing in the commercial and development areas. We will continue to improve the capital structure and outlook for the company during the fourth quarter. I look forward to updating you regarding our focus on strengthening our senior management team, improving our operating effectiveness and building the foundation for long-term value growth and development. Again, thank you for your continued interest and support of Aeterna Zentaris.

[Operator:]

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