Aeterna Zentaris Inc.
Q1 2013 Earnings Call Transcript

Published: 8 May 2013

[Operator:]

Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aeterna Zentaris First Quarter Results Conference Call. [Operator Instructions] Thank you. Mr. Paul Burroughs, Director of Communications, you may begin your conference.

[Paul Burroughs:]

Thank you. Good morning, everyone, and welcome to Aeterna Zentaris' 2013 First Quarter Financial and Operating Results Conference Call. With me today are David Dodd, President and CEO; Paul Blake, Chief Medical Officer; Dennis Turpin, Chief Financial Officer; and Nick Pelliccione, Senior VP, Regulatory Affairs and Quality Assurance. Please take note that during this call, we may 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, Wednesday, May 8, 2013, and the company disclaims any intent or obligation to update these forward-looking statements unless we are 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 everyone, again, good morning, and thank you for your participation and interest in our company. Recently, I had the opportunity to speak with you, and I discussed several concepts. One was the vision of the type of company we want to become, which we have been sharing with and discussing with in all of our sites with all employees. And it really was focused on a few major principles

[Dennis Turpin:]

Thank you, David. First, let me update you on our cash position. Cash and cash equivalents totaled $33.2 million as of March 31, 2013, compared to $39.5 million as of December 31, 2012. Cash flows used in our operating activities were $5.9 million for the 3-month period ended March 31, 2013, compared to $8.4 million of cash flows used during the same period in 2012. The decrease in our cash used in operating activities is mainly related to lower disbursement with respect to our R&D activities, as well as to lower accounts payable and income tax settlements. Based on our current expectations, we believe we have sufficient capital resources to fund our planned operation for at least the next 12 months. During 2013, we expect to continue to focus our R&D efforts mainly on our later-stage compound AEZS-108 with the advancement of the Phase III study under the special protocol assessment in endometrial cancer. We currently expect our R&D expenses to total between $21 million and $23 million for the year 2013 as compared to $20.6 million in 2012. Taking into account our Cetrotide transactions, our co-development and profit-sharing agreement with Ergomed as well as the initiation of Phase III trial with AEZS-108 in endometrial cancer, the discontinuance of perifosine Phase III programs and the recent change to our management, we now expect that our overall operating burn in 2013 will be close to $26 million, which is $6 million lower than our original expectation. Now more details about our results of the first quarter ended March 31, 2013. Revenues were $16.6 million for the 3-month period ended March 31, 2013, compared to $9.5 million for the same period in 2012. The increase is largely attributable to comparative higher deliveries of Cetrotide and to the recognition of unamortized deferred revenues related to upfront payments received from our licensee partners in connection with perifosine. This is representing close to $6 million of noncash revenue following the company's decision to discontinue the Phase III trials of perifosine. R&D costs, net of refundable tax credits and grants, were $4.4 million for the 3-month period ended March 31, 2013, compared to $5.6 million for the same period in 2012. The decrease is attributable to lower employee compensation and benefit costs due to continued cost saving measures relating in a lower number of employees. The decrease is also related to comparative lower third-party costs associated with the development of most of the company's products. Net income for the 3-month period ended March 31, 2013, was $1.9 million or $0.07 per basic and diluted share compared to a net loss of $11.5 million or $0.65 per basic and diluted share for the same period in 2012. The significant increase in net income is due largely to the significant increase in licensee -- license fee revenues, which is noncash as mentioned and in net finance income, which is related to the warrant liability reduction. This is also a noncash event, as well as to lower net R&D costs partly compensated by higher SG&A. Thank you for your attention. Now David.

[David Alan Dodd:]

Thank you, Dennis. Now my colleagues and I will answer your questions. I'm therefore turning the call over to the operator for instructions on the question-and-answer period. Thanks.

[Operator:]

[Operator Instructions] Your first question comes from the line of Joe Pantginis from Roth Capital Partners.

[Joseph Pantginis:]

A couple of questions if you don't mind. First, maybe on the 108 program, glad things are going with the Phase III here. Looking forward, David, what kind of recruitment projections are you looking to give? Can you give any today? And what are your plans for further guidance in the future regarding how the study is progressing?

[David Alan Dodd:]

Sure. I'm going to ask Paul Blake to provide you an update. He has all the information, and he'll do it for sure much better than I.

[Paul Blake:]

Thanks for the question. As David mentioned, we are truly waiting any day now to open our sites in Israel, and the first patient, I hope, will come there this month. David mentioned we're trying to have 100 to 120 sites open for the study, and our aim is to have them all open by the end of the year. We think it's going to be a 2-year period to complete recruitment from now, and we're going to keep you updated as that progress turns into reality from time to time.

[Joseph Pantginis:]

And then, let's see. Just, let's switch gears. Let's keep the clinical focus for a second. I guess with the 130 program, a couple of quick questions on that. Any more detail you can provide on what factors need to be addressed regarding your discussions with the FDA in filing the NDA? And then secondly, you did mention additional indications that can broaden the potential market for the diagnostic. Would any of these indications require additional studies? Because I know you mentioned one of them would be part of the original label.

[David Alan Dodd:]

Yes. I'm going to ask -- Nick, would you like to give an update on the FDA? I think any of us could, but you've been in direct contact with them and as far as you'll update, yes.

[Nicholas J. Pelliccione:]

Basically, we've been talking to them on a pre-NDA basis just to iron out some details about completing the package so that when we submit, we have a full and complete package that will be accepted for filing. These are standard kind of details but things that we had to get squared away, and we wanted to make sure we had their full agreement that we were prepared to make the submission. So we now are on that final path to doing that, and we're working towards that submission.

[David Alan Dodd:]

And Paul, would you like to update on additional, both TBI and then the pediatrics, et cetera?

[Paul Blake:]

Yes. As David mentioned, traumatic brain injury is a known cause of adult growth hormone deficiency and other pituitary hormone deficiencies. We did have a number of patients with traumatic brain injury in our Phase III study, and that's why we believe that those patients are encompassed within the original file that will go in. And I think it's one of the decisions we'll take as to whether or not to do some further work in that area to emphasize that or not. We also know that we can probably double the potential market by going into pediatrics as that's something desirable, and that's something that will be very helpful in both North America, Europe and the rest of the world. We've referred to cancer cachexia, and that's a pilot study ongoing, and we hope there the therapeutic use will complement the diagnostic use we're talking about. And cancer cachexia is the first of those therapeutic uses. Cachexia does have other causes, such as chronic congestive heart failure, chronic obstructive pulmonary disease. So I think we have an embarrassment of opportunities with 130. It's a question of resourcing and choosing where to spend our discretionary resources in the future.

[Joseph Pantginis:]

And then maybe a question, I guess, for David or Dennis, maybe just sort of 2 financial questions. I guess maybe a quick question on Cetrotide. How would we look based on your recent licensing arrangement? Do we view the accounting of the product going forward since this is, like you said, about a 36-month transition period? And then second, with regard to your burn, you had mentioned that you're going to be focusing on your later-stage products. Are there any other potential efficiencies that we might be looking towards going forward?

[David Alan Dodd:]

I'll comment first on the transition. I want to clarify. The transition is targeted to be completed by October 1, but the agreement recognizes that there always are some lingering, we call them transition services and all, but in our plan and the way to look at this is that effective October 1, this becomes, then, handled by Merck Serono. And we'll continue to be compensated for whatever services they may require of us. Even from the background and on the quality of the product, they may ask for a little assistance here and there. So I don't want to have you thinking that it's a 36-month transition process. We're focused on having this completed by October 1, and that's also the desire for Merck Serono.

[Joseph Pantginis:]

Got it. Sorry for the misunderstanding.

[David Alan Dodd:]

Yes. No, it's fine. Dennis, want to address the accounting?

[Dennis Turpin:]

No. Regarding the accounting, we are evaluating how to treat this transaction, and you will have a full report of that on the next quarter filings. Our first assessment is obviously starting in October 1. You won't see any more sales and cost of sales related to Cetrotide. However, for the next 2 quarter, we may have also to present sales and cost of sales on a net basis. And as you all know, we are not generating significant cash flow from the manufacturing of Cetrotide, so this would have no impact, really, on the P&L. What is important also to understand is that we are going to obtain an upfront payment. This is going to be paid after the closing, which is expected on October 1 of this year. And in addition to that, other payment that are not disclosed will be made. It's more related to transition of inventory and also equipment. So the goal is really to focus on other activities than the manufacturing of Cetrotide.

[David Alan Dodd:]

And that primary payment is scheduled for fourth quarter.

[Operator:]

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

[Shaukat Khan:]

This is Shaukat, Dr. Shaukat Khan calling in for Jason Kolbert. Can you just talk about, a little about your relationship with Ergomed? How active have they been designing or executing of the trial?

[David Alan Dodd:]

Okay. I'll start off, Dr. Khan, and I'll turn over to Paul Blake. We just kicked off, I think, week before last, 2 weeks ago, then, the program with Ergomed. We've -- there is a, as you might imagine, there is a steering committee that oversees this entire program. Paul Blake will go into details. He chairs that steering committee, and then we'll also have an operations committee, which will be those people from both sides who are working on a day-to-day basis, so to speak, to ensure that everything is moving forward successfully. And we believe the construct of the agreement creates a huge incentive for, obviously, for both sides so as to focus on doing the very best job and getting it done in a timely manner. So Paul, you want to fill in and explain?

[Paul Blake:]

Yes. You asked about the design of the study. Ergomed are not involved in the design at all. We've created that with our co-chairs of the study, one from Europe, one from North America. We've taken the protocol through Parallel Scientific Advice with both the EMA and the FDA, and we've had the pleasure of announcing a Special Protocol Assessment being agreed with the FDA at the end of 2012. So Ergomed's role is not at all involved in the design. It is involved in the execution of the study, and as David just mentioned, we have a steering committee in place. We have an operating committee in place. The very detailed site monitoring will all be done by Ergomed colleagues. In a primary sense, we'll be doing secondary quality control monitoring of them. The statistics and data management will be performed within the Ergomed organization, and again, we'll be checking the quality control of that ourselves. Is that enough detail for you?

[Shaukat Khan:]

Yes. Also, what kind of due diligence did they do before coming on board?

[Paul Blake:]

That's -- well, my simple answer there is very thorough due diligence because they're putting themselves at financial risk as well. We made all the data available to them through a form of electronic data, and they had access to all information. They had some internal staff and some very appropriately qualified external experts looking at all aspects to justify for them that they were making a wise investment.

[Operator:]

Your next question comes from the line of George Zavoico from MLV & Company.

[George B. Zavoico:]

Just following up a little bit on the Ergomed deal. I presume that encompasses only endometrial cancer, and I wonder if the answer to that is yes, whether they have an option or retain an option or maybe this is very informal that they may have the option to come in on the other possible indications for 108.

[David Alan Dodd:]

Paul or Dennis?

[Dennis Turpin:]

Yes. On this -- let's say to start, we are focused only on endometrial cancer, and there are some rules that are not disclosed in case of termination that may apply if ever we decide to no more develop the product, AEZS-108, and Ergomed wants to continue, that can be an option for them. But there's no formal option that was given to Ergomed. We really control the product. Ergomed will invest 30% of the clinical costs. It is expected to be $30 million over 3 years of investments all in all. So $9 million will be invested by Ergomed, $21 million by AEZS. And Ergomed is sharing the risk because if it is not successful, they will lose their investment. And if it is successful, they will get a percentage of net income, which is calculated on the basis of net sales less the direct costs related to the revenue generated by 108 in endometrial cancer indication only. Okay?

[Paul Blake:]

George, you asked another part to your question. Paul speaking. Do they have another opportunity on other indications? Nothing formally agreed. It's an endometrial cancer deal only. But obviously, we anticipate great success with the project. We're very happy to be working with them, so it's always possible to expand if need be. Nothing there at the moment.

[George B. Zavoico:]

Yes. Well, with Retrocero [ph] getting involved like this, it's always very nice to see them actually take a financial position and share some of the risk because I think you would expect them to perform extra carefully and perhaps even provide some extra effort in making sure that this goes as best as it possibly can. And in that regard, Paul, in endometrial cancer and these other indications, is the treatment regimen -- do you think the treatment regimen for 108 to be relatively similar across these indications? Or is that, obviously, one of the things you're going to confirm and find out in these early-stage trials?

[Paul Blake:]

In the endometrial cancer study, we're using the maximum dose that we found to be effective and adequately tolerated in the Phase II study in both endometrial cancer and in ovarian cancer, and that was the same dose in both studies. You may recall some data coming out from Dr. Pinski's unit in USC in men with castration and taxane-resistant prostate cancer, and there, the maximum tolerated dose is a little low. It's 210 milligrams per meter square, and we think that's because of the frailty, the age and the extent of prior chemotherapy. So we have been doing dose finding in each of the indications, and it's not always the same so far.

[George B. Zavoico:]

And finally, a question on AEZS-120 in Denmark. It sounded like it's only going to happen in Denmark and an IND in the U.S. Would that be the same trial? And how many patients are you looking for? In other words, would the Denmark trial be the same as the IND that you're submitting in the U.S.?

[Paul Blake:]

The Danish trial -- the Danish site was picked because there's an unusual combination there of prostate cancer expertise coupled with a very strong immunology unit. And obviously, immunological measurements are an important aspect of this. That first trial is looking to have up to 16 patients with a resistant disease. We'll go through the pre-IND meeting and the IND process and work out with our designated experts in the U.S. and the FDA whether we should do something similar or something different.

[George B. Zavoico:]

Okay. So the Danish site, do they have -- can you get any grants or any nondilutive funding to help with that trial?

[Paul Blake:]

I think you may recall that some of it, the work for 120 has already come with German government support, but this is a company-sponsored Phase I study.

[Operator:]

[Operator Instructions] Your next question comes from the line of Philippa Flint from Lumberton.

[Philippa Flint:]

Just to follow-on, a couple of questions on 130, are you still on track to file the NDA in Q2? And can you talk a little bit about how you intend to commercialize it?

[David Alan Dodd:]

Okay. I -- we are targeted and working to file the NDA, submit the NDA in Q2. And regarding commercialization, we're evaluating that right now. The resources required to commercialize this product successfully, et cetera, are not extensive, and it certainly could be a very positive important step for us to going forward to establish ourselves and again, to brand the company as a commercial-oriented company and not just a development company, so we are very seriously considering the commercialization by ourselves with this product and all. We have looked at alternatives and continue to consider those where we would work with someone else, everything from a semi-active to a passive type mode and all but increasingly, I think, our judgment is that the opportunity to commercialize this ourselves makes more sense. And let me just add, especially when one looks at the additional expansion opportunities within the current -- within the initial indication, I should say, as well as the potential follow-on indication of pediatrics, I mean, it would just be a good opportunity to begin to build our brand as a commercial-operating entity with that type of opportunity.

[Philippa Flint:]

Okay. And moving on to 108, a question for Dennis. For Ergomed's proportion of the clinical trial cost, will those be taken as they occur, so the 30% is as your costs are incurred there, billed 30-70 as they come in?

[Dennis Turpin:]

Yes. The way it works is that for our -- for $100 of R&D costs, we will pay 70% and they will pay 30%.

[Philippa Flint:]

Okay. And so can you talk a little bit about the -- I mean, this is a long study, 2 years, you mentioned, for recruitment. And given your forecasts, R&D burn and your current cash position, can you talk a little bit about the longer term, how you intend to finish the study -- and where you're going to find the funds to do so?

[Dennis Turpin:]

We're not commenting on the timing for financing, Philippa.

[Operator:]

There are no further questions at this time. I will turn the call back over to the presenters.

[David Alan Dodd:]

All right. Thank you. Thank you, everyone. Again, this is David Dodd. I look forward to and we all look forward to keeping you updated on the progress of our company, as we continue to develop it and as we continue to move forward with success and with some continued challenges and all. But please stay tuned, and we look forward to answering your questions at the next call. Thank you.

[Operator:]

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