Earnings Transcript for AEZS - Q2 Fiscal Year 2017

Executives: Genevieve Lemaire - Vice President, Finance and Chief Accounting Officer Michael Ward - Chief Executive Officer Richard Sachse - Senior Vice President, Chief Medical Officer and Chief Scientific Officer Jude Dinges - Senior Vice President and Chief Commercial Officer

Analysts: Gabrielle Zhou - Maxim Group Swayampakula Ramakanth - H.C. Wainwright & Co.

Operator: Greetings and welcome to the Aeterna Zentaris Reports Second Quarter 2017 Financial and Operating Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Genevieve Lemaire. Thank you, Ms. Lemaire. You may now begin.

Genevieve Lemaire: Yeah, thank you. Good morning and welcome, everyone. I'm Genevieve Lemaire, Vice President, Finance, and Chief Accounting Officer of Aeterna Zentaris and the leader of today's call. With me are Michael Ward, Chief Executive Officer, Dr. Richard Sachse, Senior Vice President, Chief Medical Officer and Chief Scientific Officer; and Mr. Jude Dinges, Senior Vice President and Chief Commercial Officer. During this call, we will be making forward-looking statements regarding future events and the performance of Aeterna Zentaris. The forward-looking statements are subject to risks and uncertainties that could cause actual events and results to differ materially from the forward-looking statements. 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, August 11, 2017 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 a securities regulatory authority. However, we may choose to update the statements, if we do so, we will disseminate the updates to the investing public. And it is now my pleasure to introduce the new Chief Executive Officer of Aeterna Zentaris, Michael Ward.

Michael Ward: Thank you, Genevieve. Good morning and thank you for joining us. I’m glad to be with you today and now to be part of this organization, which we hope will be launching its first product in early 2018. In case you missed our recent news about Macrilen, we announced on June 30 that we resubmitted a New Drug Application or NDA to the U.S. Food and Drug Administration seeking approval of Macrilen for the evaluation of growth hormone deficiency in adults or AGHD. On July 18, we announced that the company’s New Drug Application seeking approval of Macrilen has been accepted as a complete response to the FDA’s November 2014 CR Letter and that the FDA granted a PDUFA date of December 30, 2017. We are now working closely with the FDA. As part of the review process, the FDA will be visiting one of our clinical sites as well as our Frankfurt operations. Based on market research, we expect that approximately 40,000 promontory tests or AGHD could be conducted each year after the introduction of Macrilen following FDA approval. From a patient development standpoint, there are approximately 2,000 endocrinologists conducting the AGHD test, in 150 facility [ph] centers, 200 to 300 large hospitals and community based clinics. Additional potential market expansion opportunities exist in traumatic brain injury conditions. However, I will reiterate that our focus upon commercialization will be on the current target. Keep in mind that the current AGHD stimulatory test including the gold-standard insulin tolerance test and glucagon stimulation tests are injectable, takes three to five hours to complete, are associated with potentially adverse effects and offer questionable effectiveness repeatability. Also as medical producers, their administration varies from position to position with these stimulatory agents and test procedures that being subject to FDA approval regulation or oversight. We believe that a significant commercial opportunity exist to clearly differentiate Macrilen from these existing stimulatory test procedures resulting in a value proposition that supports establishing Macrilen as the new preferred standard. On a separate note, we also announced the Board of Directors, who are in the strategic review committee to create independent oversight relating to potential strategic alternatives to maximize potential future growth and stakeholder value in the company. The strategic review committee has engaged a consulting firm and a financial advisor to assist in its efforts, which are at a preliminary level. Now, switching to cost saving initiatives. Following the negative results of ZoptEC, we have been focusing on reducing the size of the company, while ensuring we keep the right team in place to commercialize Macrilen. We successfully reached an agreement with our Work Council in Germany and the plan is expected to result in the termination of approximately 45 employees in our German operations. Employees’ departures are expected to be completed over a period of approximately 18 months. The total of the restructuring program is expected to be approximately $2 million, most of the restructuring costs are expected to be paid in the financial year ending December 31, 2018. We also expect annual savings of at least $2.5 million following the full implementation of the plan. Let me briefly comment on our financial position. We believe that our current cash position is sufficient to fund operations and for the expected approval of Macrilen at year-end. We ended the quarter with approximately $13.9 million of unrestricted cash and cash equivalent, which is indicative of an average monthly use of cash in operations of $2.1 million during the first quarters of the year representing a year-over-year reduction of more than 15% in monthly use of cash in operations. Our current expectation is that our monthly use of cash and operations during the remainder of 2017 will be further reduced to approximately $1.9 million per month. With regards to financing activity, we still have an ATM program available. We will continue to evaluate financing options available to us in order to ensure that we are in a position to commercialize the product and have sufficient resource until the company becomes cash positive. During the third quarter of 2017 through August 12, we raised an additional $2.6 million proceeds using our ATM program. Now I will ask Genevieve Lemaire, our Vice President, Finance and Chief Accounting Officer to provide more information about our second quarter financial results.

Genevieve Lemaire: Thank you, Michael, and again good morning everyone. Most of what I will be covering has been presented in more detail in our consolidated interim financial statement and MD&A for the second quarter, which were filed yesterday. From an operating expense standpoint, our main activities during the second included efforts associated with the preparation of our ND&A as well as to a lesser extent with our commercial operation and general and administrative activities. Following the negative results for ZoptEC, we were also focusing on planning the restructuring program of the company while continuing to prepare for the commercialization of Macrilen. Total operating expenses amounted to approximately $6.9 million for the quarter ended June 30, 2017, representing a 5% compared to the same period in 2016. The decrease was mainly attributable to lower selling costs. Our total R&D costs in the quarter were approximately $3.6 million as compared to approximately $3.7 million in the second quarter of 2016. Third-party costs attributable to ZoptEC increased during the three months ended June 30, 2017, as compared to the same period of 2016, which is mainly due to the fact that related commitments to close out the study and related activities were recognized in full following the negative ZoptEC top line results that were announced on May 1, 2017. Third-party costs attributable to Macrilen also decreased during the three months ended June 30, 2017 as compared to the same period in 2016. This is mainly due to the fact that we completed the Phase 3 clinical trial at the end of 2016. The cost incurred in the second quarter of 2017 related to the preparation of the NDA filing, which was submitted on June 30, 2017. Excluding the impact of foreign exchange rate fluctuation, we still expect that we will incur over R&D costs of between $10 million and $12 million for the year ending December 31, 2017. This includes an amount of approximately $1.6 million to be recorded in connection with our restructuring programs as was discussed earlier. Most of the restructuring costs are expected to be paid in the financial year ending December 31, 2018. G&A expenses were approximately $1.9 million during the quarter of both 2016 and 2017. This was in line with our expectation. Excluding the impact of foreign exchange rate fluctuation and the recording of transaction costs related to potential financing activities, which are not currently known or estimable, we still expect that G&A expenses will range between $7 million and $8 million in 2017. This includes an amount of approximately $200,000 to be recorded in connection with our restructuring program discussed earlier. Selling expenses representing mainly the cost of our sales force and sales management staff were $1.4 million for the three month ended June 30, 2017, as compared to $1.7 million for the same period in 2016. The decrease in selling expenses is explained by the reduction in a number of sales representatives from 20 to 13 in February 2017. In July of this year, we further reduced the number of sales representatives. Based on currently available information, we still expect selling expenses to range between $6 million and $7 million in 2017. This includes an amount of approximately $200,000 to be recorded in connection with our restructuring program discussed earlier. We reported net finance income of $4.1 million in the second quarter of 2017 as compared to approximately $0.2 million during the second quarter of 2016. The increase in finance income is mainly attributable to the change in fair value recorded in connection with out warrant liability. Such change in fair value results from the periodic mark-to-market revaluation, via the application of option pricing models, of outstanding share purchase warrants. The variance in the closing price of our common share has direct impact on the change in fair value of warrant liability. We used approximately $5.9 million of cash in operation during the three months ended June 30, 2017 as compared to $6.3 million for the same period in 2016. This decrease in cash used in operating activities of about 7% for the three months ended June 30, 2017 as compared to the same period in 2016 was mainly due to lower operating expenses. During the quarter, financing activities in the form of net proceeds received from the issuance of common share under our ATM programs provided $1.9 million as compared to $44,000 for the same period in 2016. We still expect net cash used in operating activities to range from $22 million to $24 million for the year ending December 31, 2017. The timing of the termination notices that will given to employees as part of the restructuring program will have an impact on the net cash used in operating activities. Management’s intention is to postpone most of the severance payments into fiscal year 2018. This guidance may vary significantly in future periods and it can also be significantly impacted by ongoing business development initiatives. We ended the quarter with unrestricted cash and cash equivalents of approximately $13.9 million. Note that we also raised approximately $2.6 million following the end of the quarter through the ATM program. And now, I will turn the call back over to Michael.

Michael Ward: Thank you, Genevieve. My colleagues and I will now answer to questions. I’m therefore turning the call over to the operator for instructions on the question-and-answer period.

Operator: Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Gabrielle Zhou of Maxim Group. Please proceed with your question.

Gabrielle Zhou: Hi, good morning guys. Thank you for taking my questions. So you mentioned that you’re planning for a commercial launch next year. So can you give us more color and next step for Macrilen? Thank you.

Michael Ward: Thank you, Gabrielle. Just to restate your question, are you enquiring as to the commercialization efforts that we intend for Macrilen upon obtaining FDA approval?

Gabrielle Zhou: Yes.

Michael Ward: Okay. Well, I think I would like to turn this over to Jude who has been leading our team in these efforts. Jude? Well, until Jude gets on, I – this is Michael Ward, we have been conducting weekly meetings between our operations in the Frankfurt and Charleston. We have signed up third party distributors. We have engaged consultants to establish the market research for Macrilen and we have started working for establishing our J code, which would be I think due on January 04 of 2018.

Jude Dinges: Hello?

Michael Ward: Thank you, Jude.

Jude Dinges: I was not unmuted, so sorry – they did not unmute me. So I apologize. Any way - and they didn’t tell me so that’s odd. So, yes, we have a very aggressive plan. Right now, we're focused on two main areas of prepping for commercialization. One is on trade distribution reimbursement access – access and reimbursement, managed care organizations and the like. We have a very strong company helping us with that – all of that activity. And then on the traditional marketing side, we are actively engaged in many areas of development around value proposition of the brand, preparing the market, preparing our - targeting our infrastructure needs et cetera. So we are very active in preparing and our plan is to launch within two months of approval. So we hope to launch around February with the launch meeting and then after that we’ll out selling. So lot of activities going on. We do know where the market, we know pretty much every physician in U.S. that orders these tests and treats these patients right now. And so we are mapping all of that out. The good news is, the value proposition for Macrilen is strong [indiscernible] and it’s just got a lot of features to it that make it a very attractive product.

Gabrielle Zhou: Okay. Thank you, Jude.

Jude Dinges: Yes.

Operator: Thank you. Our next question comes from the line of Swayampakula Ramakanth of H.C. Wainwright & Co. Please proceed with your question.

Swayampakula Ramakanth: Thank you. This is RK from H.C. Wainwright. Couple of quick questions. On the CRL submission, you said that the FDA is planning to start doing some QA work at one of your places. Does the FDA also intend to hold an advisory committee meeting again? I know they held one before the initial application was sent in. I’m not sure would they need to do one more before they approve this? Or because it's a CRL, they will not?

Genevieve Lemaire: Is it possible to unmute Richard?

Operator: Yes, Richard’s line is open.

Genevieve Lemaire: Great.

Richard Sachse: Okay. Thanks, RK for this question. The FDA is currently thoroughly reviewing our submission and as you are well aware, it's standard practice that they also do site inspections of the clinical site, sometimes of the CRL, sometimes of manufacturers and sometimes of the sponsors. So in this case, they already announced a site inspection of one of our clinical sites and they announced a site inspection of our office in Frankfurt as a sponsor inspection. We do not get to know about additional plans. They also visit additional sites, but they haven't announced it yet. With regard to an advisory committee, there was no advisory committee last time. In contrast, FDA explicitly told that they do not plan to have an advisory committee last time and we do not have any indication that they would have an advisory committee this time.

Swayampakula Ramakanth: Okay. And the regarding the commercial plan, as part of your managing the expense lines, there were few people, few sales personnel that has reduced this quarter. Is that impacting anyway for the commercialization of those people that independent from what you’re trying to do with Macrilen?

Michael Ward: Yes. We – our sales force right now are calling on profile at the end – in their areas. We have continually looked at unproductive areas where sales were not holding up for the two complimented products, and have chosen to downsize those but that has not affected in any way our ability to prepare because we now have the entire market profile. So when we get closer to launch, we will know how big the sales force we need and we'll be able to hire and deploy accordingly.

Swayampakula Ramakanth: Okay. Thank you. And Michael, this is a question for you. Regarding the strategic review committee that has been set up, just trying to understand what are the marching orders for this committee? Is it in terms of trying to understand how to maximize the commercialization and the value proposition for Macrilen? Or is to add products to the bag or is it completely to exit the business by divesting Macrilen once you get approval?

Michael Ward: Thank you, RK. The strategic committee has actually engaged two firms. The first one is to validate the commercial potential of Macrilen to really do a deep dive to supplement the efforts that Jude and his team have made on the market for more of an objective standpoint from the Board’s perspective. And then they’ve also are going to engage a company to really look at maximizing the value of the company including raising capital, strategic alternatives, potentially sale the assets et cetera. So they are looking at all option for the company. They are very encouraged by what they have seen for Macrilen and what the market research is showing, but at this point they are not foreclosing any options.

Swayampakula Ramakanth: Thank you. Thank you gentlemen.

Michael Ward: Thank you.

Operator: [Operator Instructions] There are no further questions over the audio portion of the conference. I would like to turn the conference back over to the management for closing remarks.

Michael Ward: Thank you. And thank you for your continued and supportive interest from the progress of AEterna Zentaris. I look forward to updating you when we discuss third quarter 2017 results. Again, thank you.

Operator: This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.