Earnings Transcript for AEZS - Q2 Fiscal Year 2018

Executives: Michael Ward - CEO James Clavijo - CFO Nicola Ammer - Chief Medical Officer Brian Garrison - SVP, Global Commercial Operations

Analysts: Ramakanth Swayampakula - H.C. Wainwright

Operator: Greetings and welcome to Aeterna Zentaris Reports Second Quarter 2018 Financial and Operating Results. 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, Michael Ward, Chief Executive Officer for Aeterna Zentaris. Thank you, Mr. Ward, you may begin.

Michael Ward: Good morning and welcome everyone. My name is Michael Ward, President and CEO of Aeterna Zentaris and with me today is James Clavijo, our Chief Financial Officer; Dr. Nicola Ammer, Chief Medical Officer; and Brian Garrison, Senior Vice President of Global Commercial Operations. 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 Securities and Exchange Commission and Canadian Securities Regulatory Authorities. These forward-looking statements represent the Company’s judgment as of today, Friday, August 10, 2018 and we assume no obligation to update any of these forward-looking statements unless we are required to do so by applicable law or by a securities regulatory authority. We appreciate you’re joining this call. My comments today will center on the Company’s continuing positive transformation in the second quarter 2018. I would like to start with an update on macimorelin marketed under the trade name Macrilen, in the United States used in the diagnoses of patients with adult growth hormone deficiency. As some of you may recall, Aeterna Zentaris entered into a license agreement on January 17 of this year with Strongbridge Biopharma for among other things commercialization of Macrilen in the United States and Canada. I am pleased to report that Strongbridge officially launched Macrilen in the United States on July 23, 2018 as announced on the Strongbridge earnings call on August 8. We congratulate Strongbridge on the launch of Macrilen. We continue to remain focused on solid execution of contractual obligations with Strongbridge. We held our first joint steering committee with Strongbridge in April of this year and we'll have our second joint steering committee meeting next week we continue our strong path forward led by Dr. Nicola Ammer for the next key macimorelin development phase collaborating with Strongbridge to begin the pediatric investigation plan. Additionally we are actively pursuing out licensing in other commercial partners outside the United States and Canada to make macimorelin assessable to endocrinologists in adult patients worldwide affecting the growth hormone deficiency. In that regard we have submitted our responses on July 20, to the European Medicines Agency as part of the European approval process for macimorelin and could receive later this year. Our strategic focus for the immediate future is to, one complete the EU approval and registration activities for macimorelin. Two, secure ex-U.S. license agreements for macimorelin and three begin the pediatric improvement plan for our pediatric indication of Macrilen. We also ended the second quarter 2018 at a solid cash position owing to the upfront license payment from Strongbridge. I will now turn the discussion over to James, who will provide more information about our second quarter, 2018 fiscal year financial results.

James Clavijo: Thank you, Michael. Good morning everyone and thank you for joining us. Most of what I'll be covering this morning has been presented in more detail in our interim consolidated financial statements in our management's discussion and analysis of operations for the second quarter ended June 30, 2018 which we have filed yesterday. Revenues for the three months ended June 30, 2018 were $0.2 million as compared to $0.2 million in the same period in 2017. Revenue for the six months ended June 30, 2018 were $24.8 million as compared to $0.5 million for the same period in 2017. Revenues for the three-month period ended were similar however for the six-month period ended June 30, revenues were higher primarily due to the recording of the upfront payment of $24 million received from Strongbridge. Operating expenses for the three months ended June 30, 2018 totaled $3.5 million compared to $6.9 in 2017. Operating expenses for the six months ended June 30, 2018 totaled 8.7 million compared to $12.8 million in 2017. On a comparative basis, 2018 continues to show a sharp decrease in our R&D expenditures. This is attributed to reduction in the expenses related to clinical trials. R&D expenses for the three months ended June 30, 2018 were $1 million compared to $3.6 million for the same period in 2017 and for the six months ended June 30, 2018 R&D expenses were $1.8 million compared to six [ph]. Also affecting our operating expenses are general and administrative expenses for the three months ended June 30, 2018. General and administrative expenses were $2 million compared with $1.9 million in 2017. For the six months ended June 30, 2018 general and administrative expenses were $4.8 million compared to $3.8 million. Expenses were similar from the prior period other than an increase in expenses related to legal matters. In addition, selling expenses for the three months ended June 30, 2018 were $0.5 million compared to $1.4 million for the same period in 2017. For the six months ended June 30, 2018 selling expenses were $2.1 million comparatively low. This decrease in expenses was primarily related to elimination of sales employee costs and third-party expenses. Affecting our year-to-date income for six months ended June 30, 2018 was a $1.7 million gain for the change in fair value we recorded in connection with our warrant liability. Comparatively, in 2017 a gain of $5.3 million was recognized. During the quarter ended June 2018 we recorded income tax recovery of $0.2 million. For the six months ended June 30, 2018 income taxes were $6.6 million. As reported in the first quarter of this year this expense was higher than expected due to reported deferred tax asset and income tax recovery taken in 2017 for $3.5 million. We continue to expect that income tax liability to decrease for the rest of 2018 year. Net loss for the three months ended June 30, 2018 was $2.6 million compared to $2.6 million for the same period in 2017. Net income for the six months ended June 30, 2018 was $11.8 million compared to a net loss of $6.7 million for 2017. Cash from operations used approximately $4.8 million of cash during the three months ended June 30, 2018 that's compared to $5.9 million for the same period in 2017. Cash from operations provided for the six months ended June 30, 2018 were $11.9 million compared to cash used from operations of $12.9 million. This increase in cash by operating activities was a result of the upfront cash payment received from Strongbridge. As of June 30, 2018 our unrestricted cash reserves were $19.9 million. Thank you.

Michael Ward: Thank you, James. We will open the conference call for questions. I am therefore turning the discussion over to the operator for instructions on the question-and-answer period.

Operator: Thank you. [Operator Instructions] Our first question is from the line of RK Swayampakula Ramakanth with H.C. Wainwright. Please go ahead with our questions.

Ramakanth Swayampakula: Thank you. Good morning, gentlemen.

Michael Ward: We are okay.

James Clavijo: Good morning, RK.

Ramakanth Swayampakula: So it's great that finally Macrilen is being commercialized, I think that's great news. So from your end what is it – can you just kind of remind us the economics of this transaction going forward in the sense of what sort of revenue lines should we be thinking about, would you get, I'm just trying to remember is there a transfer price, is there royalties, how does it work and when will we start seeing those inflows from Strongbridge?

Michael Ward: Thank you, RK, I could briefly summarize our transaction with Strongbridge. First of all, the royalties are 15% net sales on the first $75 million and above $75 million it pivots to 18%. There is a milestone payment when net revenues or annual net revenues are at $25 million for the year and then it would bounce up to I think $10 million to $50 million, $20 million and $100 million. And then once a pediatric indication is approved for FDA label there is a $5 million regulatory payment. Now the milestone payments on revenues are one time payments, just to be clear. So totally and we also had a bridging area at $500 million of annual net sales which would pay us a $100 million milestone. So, overall it is a $174 million of milestone payments and additional $5 million for the ped approval and then the 15%, 18% royalty payment. So and, frankly, Strongbridge just launched two weeks ago, so we don't have any lens in to look what is, how they’re trending. I think our first royalty payment change is probably the end of November under this agreement, so it's sixty days after I think each quarter, so that’s how the…

Ramakanth Swayampakula: So it's 60 days after each quarter, okay that's the timeline.

Michael Ward: Yes.

Ramakanth Swayampakula: Okay. And in terms of the pediatric indication I believe this has been going on a for a bit now, so what's the progress there, is it still in the planning stage or is it close to getting started, could you kind of give us a feel for the timeline on that indication?

Michael Ward: Sure, and I'll have Dr. Nicola Ammer address that since she is heading up the joint approval process that we're collaborating with Strongbridge and I should point out as well, as part of the economics of the license agreement. Strongbridge is funding 70% of the cost for the pediatric approval process, so Dr. Ammer, if you could respond to RK. Thank you.

Nicola Ammer: Yes, thank you. This is Nicola Ammer speaking. Thank you, Michael and thank you for this question. So we are currently in the early start up phase of our pediatric investigation plan of our development program including the identification of qualified study sites, process pediatric study and also in preparation of related clinical trial application submissions. Related to the study timeline, so they are currently still undervalue and not finally defined. Thank you.

Ramakanth Swayampakula: Oaky, so how large of a study would this be, just so that we can, kind of get a feel for like how long it would take for the study to get done?

Nicola Ammer: So, this first study will be a dose finding study and it will include all together 24 subjects, eight subjects in each dosing group of macimorelin.

Ramakanth Swayampakula: Okay, all right. And then that will be followed up by dose cohort expansion or you will have to go back and start another late-stage study with a decided dose?

Nicola Ammer: So as agreed within the pip this dose finding study is investigating on the right dose which then will be taken in the following efficacy or tests validation study and tests validation study is then supposed to include 50 subjects.

Ramakanth Swayampakula: Okay, perfect. Thank you for that. And then in terms of the European application, you said that there are some questions and that those have been answered. Is this the day 100 question that we are talking about or is this complete, is there something different?

Michael Ward: This was the RK, this was the D120 questions.

Ramakanth Swayampakula: Okay.

Michael Ward: So they were submitted July 20.

Ramakanth Swayampakula: Okay, all right. And so the clock has started again and so, we okay great. And then in terms of, before or there - in terms of ex-U.S licensing agreements, where are we on that, in any color at all because you said that's one of your mandates for this year?

Michael Ward: So, perhaps I'll turn those over to Brain as he, myself, and one of our, or couple of our professionals in Frankfurt are kind of dividing up the globe for those discussions, but Brian would you provide a brief summary?

Brian Garrison: Yes, sure Michael. Hi good morning RK. Yes, we've gotten quite a bit of interest globally. Actually have a couple of term sheets that we're reviewing currently, but as you know globally we're trying to be strategic on how we sequence potential licensing activities for price and several other factors. So but yes, we're actively in communication with a lot of different perspective licensees. As you may have picked up, our Phase 3 clinical data was just published this week in the General and Clinical Endocrinology Metabolism by Dr. Garcia, and so that’s increased some awareness out there and so that’s also helping spur some further interest in the kind of ex-U.S, ex-Canada licensing arena.

Ramakanth Swayampakula: Very good. So is there any R&D work at all, because there were some things in the pipeline at one point, is all focused now just on Macrilen and trying to commercialize Macrilen to the fullest extent?

Michael Ward: RK, the Macrilen is right now our dealing compound in which we have R&D expenses.

Ramakanth Swayampakula: Okay, perfect.

Michael Ward: Yes.

Ramakanth Swayampakula: All right, thank you very much. Thanks for taking all my questions.

Michael Ward: Thank you.

Operator: Thank you. I’ll turn the floor back out to Mr. Ward for any closing remarks.

Michael Ward: Well, thank you everyone for your continued support and interest in Aeterna Zentaris. I really look forward to updating you again when we discuss third quarter 2018 results. Thank you.

Operator: Thank you for your participation. Today’s conference has concluded and you may now disconnect your lines at this time.