Earnings Transcript for AEZS - Q3 Fiscal Year 2018

Executives: Michael Ward - President and Chief Executive Officer Leslie Auld - Senior Vice President and Chief Financial Officer Brian Garrison - Senior Vice President Corporate Development Nicola Ammer - Vice President and Chief Medical Officer

Analysts: Ramakanth Swayampakula - H.C. Wainwright

Operator: Greetings and welcome to the Aeterna Zentaris Report’s Third 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: Thank you, Jessie. Good morning and welcome everyone. This is Michael Ward, President and CEO of Aeterna Zentaris and with me today is Leslie Auld, Senior Vice President and Chief Financial Officer. Brian Garrison, Senior Vice President Corporate Development and Dr. Nicola Ammer, Vice President and Chief Medical Officer. During this call, we will be making forward-looking statements regarding future events and the performance of the 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 further described in Company's press releases and reports filed with the SEC and Canadian securities regulatory authorities. These Forward-Looking Statements represent the Company's judgment as of today, Wednesday, November 7, 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 joining us this call. My comments today will center around the Company's performance in the third quarter 2018.As you know Aeterna Zentaris entered into a licenses and assignment agreement for the United States and Canada on January 17th of this year with Strongbridge Biopharma to carry out commercialization of Macrilen. The first and only FDA-approved oral ghrelin receptor agonist administrated and diagnoses of patients with adult growth hormone deficiency. Strongbridge officially launched Macrilen in the United States on July 23, 2018. Last week, Strongbridge reported net sales for Macrilen of 1.1 million for the third quarter of 2018. As part of the third quarter 2018 results and corporate update Strongbridge announced that it entered into an agreement with Novo Nordisk to sell the U.S. and Canadian rights to Macrilen for an upfront payment of the 145 million plus royalties on net sales, with an expected closing date of early as mid December of this year is subject to certain contingencies. This agreement between Strongbridge and Novo Nordisk further validates the value of Macrilen to HGAV patients and the endocrinology community. Our strategic focus has been and will continue to be aggressively pursuing out licensing and other commercial partners outside the United States and Canada to make macimorelin accessible to endocrinologist in adult patients worldwide that - growth hormone deficiency. As disclosed in our press release, the [indiscernible] and tariffs submitted its day 131 CHMP response to the European Medicines Agency on October 16, 2018. We anticipate a decision from the European Commission on this submission in the first quarter of 2019. Additionally, Leslie Auld joined us on September 25, 2018, as Senior Vice President and Chief Financial Officer. Mr. Auld has over 25 years of accounting, finance in the pharmaceutical industry experience with increasingly senior rolls at various leading consulting firms and biopharmaceutical companies. Strongbridge successfully launching Macrilen this summer, we are excited to have been able to attract someone who has accomplished and experienced as Leslie to our executive team. Finally, we ended first quarter 2018 and a solid cash position and our first royalty payment from Strongbridge based on its 1.1 million in net sales for the shorten Q3 sales quarter will be due later this month. I will now turn the discussion over to Leslie, who will provide more information about our third quarter 2018 financial results.

Leslie Auld: Thank you, Michael. Good morning everyone and thank you for joining us. Most of what I will be covering this morning has been presented in more detail and in our interim consolidated financial statements and in our management’s discussion and analysis of operations for the third quarter ended September 30, 2018 which were filed yesterday. Revenue for the three months ended September 30, 2018 were $0.7 million as compared $0.2 million in the same period in 2017. Revenue for the nine months ended September 30, 2018 were $25.5 million as compared to $0.7 million for the same period in 2017. Revenue for the three month period ended, September 30th was $0.7 million in inventory invoice and paid by Strongbridge and for the nine months period ended September 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 September 30, 2018 totaled $3.2 million compared to $7.4 million in 2017. Operating expenses for the nine months ended September 30, 2018 total $11.9 million compared to $20.2 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 September 30, 2018 were $0.4 million compared to $4.1 million for the same period in 2017. For the nine months ended September 30, 2018 R&D expenses were $2.2 million compared to $10.2 million. Also affecting operating expenses are general and administrative expenses for the three months ended September 30, 2018 were $2.4 million compared to $1.7 million in 2017. For the nine months ended September 30, 2018 general and administrative expenses were $7.2 million compared to $5.4 million. Expenses were similar from the prior period other than an increase in expenses related to deal matters. In addition, selling expense for the three months ended September 30, 2018 were $0.4 million compared to $1.7 million for the same period in 2017. For the nine months ended September 30, 2018 selling expenses were $2.5 million compared to $4.6 million. This decrease in expenses is primarily related to elimination of sales, employee costs and third-party expenses. Affecting our year-to-date income for the nine months ended September 30, 2018 was $1.8 million gain for the change in fair value recorded in connection with our warrant liability compared to in 2017 again $2.7 million was recognized. During the quarter ended September 30, 2017, we recorded income tax recovery of $0.5 million for the nine months ended September 30, 2018 income taxes were $6.1 million. As we reported in the first quarter of this quarter this expense was higher than expected due to a recorded deferred tax assets and income tax recovery taken in 2017 for $3.5 million. We continue to expect the income tax liability to decrease for the rest of the 2018 year. Net loss for the three months ended September 30, 2018 was $2.5 million compared to $9.6 million for the same period in 2017. Net income for the nine months ended September 30 was $9.3 million compared to net loss of $16.3 million for 2017. Cash from operations was approximately $2.4 million of cash during the three months ended September 30 as compared to $5.5 million for the same period in 2017. Cash from operations provided for the nine months ended September 30th were $9.5 million compared to cash used from operations of $18.4 million. This increase in cash provided by operations was the result of the upfront cash payment received from the Strongbridge licensing agreement. As of September 30th our unrestricted cash reserves were $16.8 million. Thank you for your attention. I will now turn the discussion back to Michael.

Michael Ward: Thank you, Leslie. We will open the conference for questions. I’m turning the discussion over to Jessie for instructions on the question and answer period.

Operator: [Operator Instructions] Thank you. Our first question is coming from the line of Ramakanth Swayampakula with H.C. Wainwright. Please proceed with your question.

Ramakanth Swayampakula: Good morning Michael and thanks for the update on the quarter. A couple of quick questions, it’s good to know that Strongbridge has made $1.1 million on the revenues for Macrilen. And you said you are potentially going get other things at the end of this month. So can you give us a little bit more clarity as to, when and what sort of - can you remind us what sort of royalty rates that we should expect from the start. And going forward now that no one noticed we - get involved in managing the operations from here onwards. When exactly would that happen, how will the transition happen and what will be changes in terms of your relationship with Strongbridge now getting in the hands of Novo Nordisk.

Michael Ward: Okay. Well to answer your first question R.K, the royalty payments under the license and assignment agreement royalties, our net sales are due 60 days after the end of each quarter. So I would expect November 29th and 30th we would receive the first check with the royalty calculation. And that would continue throughout the entire process, we get 15% up to $75 million of net sales and then anything above $75 million net annual sales is paid at 18%. So we are looking I think for a check from Strongbridge for about a 165,000 of its net sales of $1.1 million. On the transition issue, we are aware that Strongbridge and Novo Nordic had some closing conditions and from what I can tell from its 8-K filed a few days ago by Strongbridge. The deal can close I think as early as the first week of December and then I think it can close somewhere in early 2019. There is some contingencies in there. I think there was a HSR filing involved. Moving forward, we continue to look at Strongbridge as our licensee and once that deal with Novo Nordisk would close we would work with them as licensee. We have not met with Novo Nordisk at this point, but we don't see the transaction affecting our rights under the license agreement. So we look forward to working closely with our licensing partner and really pleased the value of Macrilen has been recognized so much in the marketplace.

Ramakanth Swayampakula: And talking about value recognition in the marketplace. I’m not sure what the terms where between you and Strongbridge then there is a changes of hands with the product and then getting close to $145 million upfront. Would you be able to get anything from that upfront, is there anything, any costs in your agreement on that. And additionally, now that Novo Nordisk is picking up the commercialization of macro and how do you see years of profiteering from this and also know that you potentially particularly European approval, which is probably Novo Nordisk key geography, is there any expectation of advancing that relationship into Europe as well.

Michael Ward: Well to answer your questions the licensing assignment agreements we executable with Strongbridge did not have the specific trigger on any share if Strongbridge were to assign or sell its rights to Macrilen. Our lawyers are looking at that but as I went through the agreement, earlier this week, I did not see a specific trigger in there. What I do see the value paid by the Novo Nordisk to Strongbridge, we will likely raise the value of Macrilen’s licensing opportunities for the rest of the world, we received several inbound expressions of interest recently after the deal was announced. And the Company has not met with Novo Nordisk get this point, obviously we are trying to because the momentum that has been generated by Strongbridge in the commercialization of Macrilen, I think is something that can be enhanced by the company as large and successful as Novo Nordisk. What we did see in the 8-K and the filings by Strongbridge was that the sales force was hired by Strongbridge and put in place to sell Macrilen and will remain intact. I don't know if they intend to enhance that, but that was a very favorable news to us as a licensor, but the momentum will still be there if not enhanced by this transaction. Hope that answer your questions as best I can.

Ramakanth Swayampakula: Yes. Talking about the Europe and Thailand, was it day 131 or was it day 181, because in the press release actually day 181 and then in your opening remarks you said day 131, I’m not sure which one it is. What do you think is the process in the sense how long do you think this process will continue before CHMP comes to a decision. I’m just trying to understand where in the whole process are you at, because CHMP can be a long process depending on the situation.

Michael Ward: R.K will turn that question over to Dr. Ammer who is our Chief Medical Officer and who has been working with this submissions with the EMA. Nicole would you tend to respond on this.

Nicola Ammer: Yes, hello. Thank you Michael and thank you for this question. As Michael already stated and also has mentioned in the press release. So the point of time is we ended use our day 181 to the EMA on October 16 and we still anticipate the decision from the European commission and the first quarter of 2019 was fairly a state in January. I hope this give the response to the question you had.

Ramakanth Swayampakula: Yes and okay. So I’m just trying to understand the timing and expectation going forward. And Michael is there any thoughts of bringing any additional molecule with the operations that you have or is it pretty much trying to get the commercialization of Macrilen completely done before you think about introducing any molecule especially you will have some cash cushion, could you utilize that to initiate development of the second product or bring another product so that your bag looks a little bit more heavy than you grow on a out-licensing front in the European and other markets.

Michael Ward: Yes. R.K the strategy for the Company for this year in the immediate future is really to maximize the value for Macrilen. We saw that first step with our licensing arrangement with Strongbridge has been enhanced and validated by the transactions that Strongbridge and Novo Nordisk have entered into. So we have the rest of the world to out-license and that is really with our lean operations what we are focusing on as a Company. We have had two of our executive at Bio Europe this week meeting with potential licensees. Brian Garrison has spent quite a bit of time talking to potential licensees of rest of the world. Just because of how careful we have to be to pick the right licensing partner. We want a partner who is going to make Macrilen a priority, partner that is entrenched in the endocrinology community, we will understand the importance of Macrilen to adult patients for prescribing to them diagnosis hormone deficiencies. So we have a fairly solid litmus test that we did scale back operations significantly last year with the Zoptrex clinical trial failure. So right now we are just looking at same value we can extract. I would imagine after doing our next big deal whether it be just European or Asian that we would then be able to focus on looking for additional molecules to add to our pipeline. I can’t say that we do stay very close with the endocrinology community, but Nicola and Brian spent a lot of time with these endocrinologists at the global endocrinology meetings and that is really where I think the focus of the company will be when we are able to devote the time and investment in adding additional products to the pipeline.

Ramakanth Swayampakula: Thank you Michael for answering all my questions. Good luck.

Michael Ward: Thank you.

Operator: Thank you. We have reached the end of our question and answer session. So I would like to pass the floor back over to Mr. Ward for any additional concluding comments.

Michael Ward: Thank you for your continued support and interest in Aeterna Zentaris. I look forward to updating you again when we discuss the full-year 2018 results. Thank you.

Operator: Ladies and gentleman this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.