Earnings Transcript for AEZS - Q4 Fiscal Year 2016

Executives: Philip Theodore - Senior Vice President, Chief Administrative Officer, General Counsel and Corporate Secretary David Dodd - President and Chief Executive Officer Genevieve Lemaire - Vice President, Finance and Chief Accounting Officer

Analysts: Jason Kolbert - Maxim Group, LLC Swayampakula Ramakanth - H.C. Wainwright & Co.

Operator: Greetings and welcome to the Aeterna Zentaris Fourth Quarter and Full-Year 2016 Financial and Operating Results 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, Philip Theodore, for Aeterna Zentaris. Thank you, Mr. Theodore. You may now begin.

Philip Theodore: Good morning and welcome, everyone. I'm Philip A. Theodore, Senior Vice President and General Counsel of Aeterna Zentaris. And I'm the leader of today's call. With me are David Dodd, President and CEO; and Genevieve Lemaire, Vice President Finance and Chief Accounting 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, Thursday, March 16, 2017 and the company disclaims any intent or obligation to update these forward-looking statements unless required to do so by applicable law or by a securities regulatory authority. However, we may choose to update the forward-looking statements, and if we do so, we will disseminate the updates to the investing public. It is now my pleasure to introduce the President and CEO of Aeterna Zentaris, Mr. David Dodd. David?

David Dodd: Thank you. Good morning. Thank you for joining us. As we await for the news regarding our development projects, we are focused on our capital structure and are making sure that we have sufficient capital to see our potential products through to commercialization, if one or both of them receives approval. We ended the year with approximately $22 million of unrestricted cash and cash equivalents, which is indicative of an average monthly use of cash in operations of approximately $2.4 million during 2016, representing a year-over-year reduction of almost 15% in our monthly use of cash in operations. At the end of the year, we had approximately 12.9 million common shares outstanding. During the first quarter of 2017 to date, we raised an additional $1.7 million of net proceeds using our ATM program. And we now have approximately 13.5 million common shares outstanding. After year-end, we reported top line results from our confirmatory Phase 3 study of Macrilen for the evaluation of Adult Growth Hormone Deficiency or AGHD. We were disappointed by the top line results as we failed to meet one of the co-primary endpoints of the study. However, our disappointment soon gave way to optimism, as we evaluated the full data from the clinical trial. We concluded together with our panel of independent experts that Macrilen works even better than we had expected. And that it demonstrated performance that we believe is supportive of achieving registration with the U.S. Food and Drug Administration. We will discuss the results of the clinical trial in our conclusions with the FDA at the end of March. And hope to have a timely decision regarding the future of the development of this drug. If the FDA agrees with us, we expect to be able to file the NDA or new drug application early third quarter, and if it is approved begin commercializing the product in first quarter of 2018. As you may recall, the Macrilen confirmatory study consisted of two-way crossover comparison of Macrilen with the Insulin Tolerance Test or ITT. There were four patient cohorts evaluated in the trial, high risk, intermediate risk, low risk and healthy volunteers. The co-primary end points consisted of percent negative agreement and percent positive agreement, representing the percent agreement of Macrilen with the ITT results, when the ITT indicated that the patent either did not have or did have growth hormone deficiency. For example, the percent negative agreement reflects the percent of Macrilen results that agreed with the ITT, when the ITT indicated that a patient was not deficient in growth hormone secretion. In other words, this would reflect a situation where a patient had a normal functioning pituitary gland. Such a situation was determined by the FDA to represent the more critical comparison, since one would want to avoid diagnosing a patient as deficient and thereby prescribing growth hormone supplementation, when it isn't indicated. The criterion for achieving success relative to percent negative agreement was therefore established at a higher level than that for the percent positive agreement endpoint. In addition, the trial included the evaluation of a subset of patients to determine the reproducibility of Macrilen results, since it is generally recognized that the reproducibility of ITT results is poor. This continuation study was requested by the European Medicines Agency or EMA to gain insight relative to the overall potential value of Macrilen for the diagnosis of suspected adult growth hormone deficient patients. As we reported on January 4, we achieved one of the two co-primary endpoints, the percent negative agreement. Our results were impressive, reflecting a 94% agreement with the ITT. Unfortunately, we missed the percent positive agreement endpoint, demonstrating 74% agreement with the lower 95% confidence interval below that of the pre-established criteria. However, further examination of the data provided confidence in the utility of Macrilen. And we are now scheduled to review these results in detail with the FDA by the end of March. We believe that the Macrilen results demonstrate that the drug is not only supportive of registration, but that it provides more consistent, robust and reproducible results than the ITT. Our goal is to achieve concurrence with the FDA, so that we may proceed to a formal NDA submission in the near future. Let me now briefly review the conclusions that we've reached and that we shared with the FDA. Macrilen stimulates pituitary gland effectively to secrete growth hormone. In fact, the stimulation was consistently more pronounced than that achieved with the ITT. Macrilen performed very well in the study, demonstrating sensitivity of 87% and specificity of 96%. This was even better than demonstrated in the previous study. In the reproducibility extension portion of the study, Macrilen demonstrated 94% reproducibility, while reproducibility of the ITT was not investigated in the study it is known to demonstrate poor reproducibility. Study results can be further optimized by modulation of the predefined Macrilen cut-off point of 2.8 nanograms per milliliter. In fact, any cut-off point for Macrilen between 4.6 nanograms per milliliter and 8.2 nanograms per milliliter would have resulted in a fully positive study outcome, meaning that both co-primary endpoints would have been met. Macrilen was found to be a more robust test than the ITT, only one out of 153 Macrilen tests needed to be repeated compared to 28 out of 157 for the ITT. Finally, Macrilen's stimulation to growth hormone release was more pronounced and consistent than the ITT. In approximately 80% of all cases, peak growth hormone levels following administration of Macrilen were equal to or higher than those observed during the ITT. And this was consistent across each of the four cohorts evaluated. Following our review of these results, we announced our conclusions and we shared the results with the FDA. We were pleased that the FDA so quickly agreed to meet with us within 30 days to review the data and to discuss appropriate next steps. Our hope is that the FDA will agree that the data support submission and review of the NDA for Macrilen. We are also pleased to have reported that the EMA has formally issued their concurrence with our proposed pediatric investigational plan, which provides us the ability to pursue EMA registration in conjunction with our U.S. registration plan. Shifting now to Zoptrex. On January 30, we announced the conclusion of the clinical phase of our development program for that product. The following day we had a successful pre-NDA meeting with the FDA. Based on the meeting we are now continuing to prepare our NDA for the product and we now expect to report top-line results before the end of April. If the results were supportive we anticipate submitting the NDA in third quarter. Now, I will turn the call over to Genevieve Lemaire, our Vice President, Finance, and Chief Accounting Officer, who will provide more information about our fourth quarter and year-end financial results.

Genevieve Lemaire: Thank you, David, and good morning, everyone. Most of what I'll be covering has been presented in more detail in our consolidated financial statement and MD&A for the fourth quarter and year-end, which were filled yesterday. From an operating expense standpoint, our main operating activities during the fourth quarter included ongoing efforts associated with our clinical development initiatives as well as to a lesser extent with our commercial operation, and general and administrative activity. Total operating expenses amounted to approximately $7.9 million for the quarter ended December 31, 2016, representing a 21% decrease compared to the same period in 2015. The decrease is mainly explained by the movement in G&A expenses, which will be discussed in the following slides. Our total R&D costs in the quarter were approximately $4.6 million as compared to approximately $4.2 million in the fourth quarter of 2015. The increase in R&D expenses of approximately $400,000 is mainly attributable to higher comparative third-party costs in connection with the confirmatory Phase 3 clinical trial of Macrilen, which was initiated late in 2015 with the enrollment of the first patient in the fourth quarter of that year. And patient recruitment in the trial were completed in the fourth quarter of 2016. R&D costs incurred in the fourth quarter of 2016 were lower than anticipated, mainly because we were able to negotiate reduction to a change order received from our principal R&D third-party service provider. Excluding the impact of foreign exchange rate fluctuation, we expect that we will incur overall R&D cost of between $19 million and $20 million for the year ending December 31, 2017. Although we expect a decrease in costs related to the contract research organization following the end of the clinical trial, this will be offset by the costs associated with the NDA preparation for both products, the FDA submission fee for Zoptrex if the results of the clinical trial warrant submitting a new drug application, as well as by the investment needed in inventory prior to the potential commercial launch of both Macrilen and Zoptrex. In addition, we expect to incur costs related to the validation of a second supplier for both products to be able to fulfill the expected demand. Switching now to our G&A expenses, during the quarter ended December 31, 2016, G&A expenses totaled approximately $1.8 million as compared to $4 million during the same period in 2015. The $2.2 million quarter-over-quarter reduction in G&A is mainly due to the recording in the fourth quarter of 2015 of a provision related to the restructuring of our finance and accounting functions, and the closing of our office in Quebec City, as well as the realization of cost savings from the restructuring. The comparative decrease is also explained by the allocation of certain transaction costs to the warrant we issued in connection with our equity offering in December 2015. Excluding the impact of foreign exchange rate fluctuation and the recording of transaction costs related to potential financing activity which are not currently known or estimate of, we expect G&A expenses to slightly increase in 2017 as compared to 2016, because we expect to hire additional employees necessary for the potential commercialization of our products. We expect that G&A expenses will range between $7.5 million and $8.5 million in 2017 as compared to $7.1 million in 2016. From a commercial operation standpoint, we continue during the fourth quarter to incur costs related to our contract sales force and our own management staff in support of our co-promotion agreement for Saizen and APIFINY. Selling expenses during the fourth quarter of 2016 were approximately $1.5 million and were essentially unchanged compared to the selling expenses during the same period in 2015. Selling expenses are slightly below what we anticipated, because we put down some expenses related to the potential commercial launch of Zoptrex and Macrilen, mainly because of related clinical trials took more time than expected. Based on currently available information, we expect selling expense to range between $7 million and $8 million in 2017. The expected increase in 2017 as compared to 2016 is mainly because we are preparing for the expected commercial launch of Zoptrex and Macrilen. We reported net finance costs of approximately $0.6 million in the fourth quarter of 2016 as compared to net finance costs of approximately $0.2 million during the fourth quarter of 2015. The variance is mainly attributable to the change in fair value of our warrant liability, which resulted from the periodic mark-to-market valuation of our outstanding warrants. The mark-to-market warrant valuation during the quarter was mainly impacted by a closing price of our common share on the NASDAQ, which was more stable in the fourth quarter of 2016 as compared to the same period in 2015. In addition, with specific reference to the fourth quarter of 2016, finance costs were also impacted by the warrant exercise inducement fee paid to certain holders of the Series B Warrants. From a cash flow standpoint, we use approximately $8.1 million of cash in operation in the fourth quarter of 2016 as compared to approximately $8.4 million in the same period in 2015. We used less cash in the fourth quarter of 2016 than in the prior year quarter primarily because of lower operating expenses. During the year ended December 31, 2016, our average monthly cash used in operation was approximately $2.4 million, representing a year-over-year reduction of almost 15% in our monthly use of cash in operation. Cash used in operation was lower than initially anticipated, because we incurred less R&D costs as explained in the previous slide. We expect net cash used in operating activities to range from $30 million to $32 million for the year ending December 31, 2017, as we finalize our Zoptrex Phase 3 program as well as prepare for Zoptrex and Macrilen NDA submission and commercial launch, and as we expect to generate higher revenues in connection with the promotion of Saizen and APIFINY. This guidance may vary significantly in future periods, as it assumes that Zoptrex Phase 3 study will be positive and that we will be able to register Macrilen. We also expect net cash used in investing activity to range from $1 million to $1.5 million for the year ending December 31, 2017, as we must invest in IT as well as in manufacturing capacity, while we are preparing for the potential commercial launch of Macrilen and Zoptrex. We ended the year with unrestricted cash and cash equivalents of approximately $22 million. And now, I'll turn the call back over to David, who will entertain questions.

David Dodd: Thank you, Genevieve. We will now entertain your questions. I'm therefore turning the call over to operator for instructions on the question-and-answer period.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jason Kolbert with Maxim. Please proceed with your question.

Jason Kolbert: Good morning, guys, and congratulations on all the progress. Two questions. One, very pleased to understand that Macrilen is coming back. Can you give us a little bit of the more details or granularity on your - the discussions that you've already had with regulators that led you do this optimistic point of view? And then second question, obviously very excited on Zoptrex, can you help me understand, when you look at the data and the time to events that have occurred, how that compares to what would be expected versus standard of care, meaning that it took a little bit longer to get the time to event suggesting that there is maybe some additional efficacy associated with Zoptrex? Thank you.

David Dodd: Thanks, Jason. This is David. Regarding Macrilen, we have had no discussions with regulators related to the data analysis other than submitting to them our conclusions and then a briefing document, which they have for their review in advance of our meeting, which is scheduled for the end of March. So to date, following the January 4 and then the subsequent analysis that we and our external experts have conducted, we reached the conclusions which we announced on February 13. We have supplied the information that is the basis of that analysis, and that analysis to the FDA and we requested a meeting. And they responded to have a meeting within 30 days of our request. So that's really where we are at this stage. So the process includes as it does for any such meeting between a client and our company and the regulators is when they agree to it depending on the type of meeting et cetera, one will submit a briefing document. In this case, we did that and we sent that in and they have that. And they will be reviewing it and then our team will meet with them. And then following that, and following the decisions come out that we will announce accordingly. Regarding Zoptrex, certainly as we have announced over the - generally past year, the closing of the trial was long - it took longer than what we had originally anticipated, that original anticipation was generated when we started talking about it based upon initially just general assumptions and then what we were observing as the rate of events on a monthly basis. And one might - you may recall, I previously noted that in January of 2016 we were receiving between 20 and 25 events per month. And then we saw it go down to as low as 3 to 5 per month, and that resulted in it taking longer to get to the requisite minimum number of 384 events in all. Now, given that the data that is published out in the marketplace is not current data, it's historical data, studies are historical, we caution ourselves and others on trying to overly interpret what this timing means. Clearly, it means that for many individuals that there were patients that seem to be surviving and living longer than what one might have anticipated based on a knowledge of survival of women in this situation now. However, recall that the protocol of having half the patients on Zoptrex and half the patients on doxorubicin and half the patients on doxorubicin, it excludes any other anthracyclines. But it certainly allows their oncologist, their physician to provide what they feel as the best care for the patients. And over the last several years, we've seen new therapies come into the marketplace, perhaps not for specific related indication, but as we all know in oncology it is not uncommon for an oncologist to utilize of whatever tools they feel might benefit that particular patient. And so, it would be wrong for people to think that in the study that 512 patients, half were only on Zoptrex and half were only on doxorubicin, half were randomized to receive Zoptrex, the other half doxorubicin. But that was in addition to whatever care their oncologist was providing. And so, ultimately, as much as we would like to try and interpret what might be going on, we'll just have to wait until the end of April to see to the extent that there is a difference in the median overall survival between the two treatment arms and all. But I do want to point out that the process and the trial was not as some people have asked me before, not yourself, but others have, so half were only on Zoptrex and half were only on doxorubicin. That is incorrect, because half - because all of them are managed by well-attended physicians. And they're going to do the best job they can, but they will follow the protocol not to incorporate any other anthracyclines into the trial.

Jason Kolbert: David, thank you very much for the comprehensive answer. We really look forward to seeing the data.

David Dodd: Thank you. Thank you. Hope that useful.

Operator: [Operator Instructions] Our next question comes from the line of RK with H.C. Wainwright & Co. Please proceed with your question.

Swayampakula Ramakanth: Thank you. Good morning, David.

David Dodd: Thanks.

Swayampakula Ramakanth: Congratulations on the progress so far and on both the programs. In terms of expectations for the Zoptrex data in late April, what sort of data can we see in the initial announcement, which you're going to put out in late April?

David Dodd: Excellent question, RK. I was actually just thinking I was going to work that into an answer, whatever you asked. So what we will be - what will be include in the top-line results information that we will receive will certainly include the primary endpoint of median overall survival between Zoptrex and doxorubicin. However, we have also incorporated so that at that time we will also have received information on secondary endpoint, such as progression free survival, et cetera. We've also been able to incorporate into what we are requesting as part of the top-line results package, let's call it data package will include some side-effect data. Previously, I had stated on such calls and in various settings that we did not anticipate to receive any side-effect data as part of the top-line results, but in fact we have requested such, and that's why we discuss by the end of April rather than in an earlier time period. Obviously, it takes more time, but we believe it would be more meaningful and certainly beneficial to have more data rather than less data that we are able to discuss. Everyone will be focused on the primary endpoints. We understand that. But people will want to then know regardless on the secondary endpoints and also side-effects. So we anticipate having a packet of information that we will be able to discuss and disclose.

Swayampakula Ramakanth: Thank you. Thank you for that. In the - in pre-NDA meeting that you had with the FDA, which was right after closing the study, what sort of topics were discussed in that meeting, because obviously I don't think data was there? So I was wondering what could you tell the FDA, how that FDA come to the conclusion that was regarding your application for approval?

David Dodd: Could you restate your question? It broke up a little bit, RK, I apologize, I didn't catch. Which meeting are you referencing?

Swayampakula Ramakanth: The pre-NDA meeting on…

David Dodd: Oh, yes, I'm sorry. I understand. The pre-NDA meeting, which we had on January 31, that is a - it is a meeting that a company anticipating to be submitting, plans to submit a NDA will have. In advance of the meeting, we provided a briefing document, which contained our questions. We had 10 questions we asked of them. And they were all about ensuring that we and the FDA were in agreement on what is expected to be included in the FDA - or, excuse me, in the NDA submission, what types of data there. And we also had some questions that we were seeking clarification from them that will be relevant, should we be successful and be proceeding towards what we would anticipate and be hopeful of a registration on. So in any pre-NDA meeting, it usually addresses the core elements so that the client of the FDA fully understands what is going to be expected. Remember, this study was conducted on a special protocol assessment. So that was the basis of discussion, because the protocol was agreed to et cetera. But there are always elements perhaps about certain associated data, certain data that may come from related to standard doxorubicin should it be included, would it be of interest, all of those types of things would be necessary. So that's really what it was. We submitted by the end of December our document. We had the meeting a month later. In the interim, they had reviewed everything. In fact, they had actually already responded and agreed to all of our questions. But we still had the meeting. That we felt it would be a - it would be beneficial to both parties to have face-to-face meeting. So our team met with them and addressed everything. And that was very useful for us.

Swayampakula Ramakanth: Okay. And then the next question is on Macrilen. So you're going and meeting with the FDA at the end of first quarter regarding your next study with Macrilen. So if FDA gives you the green signal on the next study, can you help us understand the timeline for the start of the study and how long the study could take and when the data would come?

David Dodd: Well, first of all, our focus and our hope is that there is no - we're going in there with a - our proposal is that the current existing data coming out of the study that we reported on January 4 is sufficient and supportive for them to accept for review a potential approval of Macrilen.

Swayampakula Ramakanth: Okay.

David Dodd: That is what we are requesting for their answer on. And we anticipate there could be three main answers. One could be, yes, we agree. And if that's the case, then we would proceed towards a submission, which we would believe in early Q3, and would allow us to be commercializing the product if it's approved in early next year. They could say, we agree - with whatever, they can say whatever. They can say, they agree with all of our data, but they request us to validate it by conduct of another trial. That trial would not be the same trial, because we wouldn't have to repeat the reproducibility portion nor would we own the QT interval study portion of that. That trial is what you're asking of, would take, we believe, approximately 18 months and cost approximately $1 million and all. So that's what would be involved in that. As you can imagine, when we have to get set up, you have to determine the protocol. You don't just go back to all the same sites and tell them, okay, crank it back up. I mean, you through - it's an entirely new program, that's why it's 18 months. The conduct of it would be about a year, but no matter how you approach it, it's going to be approximately 18 months now. The third outcome that could occur would be that the FDA agrees with the basis of what that we've concluded and our experts have concluded, and they ask - and they agree to accept it for review and potential approval, but they could require us to conduct another trial while the product - Phase 4 commitment. So while the product is on the market. And so, I think those are the three outcomes that could occur. And obviously our decision is that based on the data analysis and what we've seen and what others have seen, that the data is supportive for their acceptance as part a NDA dossier. And that's what we hope to. And we will be announcing, as we come out of that meeting and have their answer, we will announce, obviously, what they decide and what they tell us.

Swayampakula Ramakanth: Okay. Thank you. And then the last question for me is on the exclusivity that you have on the IP part for both Macrilen and Zoptrex, in terms of how much life is left on - in terms of IP for both of these drugs.

David Dodd: Sure, sure. Macrilen is patented. It's covered by patent to the end of 2027. It also has orphan drug status, which gives it the seven years exclusivity. So that's pretty nice for that product. You may recall Zoptrex, the composition of matter patent expired. I believe the last one expired in 2016. It will have five years formal exclusivity in the U.S., because it's part of a clinical trial supported 10 years in Europe. We believe that that five year in the U.S. actually translates to seven to eight years, because of the time that is involved. And also recall that we are currently prosecuting a pattern on the manufacturing aspect of Zoptrex, which can be a very expensive drug to make. And we believe that this process has the - can reduce the manufacturing cost by half or more. So we believe we would have a strong competitive advantage to any potential generics. Bottom line is Zoptrex is not an inexpensive API to make.

Swayampakula Ramakanth: Okay, okay. Thank you. That's all I have. Good luck.

David Dodd: Thank you. Thank you.

Operator: Thank you. There are no further questions at this point. I would like to turn the call back over to Mr. David Dodd for closing remarks.

David Dodd: Thank you. And thank you everyone for your continued support and your interest in the transformation of Aeterna Zentaris. We look forward to updating you regarding further progress, when we discuss first quarter 2017 results. For now, thank you, and have a great day.

Operator: This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation. And have a wonderful day.