July 25, 2016 - 5:31pm EST by
2016 2017
Price: 3.33 EPS 0 0
Shares Out. (in M): 10 P/E 0 0
Market Cap (in $M): 33 P/FCF 0 0
Net Debt (in $M): -33 EBIT 0 0
TEV (in $M): 0 TEV/EBIT 0 0

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As they say: if at first you do not succeed, try, try again.  Looking at its history, I would think that being a shareholder in NASDAQ-listed Canadian biotech Aeterna Zentaris  (AEZS) would have been nothing short of awful: the reverse-split adjusted price only 4 years ago was greater than $1,000 per share vs. $3.50 today!  After numerous drug development failures of one sort or another, an investor today can buy a company with two Phase III drugs that are completely unrelated to one another and have data readouts very soon (as well as some other stuff) for an enterprise value of approximately zero (the market cap is approximately $33 million).   The company is fully funded to these milestones (although not much beyond that).  I think investors might be too traumatized to pay attention or they may believe the company has cried wolf too many times. This is also a very small company.  For a fresh pair of eyes, there could be an excellent risk skew here.        

Business Description

AEZS is dual-listed in the US and Canada with a substantial portion of its R&D operations in Germany and its commercial operation in South Carolina.  The company has two lead products in Phase III clinical trials: one is an improved version of an existing chemotherapy agent for advanced recurring endometrial (uterine) cancer while the other is a new test to confirm adult growth hormone deficiency.  In both of these cases, the products would be the first FDA-approved therapies for their particular target indications which are initially small but with room to expand.  Also, the medical professionals who would be responsible for prescribing them are fairly concentrated specialists so it would be possible for AEZS to commercialize them without a partner in the event of FDA approval.   

In addition, the company built a sales force in 2015 in anticipation of approvals and is using it to co-promote three products in and around the practice areas of its two late-stage drugs.  That way, it can hit the ground running in the event its products are approved.  Based on commentary on the Q116 call, revenues from its estrogen therapy product have been very disappointing.  The two other products are a non-PSA blood test for prostate cancer (added at the end of 2015) and a growth hormone replacement therapy. AEZS is looking at adding further products to its portfolio. There have not been appreciable revenues to date from this strategy.  AEZS has guided to selling costs this year of 7 to 8 million but has not guided to revenue.  For the purposes of this write-up I will assume that revenues are negligible and I will not dive deeper into this commercial business.  Selling costs are included in the company’s cash burn guidance.    

The AEZS investor presentation with quite a bit of detail can be found here:

The company is listed both in Canada and on the NASDAQ but it is a foreign filer so its annual report is a 20-F. 

Let us take each Phase III opportunity in turn:

First, Macrilen would be a new way to detect if an adult has growth hormone deficiency (GHD).  This would initially be a small market of approximately $40 million.  Right now, to diagnose GHD patients get an Insulin Tolerance Test (ITT) that requires an IV over the course of 3-4 hours and can induce a negative reaction called hypoglycemia.  The AEZS product would be an instant oral therapy with less health risks.  In addition, management believes the product could be helpful in instance of moderate to severe traumatic brain injury (TBI) where 19% of hospitalized patients will also develop GHD.  This could expand the market to several hundred million dollars per year. 

So what’s the problem?  AEZS took over the product from a bankrupt company called Ardana who had been doing a Phase III which AEZS completed. The FDA later decided that the Phase III missed its endpoint based on goings on from the bankrupt company.  When certain previously excluded patients were included, the trial failed its endpoint. AEZS contents the patients were misdiagnosed with GHD so it would be inappropriate to include them.  The FDA’s conclusion led to them to question the source data and issued a “Complete Response Letter” (CRL) in November 2014 when AEZS submitted the data from the Phase III.  The FDA basically told the company that it had to do another trial.  That is the trial that is taking place right now and which will be completed by the end of the third quarter.  It appears the market does not believe the second trial will work either.  For what it is worth, there is meta-data to show that if a company tries to get a product approved after a CRL then its chances go up:  but it is hard to know for sure what will happen here.  Patents on this product run to 2026.  If successful, management believes commercialization will start at the end of next year. 

AEZS’ second product, Zoptrex, is in a 500 patient Phase III for endometrial (uterine) cancer.  In particular, it is for advanced, recurrent State III and IV patients who often don’t have many choices.  I will skip the science other than to say that Zoptrex is a more targeted version of a chemotherapy drug called doxorubicin.  While AEZS assumes the initial market in endometrial cancer would be $300-500 million, it has successful Phase II data in other cancers such as ovarian and prostate which could double the market opportunity through off-label usage.  The Phase III trial is expected to be completed this quarter.  If successful, management believes commercialization will take until 2H 2018.  The company will have five years of exclusivity but the composition of matter patent expired in 2015. Management estimates it would take 2.5 years from that point for a generic to hit the market although it believes AEZS will have a cost advantage as it has been able to reduce its manufacturing cost by 50%.    In January, AEZS filed a method patent around its manufacturing protocol.  This is typically a weaker form of patent protection than composition of matter but could be helpful to keep competitors at bay in the future. 

AEZS will focus on the US and Europe and partner-out other parts of the world.  Just this month, AEZS licensed Zoptrex to an affiliate of Orient EuroPharma for Taiwan and nine countries in southeast asia.  Terms are not yet disclosed. It has also licensed Zoptrex to Sinopharm-A-Think Pharmaceuticals (which is related to the largest state-owned pharma company in China) for the Chinese market.  AEZS received $1.1m upfront in December 2014.  The Chinese partner will take the drug through the Chinese regulatory pathway and will manufacture the drug as well. 

The market also does not appear to be optimistic about the likelihood of a positive outcome in this trial although the reasons are less clear than they are for Macrilen.  It could be because the Phase IIs were smaller.  Doxorubicin is itself frequently toxic so there could be skepticism around whether or not AEZS’ targeted version will be an improvement.  Endometrial cancer could also get crowded quickly as there are a number of potential therapies in late-stage trials. The AEZS track record between a high profile failure in 2012 and the Complete Response Letter may also mean that this trial is not getting the benefit of the doubt. The small market cap could also mean this opportunity is being overlooked. 

While a management team cannot control the outcomes of clinical trials, at least the CEO had a track record of success prior to joining AEZS in April 2013 (which was post-AEZS’ major Phase III blow-up in 2012 on a failed Phase III colon cancer trial).  Most significantly from 2000 to 2006, he was CEO of Serologicals which he took from an $85 million market cap to $1.5 billion when it was sold to Millipore.  The Chief Commercial Officer also joined the company in November 2013    A new CFO was promoted internally in February and there are two new board members in 2016.   Though it is a small amount, management (including the CEO) bought $90,000 worth of stock in the open market at approximately $3.00 in January 2016.


AEZS’ current enterprise value is approximately zero (excluding an unfunded German pension balance of $12.3 million) and the company has enough cash to get it through the first quarter of 2017.  By then, we will probably know the fate of its 2 late stage products.  In the meantime, there will be two more quarters of potential traction in its co-promotion business discussed briefly above (as well as potentially additional products to sell through the sales force). 

If both trials work, or even if one trial works, this will be a highly successful investment from these levels.  It is almost silly to put numbers on it.  Even if the drugs were 1x revenue and they captured half of their markets, in areas where they have limited or inferior competition, that would be $25 million + $150 million or $175 million.  If just Macrilen works, the company would probably be worth more than its $33 million market cap today (although in being conservative above, I said $25 million but that was only to illustrate how easy it would be to win).   If just Zoptrex works then the company could be worth multiples of its current value. 

If both trials fail then AEZS will probably not go all the way to zero but with most of its cash spent, it could certainly get close. Another capital raise would be likely and could be highly dilutive if successful.  We will be left with the detailing business which is not a high value proposition but presumably would be worth more than zero or it will be shut down.   There is also a pre-clinical oral prostate cancer vaccine which would be early stage but in the exciting area of cancer immunotherapy.  Several other products are at the discovery stage and the company has access to a compound library for future development candidates.   I am less familiar with Non-US NOLs but the company has $20m of pre-tax losses in Germany and $30m of pre-tax losses in Canada.  These could still have value. On the negative side, there is a $12.3 million unfunded German pension obligation on the AEZS balance sheet which the company funds as commitments fall due.   

Also for your information, the management cleaned up the capital structure (exchanging “toxic” warrants for shares) and subsequently raised $15 million net to the company at the end of 2015.  The capital raise was 1 common share at $5.55 and a warrant to purchase 0.7 common shares at $7.10.  The warrants do not have anti-dilution provisions that might lead to a “toxic” dynamic.      

Today there are 9.9m common shares outstanding and 243,000 options with a strike price of $5.17 (excluding deeply out of the money options) as well as 2.8m warrants with a strike price of $6.75 (excluding deeply out of the money warrants).

Finally, note that AEZS was a PFIC in 2015 which is a real pain. 



We make no claims, promises or guarantees about the accuracy, completeness or adequacy of the contents of this document and expressly disclaim liability for errors and omissions in the document.  We have no obligation to update this document.  We may change our position at any time without posting an update.  The views expressed here are merely the opinion of the author.  Readers should do their own research.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


Data readouts + progress on commercial operations

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