Full Press Release Details
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Aeterna Zentaris Inc. is a specialty biopharmaceutical company engaged in developing novel treatments in oncology and endocrinology. Our pipeline encompasses compounds at various stages of development.
Our later-stage product candidates include MACRILEN (macimorelin), an orphan drug that evaluates growth hormone deficiency in adults, and zoptarelin doxorubicin, a targeted therapy for endometrial cancer, as well as for castration- and taxane-resistant prostate and other cancers. We are also investigating various additional compounds as potential treatments for a host of unmet medical needs.
The Company's common shares are listed on both the NASDAQ Capital Market ("NASDAQ"), under the symbol "AEZS", and on the Toronto Stock Exchange ("TSX"), under the symbol "AEZ".
This Management's Discussion and Analysis ("MD&A") provides a review of the results of operations, financial condition and cash flows of Aeterna Zentaris Inc. for the three-month period ended March 31, 2014. In this MD&A, "Aeterna Zentaris", the "Company", "we", "us", "our" and the "Group" mean Aeterna Zentaris Inc. and its subsidiaries. This discussion should be read in conjunction with the information contained in the Company's unaudited condensed interim consolidated financial statements and related notes as at March 31, 2014 and for the three-month periods ended March 31, 2014 and 2013 (the "condensed interim consolidated financial statements"). Our condensed interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") applicable to the preparation of interim financial statements, including IAS 34, Interim Financial Reporting.
All amounts in this MD&A are presented in United States ("US") dollars, except for share, option and warrant data, per share and per warrant data and as otherwise noted.
About Forward-Looking Statements
This document contains forward-looking statements, which reflect our current expectations regarding future events. Forward-looking statements may include words such as "anticipate", "assume", "believe", "could", "expect", "foresee", "goal", "guidance", "intend", "may", "objective", "outlook", "plan", "seek", "should", "strive", "target" and "will".
Forward-looking statements involve risks and uncertainties, many of which are discussed in this MD&A. Results or performance may differ significantly from expectations. For example, the results of current clinical trials cannot be foreseen, nor can changes in policy or actions taken by regulatory authorities such as the the US Food and Drug Administration ("FDA"), the European Medicines Agency, the Therapeutic Products Directorate of Health Canada or any other organization responsible for enforcing regulations in the pharmaceutical industry.
Given these uncertainties and risk factors, readers are cautioned not to place undue reliance on any forward-looking statements. We disclaim any obligation to update any such factors or to publicly announce any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments, unless required to do so by a governmental authority or by applicable law.
First Quarter MD&A - 2014
About Material Information
This MD&A includes information that we believe to be material to investors after considering all circumstances, including potential market sensitivity. We consider information and disclosures to be material if they result in, or would reasonably be expected to result in, a significant change in the market price or value of our securities, or where it is likely that a reasonable investor would consider the information and disclosures to be important in making an investment decision.
The Company is a reporting issuer under the securities legislation of all of the provinces of Canada, and our securities are registered with the US Securities and Exchange Commission. The Company is therefore required to file or furnish continuous disclosure information, such as interim and annual financial statements, MD&As, proxy circulars, annual reports on Form 20-F, material change reports and press releases with the appropriate securities regulatory authorities. Copies of these documents may be obtained free of charge upon request from the Company's Investor Relations department or on the Internet at the following addresses: www.aezsinc.com, www.sedar.com and www.sec.gov.
Product Candidate Developments
Zoptarelin Doxorubicin
Corporate Developments
First Quarter MD&A - 2014
First Quarter MD&A - 2014
Status of Our Drug Pipeline
_________________________
(1) Investigator-driven and sponsored.
(2) Phase 2 in ovarian cancer completed.
(3) Sponsored entirely by license partners.
We are focused on preparing for the launch of MACRILEN for the evaluation of AGHD in the US and on advancing our ZoptEC Phase 3 program with zoptarelin doxorubicin in endometrial cancer, as discussed further below.
As for our compounds in earlier stages of development, our Erk/PI3K inhibitors and our disorazol Z product candidates, as well as our discovery activities, continue to be under review as part of our focused initiative to optimize research and development ("R&D") activities. We currently do not expect to invest significantly in these projects, unless partnered and/or sponsored through strategic alliances.
First Quarter MD&A - 2014
Condensed Interim Consolidated Statements of Comprehensive (Loss) Income Information
| Three months ended March 31, | ||||||
| (in thousands, except share and per share data) | 2014 | 2013 | ||||
| $ | $ | |||||
| Revenues | ||||||
| License fees and other | - | 6,062 | ||||
| - | 6,062 | |||||
| Operating expenses | ||||||
| Research and development costs, net of refundable tax credits and grants | 5,830 | 4,401 | ||||
| Selling, general and administrative expenses | 2,365 | 2,824 | ||||
| 8,195 | 7,225 | |||||
| Loss from operations | (8,195 | ) | (1,163 | ) | ||
| Finance income | 4,919 | 2,166 | ||||
| Finance costs | (1,028 | ) | - | |||
| Net finance income | 3,891 | 2,166 | ||||
| Net (loss) income from continuing operations | (4,304 | ) | 1,003 | |||
| Net (loss) income from discontinued operations | (52 | ) | 883 | |||
| Net (loss) income | (4,356 | ) | 1,886 | |||
| Other comprehensive (loss) income: | ||||||
| Items that may be reclassified subsequently to profit or loss: | ||||||
| Foreign currency translation adjustments | 23 | 240 | ||||
| Items that will not be reclassified to profit or loss: | ||||||
| Actuarial loss on defined benefit plans | (959 | ) | - | |||
| Comprehensive (loss) income | (5,292 | ) | 2,126 | |||
| Net (loss) income per share (basic and diluted) from continuing operations | (0.08 | ) | 0.04 | |||
| Net (loss) income (basic and diluted) from discontinued operations | 0.00 | 0.03 | ||||
| Net (loss) income (basic and diluted) per share | (0.08 | ) | 0.07 | |||
| Weighted average number of shares outstanding: | ||||||
| Basic | 54,921,459 | 25,329,288 | ||||
| Diluted | 54,921,459 | 25,330,128 |
First Quarter MD&A - 2014
Revenues recorded during the three months ended March 31, 2013 resulted predominantly from the non-recurring, accelerated recognition of remaining unamortized deferred revenue related to an upfront payment received from a licensing partner following the termination of related R&D activities.
We do not expect to record any significant revenues from continuing operations during the second quarter of 2014.
R&D costs, net of refundable tax credits and grants, were $5.8 million for the three-month period ended March 31, 2014, compared to $4.4 million for the same period in 2013.
The following table summarizes our net R&D costs by nature of expense:
| Three months ended March 31, | ||||||
| (in thousands) | 2014 | 2013 | ||||
| $ | $ | |||||
| Employee compensation and benefits | 2,450 | 2,199 | ||||
| Third-party costs | 2,543 | 1,325 | ||||
| Facilities rent and maintenance | 448 | 417 | ||||
| Other costs* | 421 | 549 | ||||
| R&D tax credits and grants | (32 | ) | (89 | ) | ||
| 5,830 | 4,401 |
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* Includes depreciation and amortization.
The following table summarizes primary third-party R&D costs, by product candidate, incurred by the Company during the three-month periods ended March 31, 2014 and 2013.
| (in thousands, except percentages) | Three months ended March 31, | |||||||||||
| Product Candidate | 2014 | 2013 | ||||||||||
| $ | % | $ | % | |||||||||
| Zoptarelin doxorubicin | 1,879 | 73.9 | 439 | 33.1 | ||||||||
| Erk/PI3K inhibitors | 202 | 7.9 | 192 | 14.5 | ||||||||
| Perifosine | 167 | 6.6 | 447 | 33.7 | ||||||||
| Disorazol Z | 143 | 5.6 | 66 | 5.0 | ||||||||
| MACRILEN , macimorelin | 42 | 1.7 | 40 | 3.0 | ||||||||
| Other | 110 | 4.3 | 141 | 10.7 | ||||||||
| 2,543 | 100.0 | 1,325 | 100.0 |
As shown above, a substantial portion of the quarter-over-quarter increase in third-party R&D costs relates to development initiatives associated with zoptarelin doxorubicin, and in particular with our Phase 3 ZoptEC trial initiated in 2013 with our partner, Ergomed Clinical Research Ltd. ("Ergomed"), the contract clinical development organization with which, in April 2013, we entered into a co-development and profit sharing agreement.
First Quarter MD&A - 2014
Excluding the impact of foreign exchange rate fluctuations, we expect net R&D costs to increase in the second quarter of 2014, as compared to the first quarter of 2014, mainly due to the advancement of our lead ZoptEC Phase 3 trial with zoptarelin doxorubicin and related sub-studies. Based on currently available information and forecasts, we continue to expect that we will incur net R&D costs of between $24 million and $26 million for the year ended December 31, 2014. As discussed below, however, we are in the process of performing a strategic review of all of our preclinical activities. This review may result in changes to our future overall R&D activities that may have a significant impact on our results of operations versus the currently available guidance. As such, our net R&D cost estimates may be revised in future periods as we continue to review our R&D activities, advance R&D development and as new information becomes available.
Selling, general and administrative ("SG&A") expenses were $2.4 million for the three-month period ended March 31, 2014, as compared to $2.8 million for the same period in 2013.
We expect SG&A expenses to remain approximately at the same level in the second quarter of 2014 as compared to the first quarter of 2014.
Net finance income is comprised predominantly of the change in fair value of warrant liability and of gains and losses recorded due to changes in foreign currency exchange rates, as presented below.
| Three months ended March 31, | ||||||
| (in thousands) | 2014 | 2013 | ||||
| $ | $ | |||||
| Finance income | ||||||
| Change in fair value of warrant liability | 4,880 | 1,757 | ||||
| Gains due to changes in foreign currency exchange rates | - | 362 | ||||
| Interest income | 39 | 47 | ||||
| 4,919 | 2,166 | |||||
| Finance costs | ||||||
| Losses due to changes in foreign currency exchange rates | (1,028 | ) | - | |||
| (1,028 | ) | - | ||||
| 3,891 | 2,166 |
The change in fair value of our warrant liability results from the periodic "mark-to-market" revaluation, via the application of the Black-Scholes option pricing model, of currently outstanding share purchase warrants. The Black-Scholes "mark-to-market" warrant valuation most notably has been impacted by the issuance of 8.8 million additional share purchase warrants and by the closing price of our common shares, which, on the NASDAQ, has fluctuated from $1.17 and $1.49 during the three-month period ended on March 31, 2014.
Gains or losses due to changes in foreign currency exchange rates are mainly related to the US dollar vis- -vis the euro ("EUR"), which strengthened by approximately 3.8% during the three-month period ended March 31, 2014, as compared to the same period in 2013.
Net (loss) income from continuing operations for the three-month period ended March 31, 2014 was $(4.3) million, or $(0.08) per basic and diluted share, compared to $1.0 million, or $0.04 per basic and diluted share for the same period in 2013. This decrease is due largely to lower comparative license fee revenues and to higher comparative net R&D costs, partially offset by higher comparative net finance income, as discussed above.
First Quarter MD&A - 2014
Discontinued Operations
On April 3, 2013, we entered into a transfer and service agreement and concurrent agreements with various partners and licensees with respect to our manufacturing rights for Cetrotide , currently marketed for therapeutic use as part of in vitro fertilization programs. The principal effect of these agreements was to transfer, effective October 1, 2013 (the "Closing Date"), our manufacturing rights for Cetrotide and to grant a license to ARES Trading S.A. ("Merck Serono") for the manufacture, testing, assembling, packaging, storage and release of Cetrotide , as well as related activities (collectively, the "Cetrotide Business"), in all territories.
As a result of the transfer of substantially all of the risks and rewards associated with the Cetrotide Business on the Closing Date, the Cetrotide Business was classified as a discontinued operation. As such, relevant amounts in our condensed interim consolidated statements of comprehensive (loss) income have been retroactively reclassified to reflect the Cetrotide Business as a discontinued operation, as presented below.
| Three months ended March 31, | ||||||
| (in thousands) | 2014 | 2013 | ||||
| $ | $ | |||||
| Revenues | ||||||
| Sales and royalties | - | 10,209 | ||||
| License fees and other* | 263 | 328 | ||||
| 263 | 10,537 | |||||
| Operating expenses | ||||||
| Cost of sales | - | 8,684 | ||||
| Research and development costs, net of tax credits and grants | 17 | - | ||||
| Selling, general and administrative expenses | 298 | 970 | ||||
| 315 | 9,654 | |||||
| Net (loss) income from discontinued operations | (52 | ) | 883 |
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* Includes revenues from certain transition services being provided to Merck Serono pursuant to the aforementioned agreements.
The decrease in sales and royalties from discontinued operations and in cost of sales from discontinued operations during the three-month period ended March 31, 2014, as compared to the same period in 2013, reflects the fact that we recorded no sales of Cetrotide and royalties during the three months ended March 31, 2014, as compared to the corresponding quarter of 2013, given that the transfer of the Cetrotide Business was effective on October 1, 2013.
Net (loss) income for the three-month period ended March 31, 2014 was $(4.4) million, or $(0.08) per basic and diluted share, compared to $1.9 million, or $0.07 per basic and diluted share, for the same period in 2013. This decrease in net income is due largely to lower revenues, higher operating expenses and higher net loss from discontinued operations, partially offset by higher comparative net finance income.
First Quarter MD&A - 2014
| Quarterly Consolidated Results of Operations Information | ||||||||||||
| (in thousands, except for per share data) | Three months ended | |||||||||||
| March 31, 2014 | December 31, 2013 | September 30, 2013 | June 30, 2013 | |||||||||
| $ | $ | $ | $ | |||||||||
| Revenues | - | - | 17 | 96 | ||||||||
| Loss from operations | (8,195 | ) | (7,972 | ) | (8,648 | ) | (9,693 | ) | ||||
| Net loss from continuing operations | (4,304 | ) | (10,596 | ) | (7,799 | ) | (9,848 | ) | ||||
| Net (loss) income | (4,356 | ) | (8,243 | ) | 3,842 | 9,330 | ||||||
| Net loss per share from continuing operations (basic and diluted)* | (0.08 | ) | (0.28 | ) | (0.26 | ) | (0.39 | ) | ||||
| Net (loss) income per share (basic and diluted)* | (0.08 | ) | (0.22 | ) | 0.13 | 0.37 |
| Three months ended | ||||||||||||
| March 31, 2013 | December 31, 2012 | September 30, 2012 | June 30, 2012 | |||||||||
| $ | $ | $ | $ | |||||||||
| Revenues | 6,062 | 281 | 265 | 402 | ||||||||
| Loss from operations | (1,163 | ) | (8,119 | ) | (6,447 | ) | (7,672 | ) | ||||
| Net income (loss) from continuing operations | 1,003 | (8,130 | ) | (7,321 | ) | 4,468 | ||||||
| Net income (loss) | 1,886 | (6,947 | ) | (6,554 | ) | 4,540 | ||||||
| Net income (loss) per share from continuing operations (basic and diluted)* | 0.04 | (0.34 | ) | (0.39 | ) | 0.24 | ||||||
| Net income (loss) per share (basic and diluted)* | 0.07 | (0.29 | ) | (0.35 | ) | 0.25 |
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Historical quarterly results of operations and net (loss) income from continuing operations cannot be taken as reflective of recurring revenue or expenditure patterns or of predictable trends, largely given the non-recurring nature of certain components of our historical revenues due most notably to the accelerated recognition of upfront payments and to unpredictable quarterly variations attributable to our net finance income (costs), which in turn are comprised of the impact of the periodic "mark-to-market" revaluation of our warrant liability and of foreign exchange gains and losses. Additionally, our net R&D costs historically have varied on a quarter-over-quarter basis due to the ramping up or winding down of potential product candidate activities, which in turn are dependent upon a number of factors that often do not occur on a linear or predictable basis.
In addition to the items referred to above, our net income (loss) also has been impacted by net variations attributable to the Cetrotide Business, which, as discussed above, has been presented on a retrospective basis within discontinued operations, given that the Cetrotide Business is no longer a significant part of our overall operations and therefore will not significantly impact our future quarterly or annual results of operations.
First Quarter MD&A - 2014
Condensed Interim Consolidated Statement of Financial Position Information
| As at March 31, | As at December 31, | |||||
| (in thousands) | 2014 | 2013 | ||||
| $ | $ | |||||
| Cash and cash equivalents 1 | 45,752 | 43,202 | ||||
| Trade and other receivables and other current assets | 2,590 | 2,453 | ||||
| Restricted cash equivalents | 865 | 865 | ||||
| Property, plant and equipment | 1,250 | 1,351 | ||||
| Other non-current assets | 11,191 | 11,325 | ||||
| Total assets | 61,648 | 59,196 | ||||
| Payables and other current liabilities | 5,763 | 7,242 | ||||
| Warrant liability | 21,617 | 18,010 | ||||
| Non-financial non-current liabilities 2 | 17,841 | 16,880 | ||||
| Total liabilities | 45,221 | 42,132 | ||||
| Shareholders' equity | 16,427 | 17,064 | ||||
| Total liabilities and shareholders' equity | 61,648 | 59,196 |
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1 Of which approximately $4.9 million was denominated in EUR as at March 31, 2014.
2 Comprised mainly of employee future benefits and provisions.
The increase in cash and cash equivalents as at March 31, 2014, as compared to December 31, 2013, is due to the receipt of net proceeds of $12.2 million pursuant to a public offering and of $0.3 million pursuant to drawdowns made under our "At-the-Market" ("ATM") sales agreement program entered into in May 2013, partially offset by variations in components of our working capital and by recurring disbursements.
The decrease in payables and other current liabilities as at March 31, 2014, as compared to December 31, 2013, is mainly due to lower trade accounts payable in connection with the Cetrotide Business.
Our warrant liability increased from December 31, 2013 to March 31, 2014 predominantly due to the issuance of 8.8 million additional share purchase warrants in connection with the public offering mentioned above, which increased our warrant liability by $8.5 million. The increase was partly offset by net fair value gains of $4.9 million, which were recorded pursuant to our periodic "mark-to-market" revaluation of the underlying outstanding share purchase warrants.
The increase in non-financial non-current liabilities as at March 31, 2014, as compared to December 31, 2013, is mainly due to the increase of $1.0 million in our pension-related employee benefit obligation (due predominantly to the recording of an actuarial loss subsequent to the adjustment of the discount rate assumption from 3.37%, which had been applied as at December 31, 2013, to 2.97% as at March 31, 2014). This adjustment was deemed necessary due to changes in the European economic environment.
First Quarter MD&A - 2014
Financial Liabilities, Obligations and Commitments
We have certain contractual lease obligation commitments. Future minimum lease payments and future minimum sublease payments expected to be received under non-cancellable operating leases (subleases), as well as future payments in connection with utility service agreements are as follows:
| As at March 31, 2014 | |||||||||
| (in thousands) | Minimum lease payments | Minimum sublease payments | Utilities | ||||||
| $ | $ | $ | |||||||
| Less than 1 year | 1,784 | (226 | ) | 592 | |||||
| 1 - 3 years | 2,216 | (451 | ) | 446 | |||||
| 4 - 5 years | 408 | (188 | ) | - | |||||
| More than 5 years | - | - | - | ||||||
| Total | 4,408 | (865 | ) | 1,038 |
Outstanding Share Data
As at May 8, 2014, we had 56,513,969 common shares issued and outstanding, as well as 2,234,863 stock options outstanding. Warrants outstanding as at May 8, 2014 represented a total of 28,907,410 equivalent common shares.
Our objective in managing capital, consisting of shareholders' equity, with cash and cash equivalents and restricted cash equivalents being its primary components, is to ensure sufficient liquidity to fund R&D activities, selling, general and administrative expenses, working capital and capital expenditures.
In the past, we have had access to liquidity through non-dilutive sources, including investment tax credits and grants, interest income, licensing and related services and royalties. More recently, we have increasingly raised capital via public equity offerings and drawdowns under various ATM sales programs.
Our capital management objective remains the same as that in previous periods. The policy on dividends is to retain cash to keep funds available to finance the activities required to advance our product development portfolio.
We are not subject to any capital requirements imposed by any regulators or by any other external source.
Liquidity, Cash Flows and Capital Resources
Our operations and capital expenditures have been financed through certain transactions impacting our cash flows from operating activities, public equity offerings, as well as from the drawdowns under various ATM programs.
Based on our assessment, which took into account current cash levels, as well as our strategic plan and corresponding budgets and forecasts, we believe that we have sufficient liquidity and financial resources to fund planned expenditures and other working capital needs for at least, but not limited to, the 12-month period following the statement of financial position date of March 31, 2014.
We may endeavour to secure additional financing, as required, through strategic alliance arrangements or through other activities, as well as via the issuance of new share capital.
First Quarter MD&A - 2014
The variations in our liquidity by activity are explained below.
| (in thousands) | Three months ended March 31, | |||||
| 2014 | 2013 | |||||
| $ | $ | |||||
| Cash and cash equivalents - Beginning of period | 43,202 | 39,521 | ||||
| Cash flows from operating activities: | ||||||
| Cash used in operating activities from continuing operations | (9,216 | ) | (7,321 | ) | ||
| Cash (used in) provided by operating activities from discontinued operations | (357 | ) | 1,439 | |||
| (9,573 | ) | (5,882 | ) | |||
| Cash flows from financing activities: | ||||||
| Net proceeds from issuance of common shares and warrants | 12,446 | - | ||||
| 12,446 | - | |||||
| Cash flows from investing activities: | ||||||
| Net cash used in investing activities from continuing operations | (7 | ) | (22 | ) | ||
| (7 | ) | (22 | ) | |||
| Effect of exchange rate changes on cash and cash equivalents | (316 | ) | (434 | ) | ||
| Cash and cash equivalents - End of period | 45,752 | 33,183 |
Operating Activities
Cash used in operating activities were $9.6 million for the three-month period ended March 31, 2014, compared to $5.9 million for the same period in 2013. This increase is due to the comparative increase in R&D expenditures predominantly related to our zoptarelin doxorubicin project. Additionally, the overall increase in cash used in operating activities was due to variations associated with our discontinued operations, following the transfer of the Cetrotide Business in the fourth quarter of 2013, as discussed above.
We expect net cash used in operating activities to remain relatively stable in the second quarter of 2014, as compared to the three-month period ended March 31, 2014, despite our continued investment in our ZoptEC Phase 3 program and related sub-studies. This estimate may vary significantly in future periods, most notably as a result of the strategic review of our R&D activities and in light of ongoing business development initiatives, as discussed further below.
Financing Activities
Cash flows provided by financing activities were $12.4 million for the three-month period ended March 31, 2014, compared to nil for the same period in 2013. The increase is due to the proceeds received from the issuance of common shares and warrants, as discussed above.
Critical Accounting Policies, Estimates and Judgments
Our condensed interim consolidated financial statements have been prepared in accordance with IFRS as issued by the IASB.
First Quarter MD&A - 2014