Full Press Release Details
Management's Discussion and Analysis
of Financial Condition and Results of Operations
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 and nine months ended September 30, 2016. 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 the accompanying notes thereto as at September 30, 2016 and for the three and nine months ended September 30, 2016 and 2015 (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 US dollars, except for share, option and share purchase warrant information, or as otherwise noted.
All share, option and share purchase warrant as well as per share, option and share purchase warrant information presented in this MD&A has been adjusted, including proportionate adjustments being made to each option and share purchase warrant exercise price, to reflect and to give effect to a share consolidation (or reverse split), on November 17, 2015, of our issued and outstanding common shares on a 100-to-1 basis. The share consolidation affected all shareholders, optionholders and warrantholders uniformly and thus did not materially affect any securityholder's percentage of ownership interest.
We are a specialty biopharmaceutical company engaged in developing and commercializing novel treatments in oncology, endocrinology and women's health.
We have two Phase 3 product candidates in development: Zoptrex , a first-in-class targeted therapy, which, if approved, will be the first United States ("US") Food and Drug Administration (the "FDA")-approved treatment for advanced, recurrent endometrial cancer, and Macrilen , potentially the first FDA-approved drug to be used in conjunction with the evaluation of adult growth hormone deficiency ("AGHD"). In addition, we currently co-promote two products: Saizen [somatropin (rDNA origin) for injection], a recombinant human growth hormone supplement, on behalf of EMD Serono, Inc., the US and Canadian biopharmaceutical businesses of Merck KGaA of Darmstadt, Germany ("EMD Serono"); and APIFINY , the first non-prostate-specific antigen ("PSA") blood test for use in evaluating the risk of prostate cancer, on behalf of Armune BioScience, Inc. ("Armune").
In addition to the clinical development programs and current commercial activities, we actively seek opportunities to in-license and acquire products for US commercialization. Our goal is to become a growth-oriented specialty biopharmaceutical company by pursuing successful development and commercialization of our product portfolio, achieving successful commercial presence and growth, while consistently delivering value to our shareholders, employees and the medical providers and patients who will benefit from our products. We also are looking into out-licensing opportunities for Zoptrex and Macrilen for territories outside the United States.
The Company's common shares are listed both on The NASDAQ Capital Market ("NASDAQ"), under the symbol "AEZS", and on the Toronto Stock Exchange ("TSX"), under the symbol "AEZ".
Third Quarter MD&A - 2016
About Forward-Looking Statements
This document contains forward-looking statements made pursuant to the safe harbor provisions of the U.S. Securities Litigation Reform Act of 1995, which reflect our current expectations regarding future events. Forward-looking statements may include, but are not limited to statements preceded by, followed by, or that include the words "expects," "believes," "intends," "anticipates," and similar terms that relate to future events, performance, or our results. Forward-looking statements involve known risks and uncertainties, many of which are discussed in this MD&A, while others are discussed under the caption "Key Information - Risk Factors" in our most recent Annual Report on Form 20-F filed with the relevant Canadian securities regulatory authorities in lieu of an annual information form and with the US Securities and Exchange Commission ("SEC"). Such statements include, but are not limited to, statements about the progress of our research, development and clinical trials and the timing of, and prospects for, regulatory approval and commercialization of our product candidates, the timing of expected results of our studies, anticipated results of these studies, statements about the status of our efforts to establish a commercial operation and to obtain the right to promote or sell products that we did not develop and estimates regarding our capital requirements and our needs for, and our ability to obtain, additional financing. Known and unknown risks and uncertainties could cause our actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, among others, the availability of funds and resources to pursue our research and development projects and clinical trials, the successful and timely completion of clinical studies, the risk that safety and efficacy data from any of our Phase 3 trials may not coincide with the data analyses from previously reported Phase 1 and/or Phase 2 clinical trials, the rejection or non-acceptance of any new drug application by one or more regulatory authorities and, more generally, uncertainties related to the regulatory process, the ability of the Company to efficiently commercialize one or more of its products or product candidates, the degree of market acceptance once our products are approved for commercialization, our ability to take advantage of business opportunities in the pharmaceutical industry, our ability to protect our intellectual property, the potential of liability arising from shareholder lawsuits and general changes in economic conditions. Investors should consult the Company's quarterly and annual filings with the Canadian and U.S. securities commissions for additional information on risks and uncertainties. See also the section entitled "Risk Factors and Uncertainties" in this MD&A. Given these uncertainties and risk factors, readers are cautioned not to place undue reliance on these 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.
About Material Information
This MD&A includes information that we believe to be material to investors after considering all circumstances. 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 SEC. The Company is therefore required to file or furnish continuous disclosure information, such as interim and annual financial statements, MD&A, proxy or information 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 Corporate Secretary or on the Internet at the following addresses: www.aezsinc.com, www.sedar.com and www.sec.gov.
Third Quarter MD&A - 2016
Status of Our Drug Pipeline
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(1) Phase 2 in ovarian cancer completed.
(2) Investigator-driven and sponsored Phase 2 trial in castration and taxane resistant prostate cancer completed.
(3) Potential oral prostate cancer vaccine available for co-development/out-licensing, subject to an option granted to a third party.
(4) Available for co-development/out-licensing.
(5) Compound library transferred to Medical University of South Carolina. Aeterna Zentaris has access to future potential development candidates.
Zoptrex (zoptarelin doxorubicin)
Zoptrex is a complex molecule that combines a synthetic peptide carrier with doxorubicin, a well-known chemotherapy agent. The synthetic peptide carrier is a luteinizing hormone-releasing hormone ("LHRH") agonist, a modified natural hormone with affinity for the LHRH receptor. The design of the compound allows for the specific binding and selective uptake of the cytotoxic conjugate by LHRH receptor-positive tumors. Potential benefits of this targeted approach include a better efficacy and a more favorable safety profile with lower incidence and severity of side effects as compared to doxorubicin alone. Zoptrex is our proposed trade name for zoptarelin doxorubicin. The proposed trade name is subject to approval by the FDA.
We believe that Zoptrex has the potential to become the first FDA-approved medical therapy for advanced, recurrent endometrial cancer, which could potentially result in the compound's rapid adoption as a novel core therapy for patient treatment and management, representing a significant potential market opportunity for us. Moving forward, we will continue to develop our commercialization plans regarding Zoptrex in this indication. In addition, contingent on the success of the ZoptEC (Zoptarelin Doxorubicin in Endometrial Cancer) pivotal Phase 3 clinical trial in women with advanced, recurrent or metastatic endometrial cancer, we have additional areas of interest for further therapeutic development for Zoptrex , including ovarian, prostate, breast and potentially bladder cancer.
On October 13, 2015, we announced that the independent Data and Safety Monitoring Board ("DSMB") had recommended that the pivotal Phase 3 ZoptEC study continue as planned. The DSMB's decision followed completion of its pre-specified second interim analysis on efficacy and safety at approximately 192 events. A final analysis of the data is expected at approximately 384 events. We expect to release top-line results in Q1 2017.
On July 1, 2016, we announced that we had entered into an exclusive license agreement with Cyntec Co., Ltd. ("Cyntec"), an affiliate of Orient EuroPharma Co., Ltd. ("OEP") for Zoptrex for the initial indication of endometrial cancer. Under the terms of the License Agreement, we were paid a non-refundable upfront cash payment in consideration for the license to Cyntec of our intellectual property related to Zoptrex and the grant to Cyntec of the right to commercialize Zoptrex in a territory consisting of Taiwan and nine countries in southeast Asia (the "OEP Territory"). Cyntec has also agreed to make additional payments to us upon achieving certain pre-established regulatory and commercial milestones.
Third Quarter MD&A - 2016
Furthermore, we will receive royalties based on future net sales of Zoptrex in the OEP Territory. Cyntec will be responsible for the development, registration, reimbursement and commercialization of the product in the OEP Territory. We entered into related Technology Transfer and Supply Agreements with another affiliate of OEP, pursuant to which the we will transfer to such affiliate the technology necessary to permit the affiliate to manufacture finished Zoptrex using quantities of the active pharmaceutical agreement purchased from us pursuant to the Supply Agreement.
On July 31, 2016, we announced that we had entered into an exclusive license agreement with Rafa Laboratories Ltd ("Rafa") for Zoptrex for the initial indication of endometrial cancer. Under the terms of the license agreement, we were paid a non-refundable upfront cash payment in consideration for the license to Rafa of our intellectual property related to Zoptrex and the grant to Rafa of the right to commercialize Zoptrex in a territory consisting of Israel and the Palestinian territories (the "Rafa Territory"). Rafa has also agreed to make additional payments to us upon achieving certain pre-established regulatory and commercial milestones. Furthermore, we will receive royalties based on future net sales of Zoptrex in the Rafa Territory. Rafa will be responsible for the development, registration, reimbursement and commercialization of the product in the Rafa Territory. We entered into a related Supply Agreement with Rafa pursuant to which we will sell finished Zoptrex to Rafa.
On October 12, 2016, we announced that we had entered into an exclusive license agreement with Specialised Therapeutics Asia Pte Ltd ("STA") for Zoptrex for the initial indication of endometrial cancer. Under the terms of the license agreement, we were paid a non-refundable upfront cash payment in consideration for the license to STA of our intellectual property related to Zoptrex and the grant to STA of the right to commercialize Zoptrex in a territory consisting of Australia and New Zealand (the "STA Territory"). STA has also agreed to make additional payments to us upon achieving certain pre-established regulatory and commercial milestones. Furthermore, we will receive royalties based on future net sales of Zoptrex in the STA Territory. STA will be responsible for the development, registration, reimbursement and commercialization of the product in the STA Territory. We entered into a related Supply Agreement with STA pursuant to which we will sell finished Zoptrex to STA.
Macrilen (macimorelin)
Macimorelin, a ghrelin agonist, is a novel orally-active small molecule that stimulates the secretion of growth hormone. Macimorelin has been granted orphan drug designation by the FDA for diagnosis of AGHD. The Company owns the worldwide rights to this novel patented compound. MacrilenTM is our proposed trade name for macimorelin. The proposed trade name is subject to approval by the FDA.
On October 26, 2016, we announced the completion of patient recruitment for the Macrilen confirmatory Phase 3 clinical trial for the evaluation of AGHD. We currently expect to release top-line results in early 2017 and to file a New Drug Application for Macrilen ("NDA") with the FDA during the first half of 2017, if the results of the trial warrant doing so. The confirmatory trial is an open-label, randomized, two-way crossover study that compares the results of the evaluation of AGHD using Macrilen to the results of the evaluation of AGHD using a procedure known as the "Insulin Tolerance Test" (the "ITT") on the same patient. The trial involves patients, each of whom was evaluated for AGHD using both Macrilen and the ITT. Thirty of the patients will be evaluated using Macrilen a second time to measure the repeatability of the result obtained using Macrilen as the evaluation method. The study population consisted of more than 110 patients who were suspected of having AGHD as a result of the presence of one or more symptoms. This segment of the population included a range of patients from those considered at low risk of having AGHD to those considered at high risk. The study population also included 25 healthy subjects, who had no risk of having AGHD. The two co-primary endpoints are "percent of negative agreement" and "percent of positive agreement" between the Macrilen test and the ITT. The evaluation of AGHD with Macrilen will be considered successful if the lower bound of the two-sided 95% confidence interval (or lower bound of the one-sided 97.5% confidence interval) for the primary efficacy variables is 75% or higher for "percent negative agreement", and 70% or higher for the "percent positive agreement".
Pre-clinical developments
On January 13, 2016, we announced that, in addition to our focus on Zoptrex , we are also focusing on Disorazol Z, because it is an ideal compound for the formation of cytotoxic conjugates with peptides, proteins and antibodies to selectively target cancer cells. We have one cytotoxic conjugate, AEZS-138, in preclinical development. It is a conjugate based on Disorazol Z and the LHRH receptor agonist that is utilized in Zoptrex . We believe that the peptide directs the compound specifically to the LHRH receptor expressing tumor cells, and mediates binding and uptake via endocytosis. Within the cancer cell, the conjugates are cleaved and Disorazol Z can deploy its potent anti-proliferative activity. We have patented the cytotoxic agent Disorazol Z in 35 countries, including the US, Japan, Europe, China, Russia, Korea and Taiwan. This patent protection expires in 2026.
Third Quarter MD&A - 2016
The conjugate of Disorazol Z and the LHRH receptor agonist as a targeted cytotoxic agent is patented in 15 countries, including the US, Japan, China, Russia, Korea and Taiwan. This patent protection expires in 2027. We expect the European patent to be granted in the near future.
Commercial Operations
Our commercial operations consist of approximately 20 full-time sales representatives and sales-management staff. The sales representatives are employed by a contract sales organization; they provide services to us pursuant to our contract with the contract sales organization. Maintaining a sales force is an essential part of our strategy to transform the Company into a commercially operating specialty biopharmaceutical company. We do not believe it is practical for a company our size to sustain itself solely on a portfolio of internally derived products: development takes too long, costs too much money and entails too much risk. Therefore, we are seeking to acquire or to in-license products that fit our areas of therapeutic interest and capabilities and that are available on what we consider to be reasonable commercial terms.
Our sales force currently co-promotes two products that are owned by others: Saizen and APIFINY . Until September 1, 2016, we co-promoted a third product: EstroGel
On May 8, 2015, we announced that we had entered into a promotional services agreement with EMD Serono, allowing us to promote Saizen [somatropin (rDNA origin) for injection] to designated medical professionals in specified US territories. Saizen is a recombinant human growth hormone brand registered in the US for the treatment of pediatric and adult growth hormone deficiency. Under this agreement, we are promoting Saizen to designated medical professionals, representing an important incremental field promotion activity in support of EMD Serono's product. We are currently promoting Saizen in approximately 20 US territories, with efforts having commenced during the third quarter of 2015. We receive a commission based on new, eligible patient starts ("NPS") on Saizen above an agreed-upon baseline.
During the fourth quarter of 2015, we signed a co-marketing agreement with Armune BioScience, Inc. ("Armune") giving us the right to promote this product to specified targets in the United States. APIFINY is the only cancer-specific, non-PSA based blood test for the evaluation of the risk of prostate cancer. As such, it is an important adjunct to the traditional PSA test.
On April 27, 2016, we announced that we had entered into a new co-marketing agreement with Armune that gives us the exclusive right to promote APIFINY throughout the entire United States. Under the terms of the new co-marketing agreement, we receive a commission for every APIFINY test ordered. The amount of the commission varies depending upon the payer. For commercial insurance tests, we receive an upfront payment when the test is performed and, within 30 to 90 days, an additional percentage of the reimbursement, minus the amount of the upfront payment. For all other tests, we receive a flat fee at the time the test is performed.
We decided to stop co-promoting EstroGel , effective as of September 1, 2016, in order to concentrate our promotional efforts on other products that we promote.
Corporate Activities
Public offerings and related events
On December 30, 2015, we announced that we had filed a preliminary short form base shelf prospectus (the "Shelf Prospectus") with the securities regulatory authorities in each of the provinces of Canada, and a corresponding shelf registration statement on Form F-10 with the SEC under the US/Canada Multijurisdictional Disclosure System. The Shelf Prospectus and corresponding shelf registration statement, which became effective on January 13, 2016, allows us to offer up to $150 million of common shares, preferred shares, debt securities, subscription receipts, warrants or units comprised of one or more of such securities during the period that the Shelf Prospectus is effective.
Third Quarter MD&A - 2016
On April 1, 2016, we entered into an "At-the-Market" ("ATM") sales agreement under which we are able, at our discretion and from time to time, to sell up to 3 million of our common shares through ATM issuances on the NASDAQ for aggregate gross proceeds of up to approximately $10 million (the "ATM Program"). The ATM Program provides that common shares are to be sold at market prices prevailing at the time of sale and, as a result, prices may vary. Between April 1, 2016 and November 8, 2016, we sold and issued an aggregate of 592,078 Common Shares at an average issuance and sales price of $3.88 per share pursuant to our ATM Program.
On September 12, 2016, all 8,064 remaining Series B Warrants that had been issued in connection with our March 2015 financing expired without having been exercised.
On November 1, 2016, we completed a registered direct offering of 2,100,000 units (the "Units"), with each Unit consisting of one common share or one pre-funded warrant to purchase one common share and 0.45 of a warrant to purchase one common share (the "November 2016 Offering"). Total gross cash proceeds raised through the November 2016 Offering amounted to approximately $7.6 million, less cash transaction costs of approximately $0.9 million, including the placement agent's fee and expenses. The warrants are exercisable six months after their date of issuance and for a period of three years thereafter at an exercise price of $4.70 per share. The warrants contain a call provision which provides that, in the event our common shares trade at or above $10.00 on the market during a specified measurement period and subject to a minimum volume of trading during such measurement period, then, subject to certain conditions, we have the right to call for cancellation all or any portion of the warrants which are not exercised by holders within 10 trading days following receipt of a call notice from us. Upon complete exercise for cash, these warrants would result in the issuance of an aggregate of 945,000 common shares that would generate additional proceeds of approximately $4.4 million, although these warrants may be exercised on a "net" or "cashless" basis.
Class action lawsuit
The Company and certain of its current and former officers are defendants in a putative class-action lawsuit brought on behalf of shareholders of the Company. The pending lawsuit is the result of the consolidation of several lawsuits, the first of which was filed on November 11, 2014. The plaintiffs filed their amended consolidated complaint on April 10, 2015. The amended complaint alleged violations of the Securities Exchange Act of 1934 in connection with allegedly false and misleading statements made by the defendants between August 30, 2011 and November 6, 2014 (the "Class Period"), regarding the safety and efficacy of Macrilen and the prospects for the approval of the Company's new drug application for the product by the FDA. The plaintiffs seek to represent a class comprised of purchasers of the Company's common shares during the Class Period and seek unspecified damages, costs and expenses and such other relief as determined by the Court.
On September 14, 2015, the Court dismissed the lawsuit, but granted the plaintiffs leave to amend. In dismissing the lawsuit, the Court affirmed that the plaintiffs had failed to state a claim. On October 14, 2015, the plaintiffs filed a second amended complaint. We subsequently filed a motion to dismiss the second amended complaint. The hearing of the motion to dismiss the Second Amended Complaint occurred on January 19, 2016. On March 2, 2016, the Court issued an order granting our motion to dismiss the complaint in part and denying it in part. The Court dismissed certain of our current and former officers from the lawsuit. The Court allowed the claim that we omitted material facts from our public statements during the Class Period to proceed against us and our former CEO, who departed in 2013, while dismissing such claims against other current and former officers. The Court also allowed a claim for "controlling person" liability to proceed against certain current and former officers.
We filed a motion for reconsideration of the Court's March 2, 2016 order on March 16, 2016 and filed an answer to the second amended complaint on April 6, 2016. On June 30, 2016, the Court issued an order denying our motion for reconsideration. As a result, the lawsuit will proceed to the class certification phase and the discovery process has commenced. During the second quarter, we exceeded the deductible amount applicable to this claim. Therefore, we believe that the insurers will bear most of the costs for our defense in future periods, subject to our policy limits.
Third Quarter MD&A - 2016
Condensed Interim Consolidated Statements of Comprehensive Loss Information
| Three months ended September 30, | Nine months ended September 30, | |||||||||||
| (in thousands, except share and per share data) | 2016 | 2015 | 2016 | 2015 | ||||||||
| $ | $ | $ | $ | |||||||||
| Revenues | ||||||||||||
| Sales commission and other | 105 | 111 | 319 | 256 | ||||||||
| License fees | 164 | 62 | 288 | 187 | ||||||||
| 269 | 173 | 607 | 443 | |||||||||
| Operating expenses | ||||||||||||
| Research and development costs | 4,512 | 4,050 | 11,876 | 12,991 | ||||||||
| General and administrative expenses | 1,631 | 1,910 | 5,390 | 7,355 | ||||||||
| Selling expenses | 1,829 | 1,714 | 5,219 | 5,123 | ||||||||
| 7,972 | 7,674 | 22,485 | 25,469 | |||||||||
| Loss from operations | (7,703 | ) | (7,501 | ) | (21,878 | ) | (25,026 | ) | ||||
| (Loss) gain due to changes in foreign currency exchange rates | (64 | ) | (367 | ) | 326 | (1,452 | ) | |||||
| Change in fair value of warrant liability | 1,687 | (7,573 | ) | 4,682 | (13,986 | ) | ||||||
| Other finance income | 25 | 40 | 131 | 279 | ||||||||
| Net finance income (costs) | 1,648 | (7,900 | ) | 5,139 | (15,159 | ) | ||||||
| Net loss from continuing operations | (6,055 | ) | (15,401 | ) | (16,739 | ) | (40,185 | ) | ||||
| Net income from discontinued operations | - | 111 | - | 60 | ||||||||
| Net loss | (6,055 | ) | (15,290 | ) | (16,739 | ) | (40,125 | ) | ||||
| Other comprehensive loss: | ||||||||||||
| Items that may be reclassified subsequently to profit or loss: | ||||||||||||
| Foreign currency translation adjustments | (62 | ) | (21 | ) | (301 | ) | 1,260 | |||||
| Items that will not be reclassified to profit or loss: | ||||||||||||
| Actuarial (loss) gain on defined benefit plans | (400 | ) | - | (2,622 | ) | 960 | ||||||
| Comprehensive loss | (6,517 | ) | (15,311 | ) | (19,662 | ) | (37,905 | ) | ||||
| Net loss per share (basic and diluted) from continuing operations | (0.61 | ) | (6.71 | ) | (1.68 | ) | (29.16 | ) | ||||
| Net income per share (basic and diluted) from discontinued operations | - | 0.05 | - | 0.04 | ||||||||
| Net loss per share (basic and diluted) | (0.61 | ) | (6.66 | ) | (1.68 | ) | (29.12 | ) | ||||
| Weighted average number of shares outstanding: | ||||||||||||
| Basic | 9,951,573 | 2,294,504 | 9,938,980 | 1,378,260 | ||||||||
| Diluted | 9,951,573 | 2,294,504 | 9,938,980 | 1,378,260 |
Third Quarter MD&A - 2016
Sales commission and other were $0.1 million and $0.3 million for the three and nine months ended September 30, 2016 and 2015, respectively, and thus remained unchanged in 2016 as compared to 2015. In 2016, those revenues mainly resulted from our sales team exceeding pre-established unit sales baseline thresholds under our co-promotion agreements to sell Saizen . We also generated sales commission in connection with our promotion of APIFINY . In the corresponding quarters of 2015, sales commission and other revenues were mainly related to EstroGel .
After a strong first quarter, the results of our co-promotion of Saizen during the second and third quarters were disappointing. The demand for Saizen appears to be much more seasonal than we previously realized. Additionally, our non-commercial, self-pay business slowed in part due to competitive price pressures.
During the third quarter of 2016, we increased our sales commission revenue from our promotion of APIFINY by 210% compared to the second quarter. This growth is mainly explained by the fact that our exclusive-promotion rights to APIFINY commenced only on June 1. We expect that we will continue to grow that business in the next quarter.
License fees were $0.2 million and $0.3 million for the three and nine months ended September 30, 2016, respectively, as compared to $0.1 million and $0.2 million for the same periods in 2015. Those revenues resulted partially from the amortization of a one-time, non-refundable payment made to us in 2014 in connection with a master collaboration agreement, a technology transfer and technical assistance agreement and a license agreement we entered into with Sinopharm, which is related to ZoptrexTM. We deferred this non-refundable payment and we amortize it on a straightline basis over a four-year period. During the third quarter of 2016, we also started to amortize the one-time, non-refundable payments made to us in connection with similar agreements we entered into with Cyntec and Rafa, which also relate to ZoptrexTM. We amortize those on a straight-line basis over a 33-month period.
We expect revenues during the fourth quarter of 2016 to be slightly higher than those recorded during the third quarter of 2016 due to higher sales commission revenue that we expect to generate in connection with our promotion efforts related to Saizen and APIFINY . We will also commence recording the amortization of the one-time, non-refundable payment received in connection with the agreements with STA, in connection with ZoptrexTM, as described in the "Key Developments" section above.
Research and Development ("R&D") costs were $4.5 million and $11.9 million for the three and nine months ended September 30, 2016, respectively, compared to $4.1 million and $13.0 million for the same periods in 2015.
The increase in our R&D costs for the three months ended September 30, 2016, as compared to the same period in 2015, is mainly attributable to higher comparative third-party costs, as described below.
The decrease in our R&D costs for the nine months ended September 30, 2016, as compared to the same period in 2015, is attributable to lower comparative third-party costs, as described below. It is also explained by lower employee compensation and benefits costs as well as lower other costs. A substantial portion of this decrease is due to the realization of cost savings in connection with our ongoing efforts to streamline our R&D activities and to increase our commercial operations and flexibility by reducing our R&D staff, which was started in 2014 (the "Resource Optimization Program").
Third Quarter MD&A - 2016
The following table summarizes our R&D costs by nature of expense:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||
| (in thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||
| $ | $ | $ | $ | |||||||||
| Third-party costs | 3,504 | 2,861 | 8,596 | 8,992 | ||||||||
| Employee compensation and benefits | 717 | 840 | 2,379 | 2,794 | ||||||||
| Facilities rent and maintenance | 224 | 88 | 641 | 631 | ||||||||
| Other costs 1 | 67 | 261 | 262 | 848 | ||||||||
| Gain on disposal of equipment | - | - | (2 | ) | (274 | ) | ||||||
| 4,512 | 4,050 | 11,876 | 12,991 |
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1.Includes mainly depreciation, amortization as well as operating foreign exchange losses.
The following table summarizes primary third-party R&D costs, by product candidate, incurred by the Company during the three and nine months ended September 30, 2016 and 2015.
| (in thousands, except percentages) | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||
| Product Candidate | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||||
| $ | % | $ | % | $ | % | $ | % | |||||||||||||||
| Zoptrex | 2,094 | 59.8 | 1,985 | 69.4 | 5,289 | 61.5 | 7,147 | 79.5 | ||||||||||||||
| Macrilen | 1,184 | 33.8 | 408 | 14.3 | 2,758 | 32.1 | 578 | 6.4 | ||||||||||||||
| LHRH-Disorazol Z | 94 | 2.7 | 50 | 1.7 | 208 | 2.4 | 139 | 1.5 | ||||||||||||||
| Erk inhibitors | 40 | 1.1 | 355 | 12.4 | 114 | 1.3 | 1,010 | 11.2 | ||||||||||||||
| Other | 92 | 2.6 | 63 | 2.2 | 227 | 2.7 | 118 | 1.4 | ||||||||||||||
| 3,504 | 100.0 | 2,861 | 100.0 | 8,596 | 100.0 | 8,992 | 100.0 |
As shown above, a substantial portion of the quarter-to-date and year-to-date R&D costs relate to development initiatives associated with Zoptrex , and in particular with our pivotal Phase 3 ZoptEC clinical trial initiated in 2013 with Ergomed. Third-party costs attributable to Zoptrex decreased considerably during the nine months ended September 30, 2016, as compared to the same period in 2015, mainly due to the fact that dosing of patients in the ZoptEC trial was completed in February 2016. This is consistent with our expectations as we are approaching the end of the clinical trials. We are confident in our ability to complete the study during 2016.
As we continue to closely monitor all initiatives supported by Ergomed related to the ZoptEC trial, we may be required to revise some of the trial's parameters or expand the scope of work performed by Ergomed and, consequently, total estimated costs in connection with the co-development and revenue sharing agreement may be adjusted. To date, our arrangement with Ergomed has been revised in previous periods and is in the process of being further revised, following our decision to open additional clinical sites, to perform additional sub-studies and to account for the increased timelines and additional activities, resulting in overall, cumulative cost increases of approximately $4.5 million, as compared to our original expectations. We currently estimate that we will incur approximately $4.4 million pursuant to our agreement with Ergomed over the next six months as we proceed with and complete our ZoptEC trial.
In addition, during 2015, we initiated the new confirmatory Phase 3 clinical trial of Macrilen , which explains the increase in costs for this product candidate. The first patient was enrolled in the fourth quarter of 2015 and we announced completion of patient recruitment in the fourth quarter of 2016.
Excluding the impact of foreign exchange rate fluctuations, we now expect that we will incur overall R&D costs of between $17.0 million and $19.0 million for the year ended December 31, 2016. The increase as compared to our previous guidance on R&D costs for 2016 is mainly explained by the estimated additional adjustments that will be made to our contract with Ergomed as described above.
Third Quarter MD&A - 2016
General and administrative ("G&A") expenses were $1.6 million and $5.4 million for the three and nine months ended September 30, 2016, respectively, as compared to $1.9 million and $7.4 million for the same periods in 2015. The decrease in our G&A costs for the three months ended September 30, 2016, as compared to the same period in 2015 is mainly due to the realization of cost savings in connection with our corporate restructuring, which was announced in the fourth quarter of 2015. The comparative decrease for the nine-month period is also partially explained by the realization of costs saving in connection with our corporate restructuring although mainly attributable to the recording, in the prior year period, of certain transaction costs allocated to warrants in connection with the completion of an offering in March 2015.
During 2016, excluding the impact of foreign exchange rate fluctuations, we continue to expect G&A expenses to be lower as compared to 2015 because we do not expect to record restructuring charges in 2016 and we expect lower transactions costs than we incurred in 2015. We now expect them to be ranging between $7.0 million and $8.0 million during 2016. This forecast includes the transaction costs related to the warrants issued in connection with the November 2016 Offering announced and completed subsequent to September 30, 2016, described in the "Key Developments" section above.
Selling expenses were $1.8 million and $5.2 million for the three and nine months ended September 30, 2016, respectively, as compared to $1.7 million and $5.1 million for the same periods in 2015. The selling expenses for the three and nine months ended September 30, 2016 and 2015 represent mainly the costs of our contracted sales force related to the co-promotion activities as well as our internal sales management team.
Based on currently available information and forecasts, we expect selling expenses to remain relatively stable and to reach a range of between $7.0 million and $8.0 million during 2016.
Net finance income (costs) were $1.6 million and $5.1 million for the three and nine months ended September 30, 2016, as compared to $(7.9) million and $(15.2) million, for the same periods in 2015. These increases in finance income are mainly attributable to the change in fair value recorded in connection with our warrant liability. Such change in fair value results from the periodic "mark-to-market" revaluation, via the application of the intrinsic valuation and the Black-Scholes option pricing models, of outstanding share purchase warrants. During the quarter, the "mark-to-market" warrant valuation was mainly impacted by the expiration of the remaining Series B Warrants. During 2015, the change in assumptions that were applied to determine the fair value of the alternate cashless feature included in the Series B Warrants significantly impacted the "mark-to-market" valuation. Furthermore, the closing price of our common shares, which, on the NASDAQ, fluctuated from $3.30 to $3.73 during the three-month period and $2.67 to $4.40 during the nine-month period ended September 30, 2016, respectively, compared to $5.02 to $27.50 and $5.02 to $84.00 during the same periods in 2015, also had a direct impact on the change in fair value of warrant liability.
Net loss for the three and nine months ended September 30, 2016 was $6.1 million and $16.7 million, or $0.61 and $1.68 per basic and diluted share, as compared to a net loss of $15.3 million and $40.1 million, or $6.66 and $29.12 per basic and diluted share, for the same periods in 2015. The decrease in net loss for the three months ended September 30, 2016, as compared to the same period in 2015, is due largely to higher comparative net finance income, as presented above. The decrease in net loss for the nine months ended September 30, 2016, as compared to the same period in 2015, is due largely to lower operating expenses and higher comparative net finance income, as presented above.
Third Quarter MD&A - 2016
Quarterly Consolidated Results of Operations Information
| (in thousands, except for per share data) | Three months ended | |||||||||||
| September 30, 2016 | June 30, 2016 | March 31, 2016 | December 31, 2015 | |||||||||
| $ | $ | $ | $ | |||||||||
| Revenues | 269 | 96 | 242 | 102 | ||||||||
| Loss from operations | (7,703 | ) | (7,184 | ) | (6,991 | ) | (9,858 | ) | ||||
| Net loss from continuing operations | (6,055 | ) | (7,008 | ) | (3,676 | ) | (10,043 | ) | ||||
| Net loss | (6,055 | ) | (7,008 | ) | (3,676 | ) | (10,018 | ) | ||||
| Net loss per share from continuing operations (basic and diluted)* | (0.61 | ) | (0.71 | ) | (0.37 | ) | (1.46 | ) | ||||
| Net loss per share (basic and diluted)* | (0.61 | ) | (0.71 | ) | (0.37 | ) | (1.46 | ) |
| (in thousands, except for per share data) | Three months ended | |||||||||||
| September 30, 2015 | June 30, 2015 | March 31, 2015 | December 31, 2014 | |||||||||
| $ | $ | $ | $ | |||||||||
| Revenues | 173 | 197 | 73 | 11 | ||||||||
| Loss from operations | (7,501 | ) | (7,989 | ) | (9,536 | ) | (10,947 | ) | ||||
| Net (loss) income from continuing operations | (15,401 | ) | (15,148 | ) | (9,636 | ) | 3,995 | |||||
| Net (loss) income | (15,290 | ) | (15,099 | ) | (9,736 | ) | 4,153 | |||||
| Net (loss) income per share from continuing operations (basic and diluted)* | (6.71 | ) | (13.69 | ) | (13.45 | ) | 6.11 | |||||
| Net (loss) income per share (basic and diluted)* | (6.66 | ) | (13.65 | ) | (13.59 | ) | 6.35 |
_________________________
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 unpredictable quarterly variations attributable to our net finance income (costs), which 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 R&D costs have historically varied on a quarter-over-quarter basis due to the ramping up or winding down of potential product candidate activities, which are dependent upon various factors that often do not occur on a linear or predictable basis.
Our selling expenses have been consistent but can vary on a quarter-over-quarter basis due to the ramping up of pre-commercialization activities associated with Macrilen (prior to the receipt in November 2014 of the complete response letter from the FDA) and to the deployment of our contracted sales force and managerial staff related to our co-promotion and other commercial activities.
In addition to the items referred to above, our net (loss) income has also been historically impacted by net variations attributable to our discontinued operations related to the manufacturing of Cetrotide and related activities.
Third Quarter MD&A - 2016
Condensed Interim Consolidated Statement of Financial Position Information
| (in thousands) | As at September 30, | As at December 31, | ||||
| 2016 | 2015 | |||||
| $ | $ | |||||
| Cash and cash equivalents 1 | 21,052 | 41,450 | ||||
| Trade and other receivables and other current assets | 904 | 944 | ||||
| Restricted cash equivalents | 512 | 255 | ||||
| Property, plant and equipment | 224 | 256 | ||||
| Other non-current assets | 9,047 | 8,593 | ||||
| Total assets | 31,739 | 51,498 | ||||
| Payables and other current liabilities 2 | 5,066 | 4,770 | ||||
| Current portion of deferred revenues | 453 | 244 | ||||
| Warrant liability (current and non-current portions) | 6,209 | 10,891 | ||||
| Non-financial non-current liabilities 3 | 16,729 | 13,978 | ||||
| Total liabilities | 28,457 | 29,883 | ||||
| Shareholders' equity | 3,282 | 21,615 | ||||
| Total liabilities and shareholders' equity | 31,739 | 51,498 |
_________________________
The decrease in cash and cash equivalents as at September 30, 2016, as compared to December 31, 2015, is due to net cash used in operating activities, variations in components of our working capital and by the increase in restricted cash as well as by the effect of exchange rate fluctuations. The decrease was offset by the net proceeds generated by the sale and issuance of common shares under our ATM Program as well as the upfront cash payment received in consideration for the licenses to Cyntec and Rafa.