Why Aeterna Zentaris got crushed, and is there any positive takeaway?

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The News:

Aeterna Zentaris Inc. (Nasdaq: AEZS) plunged 73% to $0.89 last week after announcing that the ZoptEC Phase 3 clinical study of Zoptrex (zoptarelin doxorubicin) in women with locally advanced, recurrent or metastatic endometrial cancer did not achieve its primary endpoint of demonstrating a statistically significant increase in the median period of overall survival of patients treated with Zoptrex as compared to patients treated with doxorubicin. In­ves­ti­ga­tors said the Quebec-based biotech’s drug looked re­mark­ably like the dox­oru­bicin com­par­i­son arm.

Aeterna Zentaris Inc. stocks plunged 73% after announcing #Zoptrex clinical trial failure Click To Tweet

Zop­trex scored a 10.9 month over­all sur­vival rate com­pared to 10.8 months for dox­oru­bicin. The sec­ondary end­points were also a match. That re­sult fol­lows a Phase 3 fail­ure of their lead drug Macrilen in Jan­u­ary, which the FDA re­jected three years ago.

Shares were down another 9% as of May 10, 2017.

Steve’s Take:

After a small, erstwhile biotech like Aeterna gets disemboweled over the failure of its lead drug candidate, there are usually two camps of investors, having been in both myself over the years: 1) Those who got slaughtered along with the company by investing, but without a downside/pullout hedge strategy and, 2) those who did get out in time or never invested in the first place.

The question vis-à-vis Aeterna for investors in either camp is: what the heck happened?

Endpoints jogs our memories that it was just a couple of years ago that Aeterna promised to cre­ate a bunch of new jobs as it wres­tled to make a come­back fol­low­ing a hurtful FDA re­jec­tion of its lead drug Macrilen for adult growth hormone deficiency.

Fast-forward to the present and now it’s Zoptrex–characterized by at least one an­a­lyst as “the fu­ture” of the com­pany–that has flunked a Phase 3 study for ad­vanced en­dome­trial can­cer. Aeterna is sim­ply ditching the drug and going back to see if they can squeeze out an ap­proval for the already once-rejected Macrilen. Not only is the company now talk­ing about pur­su­ing the new FDA ap­pli­ca­tion for Macrilen, but its got mar­ket­ing plans as well.

That’s all well and good but a daunting task, at the very least, with the last drop of cred­i­bil­ity at the com­pany dashed to smithereens.

CEO David Dodd had this to say:

“Our focus has now shifted en­tirely to fil­ing our new drug ap­pli­ca­tion for Macrilen and, if the prod­uct is ap­proved, to its com­mer­cial launch as soon as pos­si­ble. We will also op­ti­mize our re­sources to be con­sis­tent with our focus on Macrilen-re­lated ef­forts. We con­tinue to be­lieve in the po­ten­tial that Macrilen pro­vides for us to be­come a fo­cused spe­cialty phar­ma­ceu­ti­cal com­pany. Our in­ten­tion is to sub­mit the Macrilen NDA in the third quar­ter of 2017 and, if the prod­uct re­ceives FDA ap­proval, to com­mer­cially launch the prod­uct in the first quar­ter of 2018.”

So where did this freight train to riches go off the track so completely?

Yes, bullish sentiment for Zoptrex was so pervasive that its total failure in Phase 3 trials was unforeseen–pretty much universally. Analysts at one point set a 12-month median share price target of $4.75, with a high of $7.50. Share prices are now sitting at $0.81.

It’s a sobering reminder that many investors failed to hedge their speculative bets with puts or didn’t scale back their holdings as the shares ran up so swiftly in the days prior to the dreaded verdict. Larger than the monetary loss, however, Seeking Alpha reminds us about all the women involved in the study currently battling endometrial cancer and now coping with the failure of Zoptrex, as safer and more effective treatments continue elusive.

What do the analysts think?

As of May 05, 2017, the consensus forecast among polled investment analysts covering AEZS advises that the company will Outperform the market. Oops. This has been the consensus forecast since the sentiment of investment analysts improved on Dec 02, 2014. The previous consensus forecast advised investors to Hold their position.

Share price forecast.

The analysts offering 12-month price targets for Aeterna have a median target of $4.75, with a high estimate of $7.50 and a low estimate of $2.00. The median estimate represents a 698% increase from the last price of $0.81.

With the Aeterna play, Seeking Alpha scolds investors saying they could have easily seen the dwindling cash pool and binary Phase 3 data and decided to either hedge their bet or wait until positive Phase 3 data were posted to take what turned out to be a painful gamble.

However, many ignored the downside risk and failed to have a risk management plan in place for their investment or a target goal. These speculators were gambling on good top line data and chasing what they hoped would be an extraordinary return.

Bottom Line:

A similar case that turned out spectacularly well for investors was InterMune. Included in the company’s portfolio was a promising new drug, pirfenidone, for treating a progressive and ultimately fatal scarring condition of the lungs. In the summer of 2014, pirfenidone was undergoing FDA review.

Turns out that Roche bought the US biotech for $8.3 billion in August, 2014. The Swiss drugmaker paid $74 a share, representing a premium of 38% to the closing price on Aug. 22, just prior to the deal’s announcement. Pirfenidone was approved by the FDA in October 2014, validating Roche’s gamble.

People familiar with the situation said on Aug. 13 that InterMune and was working with financial advisors to evaluate strategic options. Investors who bet a takeover was in the offing and held a position in the stock on Aug. 12 realized a 63% appreciation in their investment.

Such a hefty premium isn’t unusual in biotech takeovers, reflecting the intense competition for promising new drugs among the larger companies which rely on small innovative firms for an increasing proportion of their product offerings.

Steve's Take: Speculating on Aeterna Zentaris Inc. stock turned out to be a bad bet Click To Tweet

But there are far more situations like the Aeterna play where speculating rather than investing–with full use of all the traditional hedging tools–can lead to a really abysmal day at the track.

Steve Walker has no position in any stocks mentioned. MedContent Inc. has no position in any stocks mentioned. MondayMorning.com has a disclosure policy.

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