March 15, 2006 (Vol. 26, No. 6)

Company Plans to Grow with a Main Focus on Oncology and Endocrine Therapy

AEterna Zentaris (AEZS shares represent an attractive risk-reward value style investment opportunity in smallcap biotech, according to Kate Winkler, Ph.D., senior executive director, healthcare and life sciences research at Global Crown Capital, so long as investors have the patience to own as the company builds institutional following and the value of its core biopharmaceuticals business becomes more adequately reflected in its share price.

Even though the companys cash position in its biopharmaceutical segment dropped at a rate of $1.5 million per month during Q4, Dr. Winkler says the loss is relatively small. The biopharmaceutical segment is still an R&D-stage business with three lead drugs in clinical development, as well as a deep pipeline, she states. They are burning money because they are not yet selling products. This is typical for R&D-stage biotech companies, and in fact, AEZS burn rate is substantially lower than many similar-stage companies, because a portion of development expense for each of its products is contributed by partners for the products in various regions.

At year-end, the companys cash position was $34.8 million, says Dr. Winkler, at which time the operating loss for the biopharmaceutical segment was $5.2M. She estimates a similar burn rate of $1.5M per month to continue.


AEterna Zentaris is a growing global oncology and endocrine therapy-focused biopharmaceutical company. It has more than 20 products in its pipeline in six different therapeutic approaches, including luteinizing hormone releasing hormone antagonists (LRHR) and signal transduction inhibitors. Its lead LRHR antagonist compound, cetrorelix, is currently marketed for in vitro fertilization under the brand name Cetrotide.

Cetrorelix is also in late-stage clinical development for endometriosis and benign prostatic hyperplasia (BPH). The lead signal transduction inhibitor compound, perifosine, is an orally active AKT inhibitor, in several Phase II trials for multiple cancers. The company will present results on some perifosine trails at the 2006 ASCO Annual Meeting. This year will see the initiation of Phase II trials for Ozarelix, a fourth-generation LHRH antagonist, for BPH and prostate cancer in Europe, as well as the start of Phase I/II trial for prostate cancer in the U.S. It expects results on the Phase II trial in BPH in the first half of 2006.

Overweight Rating

AEterna Zentaris has 58 million shares outstanding and trades at $6.23, for a market cap of roughly $360M, and the effective market cap of its biopharmaceuticals business alone is $160M, says Dr. Winkler. We maintain our overweight rating on this stock, she asserts. Our recommendation principally rests on our opinion that the sum of this companys parts far exceeds its market-determined value.

So, when will AEterna Zentaris stocks see an upward movement? Dr. Winkler says its hard to be sure. That equity in this pipeline is so inexpensive may be explained by the companys relative obscurity to date as a Canadian small pharma company with a complex corporate structure, she explains, adding, We cant point to specific catalysts that we think will bring AEZS into a position of more visibility. In addition, the corporate structure makes it a bit tricky to extract meaningful numbers since they consolidate financials of core biopharmaceutical segment with 48% owned subsidiary, Atrium Biotechnologies.

Atrium Biotechnologies has 28 million shares outstanding and trades at about $14.40, implying a market cap of roughly $400M, of which nearly $200M can be credited to AEterna Zentaris shareholders, says Dr. Winkler.

Backed by an increasingly active investor relations campaign, Dr. Winkler remains positive that upcoming Phase II data presentations and potential partnerships may accelerate an upward adjustment of valuation.

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