AEterna Zentaris Inc. (USA) (NASDAQ:AEZS) just put out its third quarter 2016 earnings, and the company took a bit of a dive on the numbers. However, as the US heads into its first post-election afternoon session on Wednesday, AEterna’s share price is up a few percentage points, and the company looks like it may recover into the latter half of the week on some pretty decent volume.

A couple of weeks ago, we noted that the company was worth keeping an eye on. Basically, at that point, it had lost a portion of its value based on the announcing of what would amount to a dilutive issue, with the goal being to raise capital for the funding of its development pipeline. We often see this sort of thing, and especially in biotech, and it can be an opportunity to get in at a discount ahead of a major upside catalyst.

Why?

Because in the wider markets, when a company raises cash, it’s often to fund ongoing operations. There’s generally an extended period, therefore, until the value gained through use of proceeds (and the expansion effect that efficient application of these proceeds has on market cap) negates the value lost per share through dilution.

In biotech, many times, this isn’t the case, because the use of proceeds generally relates to a binary event.

AEterna is a perfect example.

The company is raising in anticipation of filing a marketing application for its candidate, Macrilen. The funds will go towards the submission and – beyond that – the commercialization of the asset. The binary event here is the topline data release on which the marketing application (the NDA) relies, and it’s set to hit press at some point during the first quarter of 2017.

So what’s Macrilen?

Macimorelin, which is the clinical name for the brand name Macrilen, is what’s called a ghrelin agonist, and it is a novel orally-active small molecule that stimulates the secretion of growth hormone. The company is targeting the diagnosis of adult growth hormone deficiency (AGHD) indication, and the drug has orphan drug designation in this indication. A couple of years ago, the FDA issued a CRL relating to the drug’s application in this indication, stating that a clinical trial (which underpinned the previous application) was not sufficient in itself to support a marketing green light.

Basically, the agency wanted the company to conduct a test to show that the product was a superior diagnostic of AGHD than the current SOC, an insulin tolerance test (ITT).

In response, AEterna set about conducting a large scale phase III confirmatory study, testing against this hypothesis, and it’s this confirmatory study that we expect to hear back from come the first quarter of next year.

So what are we looking at going forward?

Well, ITT is what we might call the gold standard of testing in this arena, but it’s not great in all cases. It has problems in patients with coronary heart disease or seizure disorder, among others, based on the fact that it requires the patient to experience hypoglycemia to obtain a result.

Additionally, these sorts of tests are expensive because a medical professional needs to monitor the patient for the duration of the test (which can take anywhere between two and four hours) and the test must be administered in a setting where emergency equipment is available and where the patient may be quickly hospitalized.

If the company can demonstrate with the confirmatory study that its test is as effective a diagnostic as ITT, therefore, it could totally replace current SOC.

There’s a decent sized market, as well.

In the US alone, there are more than 40,000 of these tests conducted annually. If – as expected – physicians take up Macrilen as SOC, AEterna would be tasked with meeting this 40,000 demand, and analysts expect peak sales of somewhere in the region of $70 million annually. That’s not huge, and the test will never be a blockbuster, but for a company with a current market capitalization of just a little over $33 million, it’s a sizeable stream.

Data to hit during the first quarter, and if all goes to plan, the company expects to put forward an NDA pretty much immediately after.