Business context and reporting period
Adherex Technologies Inc. (a development-stage biopharmaceutical company) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The filing reports U.S. dollars in thousands unless otherwise noted. The company said shareholders had approved a future name change to Fennec Pharmaceuticals, Inc.; the change was expected in the third quarter of 2014.
The company had no product revenue. Its lead candidate, sodium thiosulfate (STS), was being studied to reduce cisplatin-related hearing loss in children. Eniluracil development had been curtailed, and the company was seeking partners for further development.
Financial performance and liquidity
| Metric | Three months ended June 30, 2014 | Six months ended June 30, 2014 | Comparable 2013 period |
|---|---|---|---|
| Revenue | $0 | $0 | $0 |
| Research and development expense | $72 | $104 | $554 / $732 |
| General and administrative expense | $858 | $1,363 | $373 / $732 |
| Operating loss | $(930) | $(1,467) | $(927) / $(1,464) |
| Net income (loss) | $(750) | $(3,944) | $6,607 / $2,499 |
| Net income (loss) per share, basic | $(0.03) | $(0.13) | $0.26 / $0.10 |
| Cash used in operating activities | $(410) | $(788) | $(889) / $(1,296) |
The 2014 six-month net loss included a $2,474 noncash unrealized loss on derivative instruments; the 2013 six-month result included a $3,962 noncash derivative gain. The quarterly derivative result was a $181 gain in 2014 versus a $7,535 gain in 2013. These fair-value movements materially affected reported earnings but did not themselves involve cash flows.
At June 30, 2014, cash and cash equivalents were $1,015, down from $1,663 at year-end 2013; this included $976 in money-market investments. Current assets were $1,049 and current liabilities were $5,707, including $5,336 of derivative liabilities. Excluding derivative liabilities, working capital was $678, compared with $1,408 at December 31, 2013. Stockholders’ deficit was $4,658; accumulated deficit was $112,642. The filing reports no long-term liabilities or conventional debt balance.
Cash declined by $648 in the first half. Operating activities used $788, and financing activities provided $140, primarily from option exercises; investing activities had no cash flow. The company reported 29.538 million common shares outstanding at June 30 and 29.581 million as of August 8, 2014.
Material changes versus the prior comparable period
- First-half R&D expense fell by $628, primarily because the Phase II Eniluracil trial’s enrollment and related clinical support had concluded. Lower R&D was largely offset by higher G&A, including increased noncash stock compensation.
- First-half operating expense was nearly unchanged year over year ($1,467 versus $1,464), but the company moved from $2,499 net income to a $3,944 net loss, mainly because derivative accounting shifted from a gain to a loss.
- Cash used in operating activities decreased to $788 from $1,296, largely reflecting lower R&D spending. Cash reserves and working capital nevertheless declined from year-end.
- Derivative liabilities increased to $5,336 from $2,863 at December 31, 2013. The warrants are denominated in Canadian dollars while the company’s functional currency is U.S. dollars and are remeasured at fair value.
Outlook, management commentary, risks and unusual items
- Going concern and funding: Management stated that substantial doubt exists about the company’s ability to continue as a going concern. It said additional capital would be needed to finance operations and its business strategy, potentially through equity, debt, collaborations, licensing or asset sales. Failure to secure funding could require further delays, reductions, or cessation of activities. No quantified runway or specific financing guidance is provided.
- STS trial findings: In the completed Children’s Oncology Group Phase III study, hearing loss was 28.6% with STS versus 56.4% in the control group (p=0.004). Overall survival was 77.0% versus 88.9% (p=0.029); in the post hoc disseminated-disease subgroup, overall survival was 55.9% versus 88.1% (p=0.011). The filing warns that this raises concern about a possible tumor-protective effect in disseminated disease. The SIOPEL 6 Phase III study had enrolled 107 of a planned 115 patients; its monitoring committee recommended continuing the trial after interim review of 80 patients.
- Eniluracil: Following FDA feedback that larger trial-design alternatives should be considered, the company said it would focus on finding a partner and might evaluate indications other than metastatic breast cancer.
- Warrant exchange and corporate actions: Shareholders approved a warrant exchange and a proposed 1-for-3 reverse split, expected in the third quarter. After quarter-end, the exchange resulted in 941,643 new warrants issued for 2010 warrants and 223,392 for 2011 warrants, each with a US$0.50 exercise price. The company also expected to implement its approved name change in the third quarter.
- Controls: Management concluded disclosure controls were ineffective due to material weaknesses, citing inadequate segregation of accounting duties and insufficient technical accounting staffing/knowledge. The filing also describes prior remediation efforts for a previously identified technical-accounting weakness; investors should note the control disclosures and their status.
- Other risks and commitments: The company said it lacked the financial and internal resources to complete further Phase III trials independently, depended on potential partners and additional financing, and faced development, regulatory, commercialization, and TSX listing risks. The OHSU STS license includes a 2.5% royalty on net sales (potentially reducible to 1.0% after a discretionary $150 payment), 5% on sublicensing consideration, and a $100 milestone at first commercial sale. CEO severance upon qualifying termination was stated as $160. The filing reported no legal proceedings.
Most important facts for investors to verify
- Whether the company secured sufficient funding after June 30, 2014, and how long available cash could support operations.
- Final SIOPEL 6 results and the implications of the COG survival findings, particularly for patients with disseminated disease.
- The status and financial-accounting effects of the warrant exchange, the proposed reverse split, and the name change.
- Whether internal-control material weaknesses were remediated and whether the company’s disclosure controls became effective.
- The size and terms of any partnership or financing, and the resulting effects on development plans and existing shareholders.