Business context and reporting period
The supplied filing is Adherex Technologies Inc.’s Form 10-K for the fiscal year ended December 31, 2011, filed March 26, 2012. It does not identify Fennec Pharmaceuticals Inc.; verify that this is the intended filing. Adherex was a development-stage cancer therapeutics company with no product sales. Its main programs were eniluracil, in a Phase II trial, and sodium thiosulfate (STS), in collaborator-run Phase III trials.
Financial results and liquidity
| Metric (US$ thousands, except per-share data) | 2011 | 2010 |
|---|---|---|
| Revenue | 0 | 0 |
| Research and development expense | 1,494 | 708 |
| General and administrative expense | 1,944 | 3,896 |
| Operating loss | (3,438) | (4,604) |
| Net income (loss) | 4,685 | (7,823) |
| Net cash used in operating activities | (3,226) | (1,928) |
| Cash and cash equivalents at year-end | 5,297 | 5,947 |
2011 net income was not driven by operations: it included an $8,071 non-cash gain on derivative instruments, principally warrant remeasurement. Excluding that gain, the company reported an operating loss of $3,438 and had no sales revenue; operating margins are therefore not meaningful. R&D expense rose with eniluracil trial activity, while lower stock-based compensation helped reduce G&A.
Year-end current liabilities were $5,471, including a $5,077 derivative warrant liability; accounts payable and accrued liabilities totaled $394. The company reported $4,957 of working capital excluding the derivative liability, but total current assets were below total current liabilities. It reported no long-term liabilities or conventional debt. Cash fell by $650 during 2011; financing activities provided $2,566, primarily from the rights offering. Average monthly cash burn was reported as approximately $0.3 million, versus $0.2 million in 2010.
Material changes versus the prior period
- Net income shifted from a $7.8 million loss in 2010 to $4.7 million income in 2011, largely because the derivative result swung from a $3.3 million loss to an $8.1 million gain.
- R&D expense increased about $0.8 million; G&A expense decreased about $2.0 million, primarily reflecting lower non-cash stock compensation.
- Operating cash use increased about $1.3 million, and cash declined from $5.9 million to $5.3 million.
- A 1-for-18 reverse stock split took effect August 25, 2011. The rights offering raised approximately $2.5 million; the company had about 25.2 million shares outstanding at year-end.
Outlook, risks, and unusual items
- Funding and going concern: Management said existing cash was expected to meet currently anticipated needs through 2012, but also said substantial additional funding would be needed and warned that financing might not be available on acceptable terms. The auditor’s report and financial statement notes state that substantial doubt exists about the company’s ability to continue as a going concern. Failure to raise funds could force delays, reductions, or cessation of operations.
- Clinical programs: As of March 16, 2012, the eniluracil Phase II trial had enrolled 98 of a planned 140 patients; management expected enrollment completion in Q3 2012 and final progression-free-survival data by Q1 2013. The STS trials had enrolled 52 patients in SIOPEL and 131 in the Children’s Oncology Group study. These are post-year-end updates and remain subject to enrollment, trial execution, safety, efficacy, and regulatory risks.
- Partnering and development: Adherex said it lacked resources to independently complete later-stage development and was seeking funding or licensing partners. The STS Phase III studies were managed and funded by collaborators; Adherex supplied drug, distribution, and safety monitoring.
- Accounting and obligations: Canadian-dollar warrants were classified as derivative liabilities and remeasured through earnings, creating substantial non-cash earnings volatility. Contractual commitments totaled $695,000, largely for clinical services and drug supply. Potential future payments include substantial development and sales milestones and royalties to GSK for eniluracil, and milestones and royalties to OHSU for STS.
- Controls and other risks: Management concluded disclosure controls and internal control over financial reporting were ineffective, citing two material weaknesses: inadequate segregation of duties and insufficient technical accounting expertise. Management said remediation depended on obtaining additional resources. Other prominent risks include clinical failure or delay, regulatory approval, competition, intellectual-property protection, dilution from future financing and outstanding warrants/options, and limited trading liquidity. No legal proceedings were reported.
Important facts for investors to verify
- Confirm that Adherex Technologies Inc., rather than Fennec Pharmaceuticals Inc., is the intended issuer and filing.
- Check the company’s subsequent cash position, financing, and actual runway; the filing’s through-2012 estimate is qualified by a going-concern warning.
- Review subsequent enrollment, safety, efficacy, and final results for the eniluracil and STS trials, plus collaborator commitments and timelines.
- Assess the warrant valuation assumptions and the distinction between reported net income and operating cash burn.
- Verify fully diluted share exposure, warrant and option terms, and potential dilution from future capital raises.
- Check whether the material weaknesses were remediated and whether the company remained current with SEC and exchange requirements.