Fennec Pharmaceuticals Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited financial statements are in U.S. dollars; amounts below are in thousands except per-share data. Fennec is a clinical-stage biopharmaceutical company developing PEDMARK, a sodium thiosulfate formulation intended to prevent cisplatin-related hearing loss in children.
Financial performance and liquidity
- Revenue: None in Q3 or the first nine months of 2018 or 2017. The company reported no product revenue.
- Q3 results: Operating expenses were $2,848, including research and development (R&D) of $1,798 and general and administrative (G&A) expense of $1,050. Net loss was $2,749, or $0.14 per basic and diluted share, versus a $2,352 loss, or $0.15 per share, in Q3 2017.
- Nine-month results: Operating expenses were $7,304 (R&D $3,285; G&A $4,019). Net loss was $6,904, or $0.37 per share, versus a $4,756 loss, or $0.32 per share, in the first nine months of 2017. No meaningful revenue-based margin is available.
- Cash flow: Operating cash use was $1,599 in Q3 and $4,896 in the first nine months, compared with $958 and $2,321, respectively, in 2017. Financing provided $483 in Q3 and $1,160 year to date; there was no investing cash flow reported. Cash declined $3,736 year to date to $24,524.
- Balance sheet at September 30: Cash and cash equivalents were $24,524; current assets were $24,935 and current liabilities $2,076, yielding working capital of $22,859. Total liabilities were $2,076, comprising accounts payable and accrued liabilities; no debt is reported. Stockholders’ equity was $22,859 and accumulated deficit was $128,272.
- Share count: 19,104 thousand common shares were outstanding at September 30; the cover reports 19,729,164 shares outstanding as of November 13, 2018. Options and warrants create potential dilution; loss-period equivalents were excluded from diluted EPS as anti-dilutive.
Material changes versus the prior comparable period
- Q3 R&D expense increased $1,306 year over year, mainly due to PEDMARK manufacturing and regulatory preparation. Nine-month R&D increased $2,235, primarily for manufacturing and registration-batch preparation.
- Q3 G&A fell $644 year over year, largely reflecting lower non-cash equity compensation, partly offset by higher compensation and administrative costs. Nine-month G&A rose $633, attributed to equity-based compensation and increased compensation.
- Nine-month net loss increased $2,148 year over year. Operating cash use also increased, while 2017 financing included $7,571 of net private-placement proceeds that were not repeated in 2018.
- All remaining Canadian-dollar-denominated contractor options treated as derivatives were exercised in Q1 2018; no derivative instruments remained at September 30. A $167 non-cash derivative gain was recorded for the nine-month period.
Outlook, commentary, risks and unusual items
- Management said cash at September 30 was expected to fund planned operations for at least 12 months; the MD&A estimated coverage of 12 to 15 months. Management cautioned that capital needs are uncertain and additional financing may be required; unavailable or unfavorable funding could force delays, reductions, or cessation of activities.
- Fennec anticipated seeking U.S. regulatory approval for PEDMARK in 2019, based on SIOPEL 6 and COG ACCL0431 data. PEDMARK had FDA Breakthrough Therapy, Fast Track, and U.S. Orphan Drug designations. The EMA’s pediatric committee accepted the company’s pediatric investigation plan in August 2018, allowing it to proceed toward a potential EU pediatric-use marketing authorization; this was not an approval.
- Reported SIOPEL 6 results showed hearing loss in 33.0% of evaluable patients receiving cisplatin plus STS versus 63.0% with cisplatin alone (relative risk 0.52; p=0.002). Three-year event-free survival was 82.1% versus 78.8%, and overall survival 98.2% versus 92.3%, respectively. The company reported COG ACCL0431 hearing-loss rates of 28.6% with STS versus 56.4% in controls (p=0.004). These are clinical-study findings, not evidence of regulatory approval or commercial success.
- The company has no established product revenue and remains exposed to clinical, regulatory, manufacturing, commercialization, intellectual-property and financing risks. Management said future development costs and the timing of any cash inflows could not be reliably estimated.
- Two material weaknesses in internal control over financial reporting were identified: inadequate control environment and segregation/monitoring, and insufficient technical accounting expertise for unusual transactions. Management stated they had not caused material misstatements and engaged an accounting firm to assist remediation, targeting effective controls by December 31, 2018.
- Commitments include potential OHSU milestone payments and royalties under the licensed technology agreement, and severance payments of $350 and $125 for two executives upon qualifying termination. The Research Triangle Park lease is terminable on 30 days’ notice without penalty.
- The filing reports no legal proceedings, defaults upon senior securities, material off-balance-sheet arrangements, or material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Regulatory progress and timing for the anticipated U.S. submission and any EU pediatric-use application; the filing describes expectations, not approvals.
- Whether cash burn and remaining cash support the stated 12–15-month runway, considering development, registration-batch and commercialization-preparation costs.
- Clinical evidence and regulatory interpretation of tumor-survival outcomes, alongside the reported hearing-loss results, across the proposed patient populations.
- Remediation and independent assessment of the two material weaknesses, including whether controls became effective by the company’s stated target date.
- Potential dilution from outstanding warrants and options, including the 792 thousand warrants reported at September 30 with a $1.50 exercise price and November 22, 2018 expiration.