FENNEC PHARMACEUTICALS INC. annual report, FY2012

Filing and business context

Entity mismatch: The supplied filing is Adherex Technologies Inc.’s Form 10-K, not a filing by Fennec Pharmaceuticals Inc. It covers the fiscal year ended December 31, 2012; it was signed March 28, 2013. Adherex was a development-stage biopharmaceutical company focused on cancer therapies and reported no product sales.

Financial results and liquidity

Unless stated otherwise, amounts are U.S. dollars.

The 2012 net loss included a $1.563 million non-cash loss on derivative instruments; 2011 net income included an $8.071 million non-cash derivative gain. The year-over-year earnings swing therefore does not reflect a change in sales: the company had no revenue in either year. R&D expense rose mainly with higher Eniluracil trial participation; G&A declined primarily because approximately $0.3 million of 2011 rights-offering costs did not recur.

Year-end total current assets were $2.365 million and current liabilities were $7.322 million, including a $6.640 million derivative warrant liability. The filing reports working capital of $1.683 million when excluding that derivative liability; on the balance-sheet totals, working capital was negative $4.957 million. There was no long-term debt reported. Shareholders’ deficit was $4.957 million and accumulated deficit was $110.543 million. Average monthly cash burn was reported as approximately $0.25 million in 2012.

Material changes and development outlook

• Adherex’s Phase II metastatic breast cancer trial of Eniluracil plus 5-FU and leucovorin completed enrollment at 153 patients in December 2012. Final safety and efficacy data were anticipated in the second or third quarter of 2013.
• The Children’s Oncology Group STS Phase III study completed enrollment of 135 pediatric patients in the first half of 2012; results were anticipated in the second or third quarter of 2013. The separate SIOPEL study had enrolled 69 patients as of March 16, 2013.
• Management said it lacked the financial and human resources to conduct future Phase III trials for Eniluracil and would need additional funding or a development partner if it proceeded. It continued to seek collaborations and other strategic alternatives.
• After year-end, on February 20, 2013, Adherex entered a new exclusive STS license agreement with Oregon Health & Science University (OHSU), replacing the prior agreement. Terms include a 2.5% royalty on net sales, potentially reduced to 1.0% for a $150,000 buy-down, a 5% royalty on sublicensing consideration, and a $100,000 milestone upon first commercial sale.

Risks, contingencies and unusual items

• Going concern and financing: The auditor and management cited substantial doubt about Adherex’s ability to continue as a going concern. The company had limited cash, continuing losses, negative operating cash flows since inception, and stated it needed additional capital. Failure to raise funds could require further delays, reductions, or termination of development, a business combination, or cessation of operations.
• Clinical and regulatory risk: Drug candidates remained investigational; trial outcomes, regulatory approval, safety, market acceptance, and commercialization were uncertain. Eniluracil had previously failed to show positive results in GSK Phase III trials.
• Derivative liability: Canadian-dollar warrants were recorded as a liability and remeasured at fair value, causing non-cash earnings volatility. The $6.640 million year-end liability materially exceeded cash, but did not itself represent an equivalent cash payment due at year-end.
• Potential dilution and obligations: At December 31, 2012, 18.035 million warrants and 5.498 million options were outstanding. Eniluracil’s GSK license could require a $5 million milestone upon NDA filing, up to $70 million in additional milestones for the initial indication, up to $15 million per additional approved indication, and low-double-digit royalties on sales.
• Internal controls: Management concluded disclosure controls and internal control over financial reporting were not effective because staffing was insufficient to segregate accounting duties; one full-time employee performed accounting and financial reporting duties. Additional contracted expertise had helped but had not eliminated the deficiency.
• Listing and trading: The TSX completed a delisting review and determined on January 7, 2013 that the company met continued-listing requirements. The stock had previously been delisted from the American Stock Exchange and traded over the counter in the U.S.

The filing provides no quantitative financial guidance. Management warned that operating costs and capital needs depended on trial progress, results, and financing availability. No material legal proceedings or material off-balance-sheet arrangements were reported.

Important facts for investors to verify

• Confirm the issuer identity: this filing is for Adherex Technologies Inc., not Fennec Pharmaceuticals Inc.
• Review subsequent financing, cash runway, and any events affecting the going-concern assessment.
• Verify the final Eniluracil and STS trial results and any follow-on development or partnering decisions.
• Check the terms, fair-value accounting, and potential dilution from warrants and options, as well as contingent GSK and OHSU payments.
• Track remediation of the disclosed material weakness in internal controls and any changes in exchange listing status.