Fennec Pharmaceuticals Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; comparative period is FY 2015. The filing is an annual report, not a standalone fourth-quarter report. Financial amounts below are in U.S. dollars unless stated otherwise.
Business context and development
Fennec is a pre-revenue biopharmaceutical company focused on sodium thiosulfate (STS) to prevent cisplatin-induced hearing loss in children receiving cancer treatment. STS is its only clinical-stage product candidate. The company relies on an exclusive worldwide license from Oregon Health & Science University and on external collaborators for clinical development.
Enrollment was complete in both Phase III trials. COG ACCL0431 results were published in December 2016; SIOPEL 6 final audiology results were expected in the fourth quarter of 2017. STS has U.S. Orphan Drug Designation, but is not approved for sale.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $472,000 | $256,000 |
| General and administrative expense | $2.399 million | $1.634 million |
| Loss from operations | $2.871 million | $1.890 million |
| Net loss | $2.789 million | $659,000 |
| Basic and diluted loss per share | $0.22 | $0.06 |
| Net cash used in operating activities | $2.124 million | $1.862 million |
| Net cash provided by financing activities | $5.108 million | $497,000 |
Operating margins are not meaningful because the company had no revenue. The larger net loss primarily reflects increased operating costs and substantially lower non-cash derivative gains than in 2015. Other income included a $48,000 derivative gain, $40,000 from an asset sale, and $8,000 of net interest income in 2016; the 2015 derivative gain was $1.237 million.
At December 31, 2016, cash and cash equivalents were $3.926 million, current liabilities were $402,000, working capital was approximately $3.603 million, and stockholders’ equity was $3.570 million. Total liabilities were $402,000; the filing reports no debt. Cash rose from $942,000 at year-end 2015, principally due to a $5 million private placement completed in May 2016. Accumulated deficit was $114.322 million.
Material changes, outlook and risks
- R&D expense increased by $216,000, mainly for drug manufacturing preparations ahead of anticipated SIOPEL 6 results. G&A rose by $765,000, largely due to compensation and stock-based compensation, including a $347,000 charge for extending certain Canadian-dollar option expirations.
- The May 2016 private placement issued 2,631,579 shares to Essetifin at $1.90 per share for $5 million gross proceeds. The company also sold certain Eniluracil and Adh-1 assets for $40,000, retaining a 5% revenue share on the sold assets.
- COG ACCL0431 reported hearing loss in 28.6% of STS-treated evaluable patients versus 56.4% of controls (p=0.00022). Overall event-free survival was 54% versus 64% (p=0.36), and overall survival was 70% versus 87% (p=0.07). A post hoc disseminated-disease subgroup showed overall survival of 45% versus 84% (HR 4.10); the filing says further research and SIOPEL 6 results are needed to define STS’s role.
- SIOPEL 6 interim results were described as showing no evidence of tumor protection and encouraging hearing results among the first 68 patients with eligible audiology follow-up. In the 109-patient trial, reported response categories were similar between arms; the final primary audiology outcome remained pending.
- Management gave no formal financial guidance. It stated that further STS development requires additional capital, described a need to raise funds in the near term, and warned that unavailable or unacceptable financing could force delays, scale-backs, termination of studies, business combinations, or shutdown. The company is pursuing collaborations and other strategic alternatives.
- The independent auditor and management identified substantial doubt about the company’s ability to continue as a going concern. The audited financial statements assume continued operations and do not include adjustments that might be required if that assumption proves inappropriate.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end due to two material weaknesses: inadequate segregation and monitoring resources, and insufficient technical accounting expertise for unusual transactions. Management said remediation efforts were underway; no material financial-statement misstatement was identified.
- Key risks include clinical and regulatory uncertainty, dependence on OHSU and research collaborators, limited patent protection (method-of-use patents, with U.S. applications pending), financing and dilution risk, and low-liquidity OTCQB/TSX-listed shares. The company had three employees at year-end.
Important facts for investors to verify
- Whether additional financing was obtained after the filing and on what terms, including dilution and the resulting cash runway.
- The final SIOPEL 6 audiology results, regulatory submissions and decisions, and whether the survival findings from COG ACCL0431 affect the benefit-risk assessment.
- The remediation and subsequent status of the two material weaknesses in internal control.
- The status, scope, and enforceability of OHSU-licensed patents and any regulatory or commercial exclusivity; U.S. method-of-use patent applications were still pending.
- Share count and potential dilution from outstanding warrants and options; 13.643 million common shares were outstanding at year-end 2016, with 1.383 million warrants and 2.427 million options outstanding.