Fennec Pharmaceuticals Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Figures are in U.S. dollars, generally in thousands, unless noted. Fennec is a commercial-stage biopharmaceutical company focused on PEDMARK, its sole product.
Business context and key developments
The FDA approved PEDMARK on September 20, 2022, for reducing cisplatin-associated hearing loss in pediatric patients one month and older with localized, non-metastatic solid tumors. The company announced U.S. commercial availability on October 17, after quarter-end. No product revenue was recorded through September 30; the company expected to begin recognizing revenue after launch. The European Medicines Agency continued its review of the company’s marketing application.
Financial performance and liquidity
- Revenue: $0 for both Q3 and the first nine months of 2022, unchanged from the comparable 2021 periods. Gross margin is not meaningful because there was no revenue.
- Q3 results: Operating expenses were $7.899 million and net loss was $8.089 million, versus $4.173 million and $4.185 million, respectively, in Q3 2021. Basic and diluted loss per share was $0.31, compared with $0.16.
- Nine-month results: Operating expenses were $16.454 million and net loss was $16.857 million, versus $13.016 million and $12.919 million in 2021. Basic and diluted loss per share was $0.65, compared with $0.50.
- Expense mix: Q3 research and development expense fell $396,000 to $846,000 as activity shifted toward commercial readiness. General and administrative expense increased $4.122 million to $7.053 million, reflecting higher stock-based compensation (including awards vesting on FDA approval), commercial-team hiring, legal costs and sales and marketing preparation. For the nine months, R&D declined $1.044 million while general and administrative expense rose $4.482 million.
- Cash flow: Operating cash use was $11.256 million for the first nine months, versus $10.977 million in 2021. Financing provided $19.908 million; cash increased $8.652 million to $29.752 million.
- Liquidity: Cash and cash equivalents were $29.752 million at September 30, up from $21.100 million at year-end 2021. Working capital was $27.226 million, compared with $20.733 million. Management believed available funds, together with the potential remaining Petrichor financing, would fund planned activities for at least 12 months, including commercialization.
- Debt: Long-term term loans were $25.0 million principal, or $24.688 million net of a $312,000 discount; the loans mature in 2027. The company raised $25 million in two tranches under a convertible-note facility and used $5 million to repay Bridge Bank. Cash interest was prime plus 4.5% (10.75% at quarter-end); payment-in-kind interest was prime plus 3.5%. The notes are convertible, and the facility is secured by company assets.
- Equity: Stockholders’ equity declined to $2.802 million from $15.772 million at year-end, primarily reflecting accumulated losses. The company had 26.238 million common shares outstanding at September 30.
Material changes, outlook and risks
- The major operational transition was from regulatory and development work toward U.S. commercialization following FDA approval. The company said commercialization spending and cash outflows were expected to increase in coming quarters.
- The Petrichor agreement permits up to $20 million of additional notes in $10 million tranches before December 31, 2023, subject to mutual agreement. Management also stated that the company may need substantial additional capital thereafter; further funding may not be available on acceptable terms.
- Pre-launch PEDMARK manufacturing costs were not capitalized as inventory because approval was not considered probable before FDA approval. The company expected to begin capitalizing inventory costs in Q4 2022.
- Patent challenges remain: Hope Medical’s inter partes reviews of two patents were expected to receive decisions in May 2023. The company warned that invalidation of relevant patents could impair protection beyond regulatory exclusivity. It reported additional formulation patent allowances and planned to pursue European pediatric-use marketing authorization and associated exclusivity.
- Two securities class actions were disclosed. The Chapman amended complaint had been dismissed with prejudice, but the plaintiff sought post-judgment relief. The Fisher amended complaint was dismissed with prejudice in October 2022, after quarter-end, with an appeal deadline then pending. The company recorded no liability for either matter, saying potential losses were not probable or reasonably estimable.
- Other risks include execution of the product launch, product acceptance and sales, future financing needs, variable interest rates, foreign-currency exposure, and money-market balances substantially above the $250,000 FDIC insurance limit. The company said COVID-19 had not materially affected operations to date.
- No numerical revenue, earnings or sales guidance was provided. Management’s liquidity outlook is subject to uncertainty. Disclosure controls and procedures were reported effective at the reasonable-assurance level.
Most important facts for investors to verify
- Whether PEDMARK launch uptake, reimbursement and sales generate revenue sufficient to offset rising commercialization costs.
- How much cash is consumed after launch and whether additional financing is needed; the remaining $20 million facility is conditional on mutual agreement.
- The effects of convertible-note interest, conversion and warrants on future debt service and share dilution.
- Outcomes of the patent reviews, related patent protection and the pending European regulatory review.
- Developments in the securities litigation, including any appeal or post-judgment rulings.