Fennec Pharmaceuticals Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2015. Amounts are U.S. dollars in thousands, except per-share data, unless stated otherwise. Fennec is a development-stage biopharmaceutical company focused on cancer-treatment candidates, principally sodium thiosulfate (STS); it reported no product revenue.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $43 | $32 |
| General and administrative expense | $409 | $505 |
| Operating loss | $(452) | $(537) |
| Net income (loss) | $177 | $(3,194) |
| Operating cash used | $(418) | $(378) |
- Q1 2015 net income included a $625 non-cash unrealized gain on derivative liabilities, versus a $2,655 non-cash loss in Q1 2014. Excluding the derivative gain, the quarter had an operating loss of $452; reported net income does not indicate cash profitability.
- Cash and cash equivalents were $1,916 at March 31, 2015, down from $2,307 at December 31, 2014. Cash declined by $391 during the quarter; financing provided $27, with no investing cash flows reported.
- Total assets were $1,949; total liabilities were $1,123, including $694 of derivative liabilities. Stockholders’ equity was $826. The filing reports no borrowings or debt balance.
- Management’s working capital measure, excluding derivative liabilities, was $1,520, compared with $1,932 at year-end. The filing does not provide a meaningful revenue margin because there was no revenue.
- Basic and diluted earnings per share were $0.02 and $0.01, respectively, versus a loss of $0.33 per share for both measures in Q1 2014.
Material changes and business developments
- Operating expenses fell by $85 year over year: lower G&A expense (down $96) more than offset higher R&D expense (up $11). Management attributed the G&A reduction largely to lower equity-based compensation; increased consulting and travel costs partly offset it. R&D spending related to STS trials and data analysis.
- The large year-over-year improvement in net results chiefly reflects the swing in non-cash derivative remeasurement, rather than revenue growth or cash generation.
- At March 31, the company had 10.620 million common shares outstanding, plus 4.201 million warrants and 2.387 million options. The filing reports 10.620 million shares issued and outstanding on the balance sheet.
Outlook, risks and unusual items
- Going concern and funding: The company reported substantial doubt about its ability to continue as a going concern. It had an accumulated deficit of $110.697 million and negative operating cash flow, and says it needs additional capital through equity, debt, collaborations, licensing or other sources. Failure to obtain funding could force delays, reductions or termination of development activities, business combinations, or cessation of operations. No cash runway estimate or specific financing guidance is provided.
- STS trials: Enrollment was complete in the Phase III COG ACCL0431 and SIOPEL 6 studies. The SIOPEL 6 independent monitoring committee recommended continuation after its final safety review of 100 patients; preliminary results were expected in 2015. Fennec supplies study drug and safety monitoring, while the collaborators fund and conduct trial activities.
- Clinical risk: Preliminary COG results showed hearing loss in 28.6% of STS-treated evaluable subjects versus 56.4% of controls. Overall survival was lower in the STS group in the reported analysis (77.0% versus 88.9%; p=0.029). A post hoc analysis found a concerning survival difference for patients with disseminated disease (55.9% versus 88.1%; p=0.011); the filing notes potential tumor protection and the need to interpret these findings. Localized-disease survival results did not show the same signal.
- Eniluracil: Further development is constrained by resources. The FDA had recommended considering larger trial designs after the company proposed a small pivotal study; Fennec said it was seeking a partner and might consider other indications.
- Subsequent event: On April 30, 2015, 1.307 million Canadian-dollar warrants expired unexercised; 300,000 U.S.-dollar warrants were exercised for approximately $450,000 in proceeds.
- Other obligations and risks: The OHSU STS license provides for royalties, including 2.5% on licensed-product net sales, 5% on sublicensing consideration, and a $100 million milestone upon first commercial sale. The filing also identifies a CEO severance obligation of 12 months’ salary upon qualifying termination. Development, regulatory, financing, collaborator, listing and low-liquidity risks remain material.
- Internal controls: Management concluded disclosure controls were not effective because of two material weaknesses: inadequate segregation of accounting duties and insufficient technical accounting expertise. Management said limited financial resources constrained remediation.
Important facts for investors to verify
- Available cash, actual cash burn, and the timing and terms of any needed financing; the filing does not give a clear cash runway.
- Final SIOPEL 6 efficacy and safety results, and the clinical significance of the COG disseminated-disease survival signal.
- Potential dilution from outstanding warrants and options, and the effects of warrant exercises or expirations.
- Whether the company addresses the two disclosed material weaknesses and obtains the resources needed to remediate them.
- Trial enrollment figures: the filing describes COG enrollment as 131 in one section and 135 elsewhere, while stating 126 were eligible for the reported analysis.
- The impact of the OHSU license’s milestone and royalty terms if STS is commercialized or sublicensed.