2023-11-09 18:24:46 ET
Summary
- Fennec Pharmaceuticals is a commercial-stage biotech company with a single drug, PEDMARK®, which is FDA-approved to reduce the risk of hearing loss in pediatric cancer patients.
- The company faced challenges and delays in obtaining FDA approval but finally launched PEDMARK® in late 2022, and generated $6.5 million in sales in Q3 2023.
- The company is poised to start selling PEDMARK® in Germany in May or June 2024.
- Being added to the NCCN's Adolescent and Young Adult Oncology treatment guidelines, could potentially double the TAM, increasing peak year revenue expectations.
Fennec Pharmaceuticals - Overview
Fennec Pharmaceuticals ( FENC ) is a small cap, commercial-stage biotech company with a single drug, PEDMARK®. PEDMARK is a unique formulation of sodium thiosulfate specifically developed for pediatric patients. PEDMARK® is FDA-approved to reduce the risk of ototoxicity or hearing loss associated with cisplatin in pediatric patients 1 month of age and older with localized, non-metastatic solid tumors. The drug is used in children who receive platinum-based chemotherapy. In one study, 60% of children develop irreversible ototoxicity when exposed to platinum-based chemotherapy ( Trends Pharmacol Sci. 2013 Aug;34(8):458-69 ). Approximately 85% of children with cancer survive over 5 years ( Key Statistics for Childhood Cancers ).
The Company had a long and rocky road before it finally got FDA approval in late 2022. It had two consecutive complete response letters (“CRL”) from the FDA in 2020 and 2021. The clinical data was robust, their issue related to a manufacturing vendor who failed their FDA inspections. Many smaller drug companies have this issue. Fennec is a special case. Management lost a lot of credibility during that process.
PEDMARK® was finally launched in the fall of 2022, and the Company generated $6.5 million in sales Q3 2023 (Wall Street Q4 2023 revenue consensus was $5.5M). At $10k per vial, assuming 10 vials per patient on average (drug is weight based, so a 3 year old would use much less than an 18 year old), each patient could equal $100K in revenue over the full treatment cycle (depending on type of cancer).
The Company received approval from the European Medicines Agency (“EMA”) in June 2023. They have been working with countries in Europe to be able to launch the drug as soon as they have sign-off on their current manufacturer. (Approval was based on the old manufacturer that caused the CRL’s in the US). According to management, they expect to be able to start selling in Germany in May or June 2024.
The Company has not mentioned their Japanese approval path recently, but they have said that they will provide an update on their timing of submission in early 2024. They needed to perform a cross-over PK study to complete their submission.
PEDMARK® Launch Process
The Company initially targeted hospitals and cancer centers that provide pediatric cancer treatments in either the out-patient (deliver chemotherapy and leave that day) or the in-patient (stay the night) setting. Children with cancer are treated at specialized children’s hospitals, of which there are approximately fifty major centers throughout the United States. Each of these hospitals have a pharmacy and therapy (“P&T”) committee that approves the use and costs of all new drugs. Much of the work involved in launching a new drug therapy involved working through the process with these committees, on a site-by-site basis. For FENC, the process has taken 6 months, on average. During a discussion with management, I confirmed that the first-movers to use PEDMARK® were the smaller hospitals whose physicians already understood the benefit of the drug and did not require a long process through their P&T committee. This process time lag could be seen in their Q1 and Q2 2023 revenues, being flat. The recently reported Q3 2023 revenues were double those of Q2 2023, suggesting that the Company had worked their way through a large bolus of P&T committees, and were now working on individual doctors to educate them of the benefits of PEDMARK®.
The original thesis around the market size for the Company was based on the assumption that there are approximately 10,000 children under age 15 diagnosed with cancer per year in the US, and that approximately 33% percent of the children have solid tumors treated with platinum-based chemotherapy, then approximately 3,300 children would be eligible for PEDMARK® treatment per year in the US. On average, the larger children’s hospitals probably serve 40-60 potential PEDMARK® patients per year. At approximately $100K per patient (or close to 10 vials), the total addressable market (“TAM”) was assumed to be approximately $330M.
Added TAM from NCCN AYA Guidelines
As of April 1, 2023, PEDMARK® has an effective J-code ( J0208 ), which opened an easily reimbursable billing pathway for patients treated in the outpatient setting. Recently, sodium thiosulfate was added to the National Comprehensive Cancer Network’s AYA Oncology guidelines as a way to prevent ototoxicity in adolescents and young adults, which includes ages 15-39. PEDMARK®’s use in patients over the age of 18 would be off-label, but within treatment guidelines.
“Ototoxicity - Routine evaluations for tinnitus and periodic audiogram to monitor hearing loss associated with platinum based chemotherapy. Consider sodium thiosulfate ((STS)) to reduce the risk of ototoxicity associated with cisplatin in pediatric patients with localized, non-metastatic solid tumors. There are concerns about the use of STS in the metastatic setting.” Source: NCCN Guidelines
The inclusion of this statement in the AYA Oncology guidelines, effectively provides support for PEDMARK®’s use in a broad set of adolescent and young adult cancers, which are often treated outside of the major children’s hospitals. Groups like Texas Oncology provide care to a broad range of patients, including AYA patients. These centers mostly provide outpatient care, which allows them to fully utilize the J-code for reimbursement and collect a margin on the therapy.
The Company believes that the AYA market could be as large as 30,000 patients per year, and each AYA patient could use twice the number of vials as the younger patients under 15. The TAM for the AYA community cancer center market could be as large as $600M, but I would assume that insurance companies would start to push back if they start paying for a lot of PEDMARK® off-label use.
Patent Portfolio
One of the largest red flags in any small biotech is the presence of challenges to their patents. In 2021, Hope Medical Enterprises, Inc. (“Hope”) filed two petitions for an inter partes review (“IPR”) with the US Patent Office. Hope is trying to invalidate US patent # 10,596,190 (“190”), which relates to a method of use US patent # 10,792,363 (“363”), which relates to an anhydrous form a method of manufacture. 190 was issued in March 2020 and 363 was issued in October 2020.
While this IPR petition is not ideal, I do not believe the two petitions will impact the exclusivity period of PEDMARK® and I think is a red herring. In the FDA Orange Book, there are four patents listed. Of the four patents filed with the FDA, US patent # 11,617,793 (“793”), 793 covers the final formulation in the product labeling, which includes boric acid. Any generic that wants to reference the data in PEDMARK®’s regulatory filing would need to also include boric acid, and therefore should be blocked in the US until 2039. Management has communicated that they do not expect any movement on the petition until 2025.
Figure 1: PEDMARK Orange Book Listing
Management Team
The Company has a dedicated leadership team that has been with the Company since its founding in 2009. The Chairman, and many of the Directors, have large exits from other biotech companies.
Chairman | Dr. Khalid Islam
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Chief Executive Officer | Rostislav Raykov.
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Chief Financial Officer | Robert Andrade
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Proforma Model
When updating the model for the Company, I have made the following assumptions:
- 3,500 total patient population treated in pediatric hospitals in the US @ $100K per patient (spread across 2 quarters), hitting 20% penetration by 2030
- 25,000 total AYA patients treated in community cancer centers in the US @ $200K per patient, hitting 2% penetration by 2030
- 5,000 total patients treated with platinum therapy in pediatric hospitals in Europe @ $70K per patient (spread across 2 quarters), hitting 20% penetration by 2031
- 5% COGS, $30M per years in operating expenses
- Included $140M in tax loss carry forward, which pushes paying taxes off till 2027
- Increased discount rate to 20% to reflect current market conditions
Assuming the 793 patent is indeed effective until 2039, and the EU exclusivity is 10 years from the date of launch, a DCF model of the Company using a 20% discount rate projects a value of ~$900 million, or about $27 per share. Previously, I had modeled a stock price of approximately $15 per share. The doubling of potential value can be attributed to faster market penetration assumptions, and the addition of the AYA population to the model, assuming no need to increase sales FTE.
The Company has guided to be cash flow positive in Q4 2023. Based on almost achieving that goal in Q3, it is likely that the Company’s sales trajectory allows them to exceed that guidance and have a positive GAAP net income in Q4 2023.
If one assumes that the 793 patent is not able to protect the product, and the US exclusivity is limited to 7 years from the Orphan exclusivity, then the NPV drops down to approximately $400 million, or about $11 per share.
Analyst Coverage
The Company is covered by multiple analysts. Mr. Knickerbocker at Craig Hallum has performed a nice analysis of the Company and has set a price target of $17.
Potential Risks and Potential Surprises
- Financing: The Company burned only $2M in Q3 and expects to be cash flow positive in Q4 2023. The Company had $12M in cash at the end of the quarter, and $25M in debt. A majority of the debt can be converted into stock at $7.89 per share. The Company can draw up to an additional $20 million in debt prior to the end of 2023 if needed. The Company should not need to raise money.
- Valuation: Since the start of the pandemic, classical NPV valuation methodologies have been disconnected from public company market caps. This is especially true in the small cap space. In June 2022, 20% of biotech companies were trading for less than the cash on their balance sheet. This disconnect may persist for a long time. Therefore, the models used to generate the stock price estimates in this report should be seen as directional.
- Partnership or Sale: The Company is speaking to companies about both a full sale, and also a distribution partnership in Europe. The best-case scenario is that an acquisition fully values the Company. Management has stated that they would like an EU distribution partner, as long as that does not prohibit a sale of the Company. For investors who have been in the name a long time, the worst-case scenario is that they do not sell, and decide to grow a pediatric oncology specialty pharma. Management was incentivized to close a sale before the end of 2023, but that looks unlikely at this point. If management and the board hold out for the perfect deal, the worst-case scenario may play out by default.
- Upside: I have modeled 20% penetration in the 0-15 population in the US and Europe, and a 2% penetration in the AYA population. Given that PEDMARK® prevents hearing loss in kids, one could imagine that parents would push hard for the drug’s use in more than 20% of kids. It is entirely possible that a penetration of 50-70% is achieved. If so, the Company could be valued at much more than my model estimates.
Conclusion
FENC is a single asset, de-risked, commercial stage company whose most likely near-term path is still a buy-out, but probably not till mid-2024. I believe the negative concerns some may have regarding their patent exclusivity are overblown. The recent quarter suggests that the Company is getting significant traction on their launch of PEDMARK®. The addition of the AYA population, even if only a small percentage, adds between 50-100% TAM for the Company, as most conservative case. The smaller cancer clinics who treat many of the AYA patients know how to fully utilize J-codes to get the best outcomes for patients. Adding the AYA TAM, shifts the 2024 NPV to around $27 per share – not that valuations mean much these days. Even with the recent rise to over $8, I believe FENC is undervalued. As the Company’s penetration into the AYA market becomes more clear over the next few quarters, an acquirer will have better data to understand what peak years sales are possible. At that time, I hope that the Company and an acquirer find a mutually agreeable price to reward long term investors for their patience.
For further details see:
Fennec Pharmaceuticals Expands Possible TAM Significantly