To The Moon

$Fennec Pharmaceuticals Inc.(FENC)$ 

$Jazz Pharmaceuticals PLC(JAZZ)$ 

Introduction

​In late September, Fennec Pharmaceuticals (NASDAQ:FENC) announced it had received FDA-approval for Pedmark. This came after two FDA rejections related to manufacturing deficiencies. Fennec has spent over a decade getting Pedmark to market, resulting in an accumulated deficit of nearly $200 million. The company now shifts its attention towards Pedmark's arrival to the market.

Children undergoing cisplatin-based chemotherapy, used in the treatment for many pediatric cancers, often succumb to ototoxicity, or hearing loss. Not only is this costly (e.g. hearing aids, cochlear implants), it is associated with declines in cognition and behavior. In two phase 3 studies, when Pedmark, or sodium thiosulfate injection, was administered following cisplatin infusion, it reduced occurrence of ototoxicity without acting as a tumor protectant in localized non-metastatic tumors. The primary outcome data were highly significant (p<0.01) and Pedmark now stands alone in the indication.

Pedmark for high-risk (for hearing loss) pediatric patients with localized non-metastatic tumors should become synonymous with cisplatin. It should, in a sense, market itself, as neglecting its proper use, and subsequent ototoxicity, would be inexcusable for practitioners. Fennec figures to have 7.5 years of U.S. market exclusivity with Pediatric Orphan Drug Designation and aims to have 10 years of E.U. exclusivity if their Pediatric-use Marketing Authorization (or PUMA) is granted.

At writing, shares of Fennec trade at $10.35, making its market capitalization ~$270 million. Fennec trades under two-times estimated peak annual revenue (explained in detail below), which is a conservative valuation in light of the drug's prospects. The market appears to be discounting the possibility that the company markets the drug alone. However, it is doubtful Fennec will go it alone for long, as doing so would incur significant costs (e.g. mostly related to developing their own marketing team) and slow the drug's delivery to patients (relative to a full-bodied sales team of a larger biotechnology company). Below, I propose, for all parties (Fennec, patients, investors, etc.), it is best for Fennec to be acquired and ruminate on the potential acquisition cost.

Finances/Cash Runway

Cash & Equivalents $29.8 million

Quarterly Cash Burn ~$8 million

Debt $25 million

as of September 30, 2022

FDA-approval allowed Fennec to obtain an additional $20M non-dilutive loan, having already obtained $5M. This will permit the company to, at the least, begin the initial processes involved with marketing and selling a drug. It is, however, unreasonable to believe this will be enough for Fennec to survive long. That is, until Pedmark is a profitable asset. If Fennec is to remain its own entity, it will likely have to secure additional loans or succumb to dilutive measures, such as a stock offering, to take Pedmark to its fullest potential. The previous $14.2 million in annual cash burn (2021) will surely balloon if Fennec is to venture into the wild on its own. Assuming Fennec markets the drug on their own, they likely have no more than a year of cash runway. They would also remain indebted and subject to interest, fees, etc.

Market/Acquisition Estimates

Prospects

Pedmark's indication (to reduce the risk of hearing loss in pediatric patients undergoing cisplatin-based chemotherapy with localized disease) comes as no surprise based off the totality of clinical trial data (which I have discussed extensively in previous articles). Although, in past communications, management was hopeful Pedmark would receive a broader indication - inclusive of pediatric patients with non-localized, metastatic disease, it will have to settle for patients with localized, non-metastatic solid tumors. This narrow indication remains a worthwhile business pursuit. Medically, Pedmark should be expected to be welcomed with open arms. A popular resource for practitioners and prescribers, UpToDate (subscription required), recommends the use of Pedmark for its given indication. The costs and developmental setbacks associated with hearing loss during youth and the subsequent lifelong requirement of hearing aids are too burdensome and expensive to not utilize Pedmark when indicated. Pedmark should, therefore, experience predictable and rapid commercial use. That is, with an existing marketing team.

Pricing

In late September, Fennec revealed the pricing of Pedmark, set at $11,417.09 per single-dose vial. The amount of cycles for chemotherapeutic agents varies with type of cancer. We will use hepatoblastoma (a cancer arising from liver cells) as an example. These patients with, typically, undergo between 4 and 8 cycles (doses, then rest) of cisplatin. Assuming 6 cycles at $11,400 per vial, Pedmark should net $68,400 per patient. This is in-line with my pricing estimates made in 2019.

Market

Fennec estimates there are nearly 7,500 U.S. and E.U. yearly patients with localized, non-metastatic disease. Nearly 1/3 of these patients will have risk factors that make them high-risk for ototoxicity (e.g. age < 5 years). Assuming Pedmark reaches 90% of this high-risk population, estimated peak annual sales should be ~$150 million. I believe this is a conservative estimate. Given the lack of phase 3 candidates for the same indication and U.S. exclusivity and pending E.U. PUMA, Pedmark should have a decent run on the market prior to generic competition.

Acquisition

The acquisition of biotechnology companies is very complicated and involves several variables that, for the sake of simplicity and brevity, I will not outline. Biotechnology companies are often acquired for ~3-times peak annual revenue. For Fennec, this would place an acquisition price of $450 million or ~$17/share (~26,200,000 outstanding shares), or, to be less specific and more realistic, in a range between $350 and $550 million. This represents returns in excess of 40% for current Fennec investors. To avoid having to obtain additional cash via dilutive or nondilutive means, Fennec should sell within a year from now.

Potential Acquirers

Although merger & acquisition activity is expected to remain quiet into the new year as potential acquirers are opting for partnerships, instead, given the economic headwinds, Pedmark would be a great add-on for a mid-cap biotech. Pedmark, a niche asset (and, therefore, easier to market) is without competition and serves an unmet, critical need. For a strong, existing oncology-focused biotech marketing team, it figures to be cake to sell.

Jazz Pharmaceuticals (JAZZ) is a great example of a mid-cap biotech ($9.8 billion market capitalization), with an existing portfolio including oncological, pediatric, and orphan drugs, that could immediately benefit from acquiring Pedmark.

Risks

In today's environment, 40%+ investment returns within a year is a great opportunity, but it is not without risk. If, for whatever reason, Fennec is not able to find a suitor within a reasonable amount of time, its stock will surely suffer. Pedmark is not likely to procure market-pleasing revenues for Fennec.

If Fennec pursues marketization alone, it will costs tens of millions of sales & marketing dollars and by the time Fennec comes face-to-face with competitors (e.g. generics), it may never make a profit.

Fennec would likely have to support to dilutive means to fund its efforts. Even raising as little as $50 million would dilute shares in excess of 15%.

As mentioned earlier, acquisitions in the biotechnology industry are down.

Relative to being marketed by a larger biotechnology company, Pedmark would reach peak annual sales at a later date, limiting its value prior to potential generic entry.

Other risks include patent litigation (see "Hope Medical Enterprises, Inc." in their quarterly report), decreasing use of cisplatin for pediatric cancers, complications involving the manufacturing of Pedmark, and so on.

Conclusion

Fennec's board doesn't shy away from displaying their history of merger and acquisition. The company scores little benefit from going to the market alone. Given the significant start-up costs associated with a small biotechnology company taking a small drug to market, one could argue Fennec would, actually, score nothing. The market is pricing in the possibility Fennec goes it alone, but I believe a sale is the likely event. If Pedmark is to sell for just 2.5x my peak annual revenue estimates, there is opportunity to be had for its investors. Fennec may be worth a speculative position (<1%) in your diversified portfolio.