Fennec Pharmaceuticals (NASDAQ:FENC) is a pioneering biopharmaceutical firm dedicated to devising and introducing novel therapies for patients who lack sufficient medical solutions. They have recently celebrated a landmark achievement after years of extensive R&D work, receiving FDA approval for their new drug, Pedmark. This medication is crafted to alleviate cisplatin-triggered ototoxicity in pediatric patients affected by localized, non-metastatic solid tumors.
In my previous analysis of Fennec, I observed that Pedmark is in a favorable position for market success and the company’s growth. This is due to the recent approval by the FDA and endorsements from renowned organizations like the NCCN and EMA. These validations, along with the possibility of expanding into the EU market upon approval of the CHMP’s recommendation by the European Commission, are positive indicators for Pedmark to become a preferred treatment for cisplatin-induced ototoxicity in pediatric patients. This could potentially lead to Fennec’s acquisition and further strengthen its presence in the market. Since my last update, stock of Fennec has dropped 11.6%.
Recent events: Fennec Pharmaceuticals disclosed that they generated $1.7 million in revenue from Pedmark during the first quarter of 2023. Additionally, the company reported holding $18.4 million in cash.
For Q1 2023, Fennec Pharmaceuticals reported a cash position of $18.4 million, down from $23.8 million at the end of 2022, due to operational costs. However, these funds are projected to sufficiently support the next year’s operations.
Net product sales totaled $1.7 million in Q1 2023, generating a gross profit of $1.6 million. This marks a significant shift from Q1 2022 when the company had no revenue.
The company’s R&D expenses, related to clinical trials, decreased by $1.4 million compared to Q1 2022. In contrast, selling and marketing expenses for Q1 2023 reached $2.5 million.
General and administrative expenses saw an increase of $2.2 million from Q1 2022, largely attributed to non-cash employee remuneration and product support expenses.
Finally, Fennec Pharmaceuticals reported a net loss of $6.1 million for Q1 2023, larger than the $3.7 million loss in the same period of 2022.
Q1 Earnings Call Insights
Management at Fennec expressed satisfaction regarding the successful U.S. commercial launch of their drug, Pedmark. They highlighted its widespread acceptance among healthcare providers in various regions and its increasing adoption rate month-over-month. The drug has been particularly utilized in several tumor types, including hepatoblastomas, osteosarcomas, and germ cell tumors.
In the context of insurance coverage, Pedmark has achieved broad payer acceptance. Patients using the drug are roughly equally split between those insured commercially and those covered by government programs. In a significant development, the U.S. Centers for Medicare and Medicaid Services issued Pedmark a permanent J-Code in April, which simplifies the reimbursement process and should boost patient access to the drug.
While some larger academic institutions have yet to prescribe Pedmark due to complex formulary processes, Fennec’s management is actively engaging with these institutions to secure formulary access. They expect a growth surge for Pedmark in the forthcoming quarters as more of these institutions grant approval. The management team is confident in their strategic launch plans for Pedmark and believes it will secure a substantial market share.
Concerning financial management, Fennec currently incurs roughly $2 million monthly or about $25 million annually in operating cash expenses. A key objective for 2023 is to attain a breakeven point, which management views as an achievable major milestone. To reach this breakeven point, the company must generate a minimum quarterly revenue slightly above $7 million. Management is confident of meeting or exceeding this goal given the promising market potential for Pedmark.
My Analysis & Recommendation
Fennec Pharmaceuticals is at a crucial crossroads with the successful launch of Pedmark, an innovative and promising solution to cisplatin-triggered ototoxicity in pediatric patients. Given the warm reception Pedmark has received from the medical community, it’s clear that the drug fills a significant therapeutic gap, and the potential for European expansion adds another dimension to Fennec’s growth prospects.
However, while the financial health of the company appears to be in a state of transition, it is not without risk. The company’s declining cash position, coupled with its increasing operational expenditure, is a matter of concern. While the reduction in R&D expenses signifies the successful transition from a clinical-stage to a commercial-stage company, the rise in marketing and administrative expenses is indicative of the costs associated with the drug’s launch. While these investments are essential for the successful establishment of Pedmark, it is clear that their impact is placing significant pressure on Fennec’s cash reserves.
Furthermore, the increase in net loss is worth noting as it may signify a potential shortfall, primarily due to the operational expenses outpacing revenues. However, it’s important to bear in mind that the commercialization phase of any biopharma enterprise tends to be cash intensive and generally yields lower profits in the short term due to high operational costs.
Pedmark’s early sales, despite modest, show promise. Achieving breakeven is a realistic ambition for Fennec given the drug’s promising market potential, extensive payer acceptance, and the anticipated surge in demand as more institutions grant formulary access.
In summary, Fennec’s strategic launch of Pedmark, potential market capture, and industry endorsements speak volumes of its potential. The company is strategically placed to secure a strong presence in the pediatric ototoxicity market, paving the way for a robust long-term growth trajectory. However, it is crucial to remain cognizant of the financial hurdles the company may face in the short term due to increasing operational costs.
My recommendation for Fennec Pharmaceuticals remains a “Buy,” with an optimistic outlook for the company’s future growth and profitability. However, investors should brace for potential short-term downside in the stock price due to these aforementioned financial concerns. These should, however, not detract from Fennec’s promising long-term prospects as the company scales up its operations and cements its place in the market with Pedmark.
Risks to Thesis
When the facts change, I change my mind.
Investors should be cognizant of the risks that could potentially challenge the “Buy” investment thesis for Fennec Pharmaceuticals:
Single Product Reliance: Fennec’s market performance is heavily reliant on Pedmark’s commercial success. Should Pedmark fail to achieve anticipated sales or experience a deceleration in growth rates, this could materially impact Fennec’s revenue and valuation.
Regulatory Hurdles: While Pedmark has secured FDA approval, the drug’s endorsement by the European Commission is still pending. Adverse developments or delays in this process could curtail Fennec’s ability to expand its market reach and generate additional revenue.
Financial Vulnerability: Fennec’s financial health is currently under pressure, indicated by dwindling cash reserves and an enlarged net loss. If Pedmark’s sales growth fails to meet expectations, these financial challenges could intensify, leading to concerns about the company’s solvency.
Challenges in Market Adoption: Although Pedmark’s initial reception has been promising, adoption by some larger academic institutions has been impeded by lengthy formulary processes. Prolonged delays or rejections could inhibit Pedmark’s market penetration and impede revenue growth.
Competitive Landscape: The biopharmaceutical industry is highly competitive. Should other entities develop comparable or superior treatments for cisplatin-triggered ototoxicity, this could erode Pedmark’s market share and negatively impact Fennec’s profitability.
Insurance Coverage Dynamics: Pedmark has attained extensive insurance coverage so far, but any alterations in the healthcare insurance environment that affect Pedmark’s coverage or reimbursement rates could negatively influence its sales.
Microcap Status Risks: As a microcap company, Fennec is exposed to specific risks inherent to smaller firms. These can include higher stock price volatility, less liquidity, limited access to capital markets, and potentially less attention from institutional investors.
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