Value Investors Club / FENNEC PHARMACEUTICALS INC (FENCF)

Description

Introduction

In the last four weeks, Fennec Pharmaceuticals, Inc. (“FENCF” or “the Company”), a thinly traded microcap stock, has received two very good pieces of news, one of which may be quite positive for the stock in the next two to six weeks and both of which bode well for the medium/long term value of the Company. This short term event, the early conclusion of a Phase III trial due to statistically significant efficacy, could lead to an immediate increase in value of significantly more than 100%, followed by a baseline medium/long term revaluation of 6x – 8x the current stock price.

Fennec Pharmaceuticals, Inc. is a clinical-stage biopharmaceutical company focused on developing drugs to treat cancer. The Company’s lead drug candidate, Sodium Thiosulfate (STS), is a chemoprotectant against hearing loss often caused by platinum-based anti-cancer agents (see: Appendix A). Fennec separately partnered STS, which has received an Orphan Drug designation from the FDA, with the Children’s Oncology Group (COG) and the International Childhood Liver Tumor Strategy Group (SIOPEL) for two Phase III trials

The COG trial, which concluded in late 2013, demonstrated clear efficacy in limiting the effects of cisplatin-induced ototoxicity (cisplatin is a commonly used chemotherapy). The interpretation of these results, however, were confounded by the heterogeneity of the trial population in disease (metastatic versus localized tumors) and tumor stage, raising issues when an apparent safety signal appeared in the metastatic population (versus none in the localized). Even so, these results were well received when presented the following June at the 2014 annual meeting of the American Society of Clinical Oncology (ASCO), considered the most important annual confab devoted exclusively to the treatment of cancer. Looking now for confirmatory insights, all eyes have turned to the second Phase III trial of STS, currently underway in Europe.

The SIOPEL sponsored Phase III trial has enrolled 109 pediatric patients with pediatric hepatoblastoma (localized liver cancer) and is expected to conclude in mid-to-late 2017. However, if STS meets its statistical endpoint in the SIOPEL trial during an interim look at efficacy, which has been performed but not yet announced, the trail will break early and the stock most likely will rerate in dramatic fashion. We believe there is a good likelihood of such a break and expect to learn either way within the next two to six weeks. (see: Catalysts). Even without an early break, the drug appears almost certain to work, making the medium/long term upside prognosis for the stock significant.

Catalysts

The first piece of news referenced above was the April 8, 2016 announcement of an investment of US$5 million by Sigma Tau Finanziaria, a well-known and well-respected European pharmaceutical holding company with significant history in oncology treatments and orphan indications, in exchange for approximately 20% of the company. While the notional size of this investment is not extraordinary for a company as large as Sigma Tau, a privately owned company that had approximately EUR700 million+ in annual revenues before selling its non-rare disease business, approximately half the revenues, in May of last year, it is a significant number for FENCF. Not only does this announcement bolster the balance sheet, removing any potential concern about financial wherewithal, but it also confers upon STS the explicit endorsement of a major pharmaceutical company focused on pediatric therapies and orphan drugs since its founding in 1957.

Given this expertise in orphan indications and pediatric drugs, it is no great stretch to infer that the due diligence performed by Sigma Tau was both extensive and insightful. No stranger to the risks inherent in drug development, Sigma Tau nonetheless must feel the opportunity presented by STS is a bet worth making. Furthermore, it should not go unnoticed that the FENCF board of directors is chaired by Khalid Islam, who is the former CEO and Chair of Gentium S.p.A, a company that turned a $15 million 2010 investment by Sigma Tau into approximately $400 million when it was sold in 2013 to Jazz Pharmaceuticals. Clearly, Sigma Tau would not bet its capital and Dr. Islam his hard-earned reputation were they not believers in and committed to realizing the opportunity represented by Fennec Pharma and STS. Indeed, with the new investment, the Company, with monthly burn of approximately US$130 thousand, now has the capital to see STS through the conclusion of the SIOPEL trial, should it be necessary, and the launch of the drug, most likely first in Europe and, subsequently, the US.

The second piece of good news referenced above was the April 22, 2016 announcement that Penelope Brock, International Chair of SIOPEL, will present the results of the SIOPEL Phase III interim look at the 2016 ASCO confab on June 5, 2016. While the extent of the clinical efficacy has yet to be released – abstracts for posters, presumably including those to be presented by Dr. Brock, will be released on May 18, 2016 – it is not a stretch to state that ASCO would not have accorded a coveted speaking spot to SIOPEL had its data not been both intriguing, perhaps extraordinary, and persuasive. Therefore, we believe there is a reasonable likelihood that the trial will break early, news that would send the stock soaring and set the Company up for a variety of opportunities, including a sale.

Valuation

As most investors realize, attempting to divine the valuation of a micro-pharma company with any precision is a Sisyphean task. Even so, what is clear at this point is that the current FENCF market capitalization does not at all reflect the potential for STS. Indeed, the Company has the opportunity to enter the platinum-induced hearing loss market as the sole preventative treatment, allowing patients to achieve high efficacy from chemotherapy but with a reduced risk of hearing loss. Using a conservative estimate of US$60 million in yearly sales, which is quite small given the size of the target market (see: Appendix B); the price potential for the drug, which we conservatively estimate at US$50,000 per treatment; and the low end of a 5x – 8x revenue multiple, which typically is where pharma companies transact, FENCF easily could be worth US$20/share or more.

Additionally, in 2012 the FDA Safety and Innovation Act was signed into law, which included the "Rare Pediatric Disease Priority Review Voucher Incentive Program". This law extends the priority review voucher program, originally designed for developers of treatments for neglected diseases, to rare pediatric diseases and STS would be eligible. Under priority review granted by the vouchers, which are freely tradable, drug developers can have the length of time for drug review shortened to 6 months. In August, 2015, one of these vouchers reportedly sold for US$350 million, a potent source of value clearly not reflected in the current stock price.

Appendix A (STS & Ototoxicity Explained)

Platinum-based chemotherapy plays a key role in the treatment of various pediatric cancers, however partial or complete hearing loss is potential adverse event. Ototoxicity from platinum-based chemotherapy may result from deposition of protein-bound platinum in the inner ear. Platinum-drugs can destroy the outer sensory hair cells in cochlea, the auditory portion of the inner. These sensory hair cells are responsible for converting the mechanical vibrations (or sound) that enters the ear canal into electrical signals, which are carried to the brain by the auditory nerve. However, when sensory hair cells are damaged, sound waves still move through the inner ear fluid but transduction no longer occurs and the sound does not reach the brain. This type of hearing loss is referred to as sensory-neural hearing loss. Additionally, unlike rapidly dividing tumor cells, cochlear hair cells do not grow back and therefore loss of these cells results in permanent hearing loss. Platinum agents initially impair hearing in the high frequencies and progresses to lower frequencies with increasing cumulative dose.

Sodium Thiosulfate Mechanism of Action. STS is a thiol-reducing agent used industrially in photographic processing and clinically it is FDA approved as an antidote against cyanide poisoning and is used to treat nitroprusside overdose. Although the mechanism of STS otoprotection is not fully known, it may involve free radical scavenging and/or covalent binding to inactivate the platinum compound. Due to concerns regarding reduced platinum antitumor activity when given with STS, the time of administration of chemotherapy and STS may be staggered.

Treatment for most cases of pediatric cancer typically involves chemotherapy, surgery and/or radiation while less common treatments include transplants and immunotherapy. Chemotherapy regimens for cancers such as neuroblastoma, hepatoblastoma, retinoblastoma, germ cell tumors, osteosarcoma, medulloblastoma and other brain tumors routinely include cisplatin and/or carboplatin. According to the American Cancer Society Facts and Figures 2012, there were approximately 12,060 new cases of childhood cancer (age 0–14 years) in the US last year.

The incidence of hearing loss in children depends upon the dose and duration of chemotherapy. Platinum-induced hearing loss is more prevalent in younger children. This is likely due to the developing nature of the auditory system in younger children (<4 years), making this group more vulnerable to damage. It may also be due to a different platinum pharmacokinetic profile in younger children that could result in slower clearance and increased exposure to the drug. Cochlear toxicity from cisplatin is more prevalent than with carboplatin, and is a dose-limiting side effect for cisplatin. Statistics regarding prevalence of platinum-induced hearing loss vary, with reported incidence of cisplatin ototoxicity in children ranging from 26% to more than 90%.

Appendix B (Target Market)

Sodium Thiosulfate addresses an important unmet medical need and large market. The target market for STS is an area of severe unmet medical need, specifically young patients receiving platinum chemotherapy. Of 10,400 new cases of childhood cancer, an estimated 2,000 patients will receive this treatment in the United States. Many of these patients will experience hearing loss related to their chemotherapy, and there is currently no treatment available to inhibit hearing loss. STS has received Orphan Drug designation in the United States for the prevention of ototoxicity induced by platinum cancer chemotherapy in pediatric patients and will therefore receive 7.5 years of marketing exclusivity upon approval. We see an even larger market opportunity for STS in Europe, particularly since the SIOPEL sponsored trial is an international trial based in the United Kingdom.

Indeed, while 2,000 children receive platinum-based chemotherapy each year in the United States, twice that receive such treatment in Europe, and at least twice that in Asia and other. Another 30,000 adults are at risk of platinum-induced hearing loss each year. The cost associated with pediatric patients that have substantial hearing loss prior to language development can be significant due to hearing aid and cochlear implant costs, as well as specialized schooling for the deaf in the extreme cases. We expect strong market adoption for STS if it is approved due to the ability to reduce costs and improve the long term quality of life for patients.

Hearing loss attributed to platinum-based chemotherapy treatments is very common, and one study found that 61% of children experienced hearing loss after treatment. The incidence and severity depends on several factors including the type of cancer, type of platinum-based chemotherapy, and age of the patient. There is a high unmet need for these patients, as no preventative treatments are currently FDA approved, and we are unaware of any late-stage programs other than STS. Around

Appendix C (Competitive Landscape)

Hearing aids have been recommended for 30% to 40% of survivors of childhood cancers who experience hearing loss. Cochlear implants are small electronic devices with an estimated cost of more than $75,000 that are surgically placed in the inner ear to assist with certain types of deafness. While cochlear implant and hearing aids may provide some benefit, there is no treatment for hearing restoration. Further, hearing loss in younger children can result in communication difficulties and impaired speech and language development. What is most important for patients like these is that they have a treatment to protect their hearing before it is lost. We do not know of any late stage drugs in development for otoxicity other than STS

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Catalysts

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			2016	2017
Price:	2.30	EPS	na	na
Shares Out. (in M):	15	P/E	na	na
Market Cap (in $M):	35	P/FCF	na	na
Net Debt (in $M):	0	EBIT	0	0
TEV (in $M):	35	TEV/EBIT	na	na