Long - Fennec Pharmaceuticals Inc. (FENC) 

Thesis Overview 

Fennec Pharmaceuticals is a small-cap pharmaceutical company whose orphan drug, PEDMARK, treats chemotherapy-induced hearing loss in pediatric patients. The company’s new drug application has been rejected twice by the FDA (CRL), both times due to deficiencies identified during inspections of their third-party manufacturer. Importantly, the CRL stated that there were no issues with the drug’s safety or efficacy. In March of 2022, Fennec has resubmitted its NDA which now references a new third party manufacturer. We believe that the current NDA has relatively low regulatory risk due to being a re-submission of already reviewed clinical data, while the new manufacturer (with clean inspection history) should alleviate any inspection concerns. Meanwhile, the valuation is trading at significantly depressed levels, as the market has basically given up on the company. We also believe that the company is an interesting takeover candidate for a smaller spec pharma company post approval. 

Manufacturing Debacle 

On November 29th, 2021, FENC announced that it expected to receive a CRL (Com­plete Re­sponse Let­ter) from the FDA (Food and Drug Administration) relating to issues found by the FDA while inspecting a third-party manufacturing facility. This led to the stock selling off more than ~50% in the session, then by another 10%+ the proceeding two days. The stock has recovered some of the losses since but still trades 42% lower than the pre-CRL announcement as of June 24th, 2022. While the initial reaction was warranted, conversations with management have helped reaffirm that the quality at the third-party facility was indeed not up to current standards and has resulted in several CMC related CRLs for other companies as well. In our discussions, management made it clear that they resubmitted the NDA with a new third-party manufacturing partner, which had a clean inspection history. 

As of March 2022, FENC has resubmitted their NDA, which was accepted by the FDA, and a PDUFA target action date was assigned for September 23rd, 2022.  

Making the Case for Approval 

PEDMARK’s mechanism of action works to eliminate the effect of Cisplatin in the Cochlea. Cisplatin, a chemotherapy drug, can lead to ototoxicity in pediatric patients, which causes irreversible damage to the hair cells of the cochlea, leading to hearing loss or complete deafness. This often means juvenile cancer survivors living the remainder of their lives with impaired speech, hearing aids, or cochlear implants. Beyond the financial cost burden of these outcomes, they severely impair the social, academic, and cognitive development of children, leading to lower graduation rates, higher future unemployment rates, economic productivity, and reduced household formation. (See Graphic Below): 

Currently, there are no marketed preventative measures for juvenile ototoxicity. There are ~5,000 and ~6000 patients in the United States and Europe respectively receiving Cisplatin, with estimates of 60-90% eventually developing ototoxicity.  

The administration of PEDMARK reduced the risk of hearing loss by 48% in all children and by 70% in children under 5, which are especially sensitive to Cisplatin induced ototoxicity. The company’s clinical data were published in the prestigious New England Journal, further emphasizing its relevance (Sodium Thiosulfate for Protection from Cisplatin-Induced Hearing Loss | NEJM) 

The company has stated that “no clinical safety and efficacy issues were identified during the review and there is no requirement for further clinical data” after receiving their first CRL. We believe that these de-risks the current review and that the previous manufacturing inspection issues are addressed by switching to a new manufacturer with a clean inspection history. 

Takeout Candidate 

In the last few years, pharmaceutical companies have outsourced a fair amount of internal development to M&A. According to data from Biopharma Dive, the sweet spot for deal size has been in the sub $500 million category, which has seen the greatest number of deals each year dating back to 2018. With respect to treatment category, Cancer targets had the most deal in 2018 and 2019, and the second most in 2020, 2021, and thus far year-to-date in 2022. FENC fits both categories. Given that many biotech related names stock has been punished over the last year, and pharma is flush with cash, we expect to see an acceleration of deals into the rest of the year. We believe post successful NDA, FENC is one of the most interesting acquisition targets for specialty pharma players.  

Valuation 

For the United States, we assume an Orphan price of $20,000 per treatment cycle ($120,000 per patient) and 3,500 patients with localized, non-metastatic tumors treated with Cis-Platin. This results in a TAM of $420M. We assume that the company will be able to penetrate 50% of that, resulting in annual sales of $210M. Importantly, we think that the launch should be relatively swift and only require limited sales force investment (10 to 20), since most pediatric cancer patients are being treated in highly specialized centers.  

We propose to value the company at a multiple of 3x sales (in line with Catalyst pharmaceuticals, another orphan single product spec pharma company), resulting in a potential valuation of $630M 3 years post launch. We assume that the share count will increase from 26M to 30M to finance the launch, which would result in a per share price of $21, compared with the current share price of $5.70. 

We chose Catalyst pharmaceuticals as a comparator, because it also launched an orphan specialty drug at a high price point in a setting where the (unapproved) active pharmaceutical ingredient was available from a nonprofit. In Catalyst’s case, the market was initially very skeptical – but the company was still able to launch the approved drug successfully. The same setup exists with Fennec Pharmaceuticals. A nonprofit is offering the same active pharmaceutical ingredient to patients at cost. However, significant barriers exist to administer an unapproved drug intravenously to Children (imagine the resistance of a hospital administrator) – probably even more so than in Catalyst’s case, as the drug was oral and given to adults. As such, our market research indicated, that currently only about 5% of eligible Children receive hearing loss prevention when undergoing Cisplatin based chemotherapy. We believe that this share will ramp up significantly, if there is an FDA approved drug that is included in the guidelines and promoted by a sales-force. 

Upon approval and successful launch, Fennec might be rewarded with a higher multiple than Catalyst pharmaceuticals, due to longer regulatory exclusivity (7.5 years) and stronger IP protection (until 2039). 

Risks 

PEDMARK has yet to receive approval from the FDA or non-U. S agencies, such as the EMA (Eu­ro­pean Med­i­cine Agency). Although it has been outlined clearly that the two CRLs the company received were solely related to the manufacturing process, it is possible that further review by the FDA, or other agencies, finds issues with PEDMARK and its pharmacological capabilities.  

If the FDA were to reject the NDA and require additional clinical studies, we’d expect the shares to trade down to close to net cash ($0.50/share).