7/12/23, 11:10 PM Fennec _ Undervalued, Near-Cash-Flow-Positive, Possible Buyout Candidate (NASDAQ _ FENC) _ Seeking Alpha

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Fennec Pharmaceuticals: Undervalued, Near-Cash-

Flow-Positive, Possible Buyout Candidate
Apr. 26, 2023 8:33 AM ET | Fennec Pharmaceuticals Inc. (FENC), FRX:CA | 5 Comments | 7 Likes

Daron Evans
272 Followers

Summary
After a long approval process, with two CRL speed bumps, Fennec is finally a de-risked
investment opportunity with substantial upside potential.

US Commercial sales started in Q4 2022, and a J-code covering PEDMARK® became

effective April 1, 2023.

CHMP recently issued a positive opinion for the approval of the Company’s product, with
formal approval for sale in the EU expected in June.

Management was recently given an incentive to complete a sale of the Company before the
end of 2023, which likely requires them to announce a deal this summer.

Regardless of the potential for a sale, Management expects to be cash flow positive by Q4
2023.

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FatCamera/E+ via Getty Images

Fennec Pharmaceuticals - Overview

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Fennec Pharmaceuticals (NASDAQ:FENC) (the Company), 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).

Source: Fennec Pharmaceuticals

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; the issue was 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.

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PEDMARK was finally launched in the fall of 2022 and the Company generated $1.5 million in
sales Q4 2022 (Wall Street Q4 2022 revenue consensus was less than $700k).
At $10k per vial, assuming 5 vials per patient per quarter (each patient may use more than 5
vials in full course of treatment, but for modeling purposes I am assuming 5 vials in a quarter),
not adjusting for free/discounted vials, $1.5M in sales could represent approximately 30 patients.

The Company received a positive opinion from the Committee for Medicinal Products for Human
Use (“CHMP”) of the European Medicines Agency (“EMA”).
The drug should be formally approved for sale in Europe this summer.
According to management, they will have drug available for sale in Europe by the end of 2023.

The Company does not mention Japan in their 10-K, but they say they have Japanese approval
on their plan once they complete the required cross-over PK studies.

PEDMARK® Launch Process

The Company targets hospitals and cancer centers that provide pediatric cancer treatments in
either the out-patient (deliver chemotherapy and leave that day) and the in-patient (stay the night)
setting.
A majority of 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. The process can take
6-9 months. 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 9 month process through their P&T committee. Over the first 12
months of launch, I would expect that the Company will block-and-tackle their way through the
P&T committees in the larger systems. Given that there are approximately 10,000 children
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.

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As of April 1, 2023, PEDMARK® has an effective J-code (J0208), which should hopefully speed
up the process of getting through P&T committees, as well as allowing hospitals to more easily
bill payors separately for the drug.
Once through the P&T, and the reimbursement set-up, each site should require little hand-holding
through each patient, given the severity of the side effect that PEDMARK® prevents.

Based on the conversation with management about the 6-9 month process for larger hospitals, I
would expect that revenues in Q1 2023 would be similar to Q4 2022 given the 6 month large
hospital discussion window would have just finished. In Q2 2023, however, it would be logical that
the Company should start to see the drug being used in one or more larger children’s hospitals.
One single large hospital could dose as many 15 patients per quarter, which could generate as
much as $750K in revenue for the Company. 100% penetration into the 50 large hospital systems
could provide as much as $40 million per quarter in revenue.

Management has told me that their launch is meeting their pre-determined metrics, and that they
aim to be cash flow positive in Q4 2023.
Analysts covering the company have also projected that the Company will be cash flow positive
by Q4 2023.
Management strongly believes that their launch process is progressing well. I do not expect that
Fennec would launch the drug itself in Europe. I expect that they would either license the drug to
a European company if they do not sell the Company this year.

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.

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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.

Source: US FDA

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.

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Chairman Dr. Khalid Islam

Founder/CEO of Gain Therapeutics (GANX)

CEO of Gentium SPA, sold to Jazz for $1 bil

Chief Executive Officer Rostislav Raykov.

Founded Fennec in 2009

Portfolio manager for Alchem Investment Partners

Portfolio manager and securities analyst for John A. Levin & Co

Chief Financial Officer Robert Andrade

Joined Fennec in 2009

Managing Director, Life Sciences M&A at Cantor Fitzgerald

When reading the stock chat boards, one can get a sense of huge frustration from investors as to
management’s lack of communications with investors. Combine that frustration around
communication with a lack of trust from the multiple CRL’s, one can understand why there may
not be huge investor enthusiasm for the story.

Looking past the CRL history, and focusing more on current behaviors, I believe that management
is currently focused on executing the drug launch to grow sales as quickly as possible, and on
positioning the company to be purchased. There is a new line the 10-K highlighting a special
compensation for management in event there is a “completion in a change of control transaction
prior to December 31, 2023”. The CEO gets 50% of a bonus pool equal to up to 1.5% of the value
of the transaction. The CFO gets 30%, and the remaining 20% will be allocated to other key
personnel.

In addition to upside from over 1.4 million options, the CEO can receive an extra $1.5-$2.5 million,
depending on the transaction value, if he can orchestrate the completion of a purchase of the
Company by the end of 2023. Assuming it takes 4-6 months to close a transaction, the Company
would need to announce a deal by this August, at the latest. I therefore believe that there are
ongoing M&A discussions that could conclude this summer.

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Stock Price Story

Source: Yahoo Finance

Figure 2: FENC 5 Year Stock Chart (Source – Yahoo Finance)

August 11, 2020 – FENC’s first CRL

November 29, 2021 – FENC’s second CRL

September 21, 2022 – PEDMARK® was approved.

Surprisingly, after the approval press release, the stock initially went down afterhours

Since the first week of January 2023, the stock has drifted down, hitting a post-approval low
of $7.60 on March 19

As of April 24, 2023, the Company had a market capitalization of $210 million, with a cash
balance of approximately $18 million (adjusting for probable burn in Q1 2023), and debt of
approximately $25 million.

Proforma Model
When modeling the Company, I have made the following assumptions:

3,333 total patients in the US / 5,000 patients in Europe

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$50K per patient dosed in a quarter in the US / $40K in Europe

Initially, 15% COGS in US, 20% COGS in Europe

~$6M per quarter in initial operating expenses

Reduction in G&A in 2024 and 2025 as legal expenses decrease

Source: Internal Analysis

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 15% discount rate projects a value of
~$450 million, or about $15 per share.

If the Company can indeed achieve cash flow positive in Q4 2023, it is likely that they will be able
to access up to an additional $20M in debt to fund operations, and the Company will likely not
need to raise additional equity capital.

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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 $270
million, or about $8.90 per share.

Assuming the model is directionally current, it is clear that the current market capitalization
reflects a thesis that the Company will only have Orphan designation to protect its US exclusivity.
There is also a general trend for some investors to short small companies who are in the early
stages of launching their own drug – that bet has played out well most of the time (see EVOK and
JAGX for great examples of how well this short play works).

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, based on a discounted multiple
of 2025 sales of $192 million.

Potential Risks and Potential Surprises

1. Financing: The Company burns approximately $6 million per quarter, and that may rise as the
Company continues to grow sales. The Company had $24 million in the bank at the end of
2022, and had $25 million in debt.
A majority of the debt can convert 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. Additionally, the Company has an active ATM, that is has never touched.
I believe that management is dilution sensitive, and they would likely draw down additional
debt and avoid additional equity dilution.

2. 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.

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3. Surprises: After going through 2 CRL’s, finally getting approval, and showing good progress on
their launch, I believe that there are better odds for a revenue upside surprise than for any
negative news. I believe that some of the downward pressure comes from management's
focus on the commercial launch and hopefully a sale, and lack of attention to broadening their
pool of investors, which generates an opportunity if one believes a buy-out is a high probability.
BELLUS Health (BLU) drifted down from lack of investor enthusiasm over the last few months,
and then surprised the faithful with a double last week.

Conclusion
FENC is a single asset, de-risked, commercial stage company whose most likely near-term path
is a buy-out. I believe the negative concerns some may have regarding their patent exclusivity
and management communication has created downward pressure on the stock and provided new
investors with a nice opportunity for 60-100% upside. Management is highly incentivized to sell
the company on a timeline that would suggest a summertime deal announcement. I would place
lower than 40% odds that the Company is not able to maintain US patent exclusivity through their
current patent life till 2039 – suggesting a probability-weighted valuation of at least $13 per share.
Good luck to all.

This article was written by

Daron Evans
272 Followers

Mr. Evans is a private investor who focuses primarily on life science opportunities.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of FENC either through stock ownership, options, or other derivatives.
I wrote this article myself, and it expresses my own opinions.
I am not receiving compensation for it (other than from Seeking Alpha).
I have no business relationship with any company whose stock is mentioned in this article.

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