Fennec Pharmaceuticals Inc. (FENC) Q1 2024 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Fennec Pharmaceuticals First Quarter 2024 Earnings and Corporate Update Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. Now I would like to turn the conference over to Fennec's Chief Financial Officer, Robert Andrade. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate you joining us today for Fennec Pharmaceuticals' First Quarter 2024 Earnings Conference Call. During which, we will review our financial results as well as provide a general business update. Joining me from Fennec this morning are Rostislav Raykov, our Chief Executive Officer; and Adrian Haigh, our Chief Operating Officer. Before we begin, I would like to remind you that during this call, the company will be making forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ from the results discussed in the forward-looking statements. Reference to these risks and uncertainties are made in today's press release and disclosed in detail in the company's periodic and current event filings with the United States Securities and Exchange Commission. In addition, any forward-looking statements made on this call represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. We specifically disclaim any obligation to update or revise any forward-looking statements. This conference call is being recorded for audio rebroadcast on Fennec's website, www.fennecpharma.com, where it will be available for the next 30 days. With that, I will now turn the call over to our Chief Executive Officer, Rostislav Raykov. Rosty?

Thank you, Robert, and good morning, everyone. On today's call, we will detail our first quarter financial results, all of which were outlined in our earnings press release issued this morning prior to this call. We'll also discuss ongoing commercial launch efforts and progress that we're making with PEDMARK in the U.S. and abroad, following the exclusive licensing agreement announcement we executed in March with Norgine to commercialize PEDMARQSI in Europe, Australia and New Zealand. In the first quarter, PEDMARK delivered total net revenues of $25.4 million, including $18 million in licensing revenues from Norgine transaction and $7.4 million in net PEDMARK product sales. Robert will further elaborate on the $18 million in the licensing revenue related to the Norgine transaction. But to be clear, we received $43.2 million from the transaction which is reflected on our balance sheet as of March 31 and cash of $51.2 million. We believe that a couple of things affected PEDMARK sales during the first quarter of this year. First, the public reminder that the U.S. FDA issued to health care professional organizations in January, stating that PEDMARK is not substitutable with other sodium thiosulfate products may have caused some unintended confusion in the marketplace. Initially, the professional affairs and stakeholder engagement staff at the FDA issued the potential health risks with substitution as a targeted outreach to the following organizations. Alliance for Pharmacy Compounding, American Academy of Pediatrics, American College of Apothecaries, American Hospital Association, American Pharmacies Association, American Society of Medical Oncology, American Society Health System Pharmacies, Association of American Cancer Institute, [ Junior Doctors ] Association, Federation of American Hospitals, Hematology Oncology Pharmacy Association, International Academy of Compounding Pharmacies and Professional Compounding Centers of America. We believe that, in turn, some of these organizations communicated the FDA safety message to their respective members. Recently, the office of new drugs and the FDA added the safety communication issued by SEDAR's professional affairs and stakeholder engagement staff to PEDMARK's approval in the FDA page. Now it is clear that substitution post potential health risks, including potassium chloride exposure, which at high doses can lead to increased risk of acute cardiac events and other serious adverse reactions, potassium chloride is not present in PEDMARK. Overexposure to boric acid can cause health risks, including headache, hypothermia, restlessness, weakness, renal injury, dermatitis, alopecia, anorexia and indigestion. Although PEDMARK also contains boric acid, it is at a lower concentration than other STS products. Overexposure to sodium nitrate, which can lead to health risks, including methemoglobinemia. Sodium nitrate is called co-packaged with sodium thiosulfate as a separate vial in some products, and it's not presently in PEDMARK. Unfortunately, Fennec continues to see unlawful compounding of copies of PEDMARK with pediatric hospital pharmacies, are necessarily putting costs in front of children's safety. The majority of the hospitals are affiliated with Children Oncology Group and thus far, the FDA safety communication has not changed their behavior. Fennec continues to diligently work with the FDA to address this issue. Additionally, prior to April 1 of this year, our J-Code did not differentiate between PEDMARK and other formulations of STS. As a consequence, which we discussed in our call last quarter, there has been some confusion and some impact to the adaptation of PEDMARK. The good news is that as of April 1, this issue has been fully resolved with CMS amending our J-Code specified PEDMARK. Now that this change is effective, we expect uptake to improve in the quarters to follow. Despite the acute challenges, we remain optimistic that it will be an exciting year for Fennec given the strong performance with PEDMARK in 2023, the first full fiscal year following our U.S. commercial launch. We're confident in our ability to navigate through these marketplace challenges to achieve our long-term objectives. Our outlook over the next few quarters will largely depend on our ability to successfully target the community hospital infusion centers that treat in the outpatient setting all the pediatric patients within our label and the NCCN guidelines for adolescents and young adults. PEDMARK continues to have broad and favorable payer coverage, as evidenced by payer approval, approved U.S. prescription claims with commercial insurance plans and Medicare Part B plans. Regarding our partnership with Norgine to commercialize PEDMARQSI in Europe, Australia and New Zealand, efforts are well underway in these territories with a targeted launch date fourth quarter this year. PEDMARQSI is the first and only approved therapy in the EU and U.K. for prevention of ototoxicity induced by cisplatin chemotherapy in patients 1 month to 18 years of age with localized non-metastatic solid tumors. As a reminder, under the terms of the licensing agreement, Fennec received approximately $43.2 million in upfront consideration and the potential of up to approximately $230 million in additional commercial and regulatory milestone payments and tiered royalties on net sales of PEDMARQSI in the license territories up to the mid-20s. Norgine will be responsible for all commercialization activities in the licensed territories and will hold all marketing authorizations. As we previously communicated, this partnership represents an important step in achieving our mission of expanding PEDMARQSI to patients across the globe who are at risk of suffering from cisplatin-induced ototoxicity. The terms provided this week -- many important benefits, including an upfront payment, further solidifying our balance sheet [indiscernible] providing meaningful participation in the ex-U.S. success of PEDMARQSI, and importantly, an experienced partner to successfully launch PEDMARQSI in the licensed territories. With that, I will now turn the call over to Adrian, who will provide an update on our commercial strategy and operations. Adrian?

Thanks, Rosty. As Rosty has said, in the first quarter, our sales force has switched the focus of their activities to the community-treated AYA population that falls within our label. We believe that there are many more patients in this segment compared to the inpatient hospital-treated pediatric population. Additionally, these older patients require approximately 4x as much PEDMARK as the younger patients. On our prior quarterly call, I alluded to the challenges that we faced during the early stages of our relaunch into this segment. Prior to April 1, 2024, our J-Code did not differentiate between PEDMARK and other formulations of STS. Consequently, there has been some confusion and some impact on the adoption of PEDMARK. In January, CMS did 2 important things to address this matter. First, they issued a new J-Code for the Hope STS product; and second, the amended Fennec's J-Code to specify PEDMARK. Encouragingly, CMS also stated that the 2 formulations are not interchangeable. As a reminder, the new J-Code specifying PEDMARK was not active until April 1. It is also important to understand that the J-Code becoming effective on April 1 is not a simple on, off event. It is taking some considerable time to get the code uploaded into the electronic prescribing systems and payment plans, and this task is still ongoing. Additionally, we are awaiting updates to the NCCN compendia and others, for example, drug decks and Lexicon. These compendia are the proof source to payers to reimburse PEDMARK and this process is expected to take 60 to 90 days to complete and validate from April 1. Another ongoing challenge has been extending infusion center hours to accommodate the time it takes to administer PEDMARK 6 hours after the cisplatin infusion. Again, this doesn't happen overnight and requires the intervention of senior management at the infusion center. We've had greater penetration in those centers that are open for 16 to 24 hours. Despite these acute challenges, we remain encouraged by the reaction to PEDMARK and the possibility to dramatically improve the quality of life for cancer survivors by preventing or significantly reducing hearing loss caused by cisplatin. We are confident that once these logistical hurdles are overcome, PEDMARK will become the standard of care and be routinely used in the AYA population. We've had a very busy conference season with participation in 11 regional oncology conferences as well as 7 key scientific meetings, including the American Society of Pediatric Hematology/Oncology, the Community Oncology Alliance, the National Comprehensive Cancer Network and the American Academy of Audiology Annual Conferences. And we're looking forward to ASCO where we intend to spread the word to as many AYA-treating physicians as possible. So in closing, we see promising opportunities for PEDMARK, including the steps we're taking to educate the marketplace, along with executing on our commercialization plans. And we look forward to the acceleration in revenue in the coming months. With that, I'll turn the call over to Robert to go over the financials for the quarter.

Thank you, Adrian. Our press release contains details of our financial results for the first quarter of 2024, which can be viewed on the Investors & Media section of our website. Rather than read through all of those details, as previous conference calls, my comments today will focus on some key financial results. The company recorded PEDMARK net sales of $7.4 million for the first quarter of 2024. Net sales in the first quarter were more highly impacted than previous quarters by discounts, including an impact from select product that was returned due to expiry. The return product was due to production and launch dynamics in the first year after launch, which we don't anticipate to continue beyond the first quarter of 2024. Total net sales for the first quarter were $25.4 million, which as mentioned, included $18 million for the accounting of licensing revenues for the Norgine transaction. The company evaluated the Norgine license agreement under ASC 606 and concluded that Norgine represents a customer in the transaction. As such, a portion of the transaction price was recognized as license revenue in the first quarter of 2024, and a portion of the transaction price associated with the material right is deferred and reflected as deferred revenue. To be clear, for the 3 months ended March 31, 2024, the company did not recognize any milestone or royalty revenue payments from the Norgine transaction. G&A expenses for the first quarter of 2024 were $5.9 million, which compares to $4.3 million in the fourth quarter of 2023. This increase is largely attributable to pre-commercialization expenses in preparation for the potential European launch or partnership. The company recorded $5.2 million in selling and marketing expenses in the first quarter of 2024 compared to $2.5 million in the fourth quarter of 2023. The increase was largely attributable to higher payroll and increased marketing expenses related to the previously mentioned AYA initiatives. And finally, on our cash position. We ended the first quarter with approximately $51.2 million in cash, cash equivalents and investment securities, which includes the approximately $43 million received from the licensing of Europe, Australia and New Zealand to Norgine. Further, as a reminder, the next anticipated milestone related to our Norgine agreement will be obtaining pricing approval in Germany in which Fennec will receive a EUR 10 million milestone payment. Further, Fennec royalties on net sales will commence in the mid-teens percentages once PEDMARQSI is launched later in 2024. We anticipate that our cash, cash equivalents and investment securities as of March 31, 2024, when coupled with PEDMARK revenue assumptions and the recently announced license agreement for Europe in March 24 will be sufficient to fund our planned operations for at least the next 12 months. And operator, with that, we are ready for questions.

[Operator Instructions] Our first question comes from Charles Duncan with Cantor Fitzgerald.

Yes. Congrats on the progress in the quarter with the Norgine collaboration. Had a couple of questions regarding the unlawful compounding. And you mentioned Children Oncology Group. I guess I'm wondering if you could provide some additional color on the initiatives that you're taking to really correct this behavior. And then can you provide us any color on the level of compounding that you anticipate to occur in Europe versus here?

Charles, I'll take this. Yes. So if you saw from the FDA announcement and then subsequently putting that announcement on the approval of PEDMARK at the FDA page, the FDA is taking this issue very seriously. The problem that we run into at the pediatric hospital level is that they have a committee called the expensive Drug Committee, where -- and typically, these committees are stacked with folks in the hospitals that are not pediatric oncologists or pharmacies for that matter. But it's -- they're really there to do everything possible, but to avoid paying for an expensive drug, which they consider PEDMARK to be one. So this is what we're facing. In terms of initiatives, what I would say is that we continue to work with the FDA on this. The FDA is very concerned. There is significant safety risk associated with the use of compounded products in this vulnerable population, particularly if you're pushing over 15 minutes to make a copy of PEDMARK a very large significant dose of potassium chloride in younger children. So with that, I think our engagement with the FDA is ongoing. And if there's anything more to report, we will hopefully soon. In terms of Europe, what I would say is there's a bit of a difference because there, you're dealing with -- so we have a pediatric use marketing authorization, which, by definition, gives exclusivity to the market on the data of the studies -- from the studies to, in this case, now Norgine. How is that different in the United States is that you're not dealing by hospital-by-hospital basis, you're dealing with a health care system that -- and regulations that you've already been approved for the use of an older drug in a pediatric population with a 10-year exclusivity. So that's well understood that you're bringing in tremendous value to this vulnerable population because if you invested in these studies and you have this 10-year exclusivity. And so you're also dealing with a single-payer system. So there, it's really the negotiation that will be ongoing between Norgine and each respective country in terms of the price achieved. But once that happens, this drug would be available and approved by a single payer. So there should not be a significant issue with compounding in Europe. And maybe I can turn it over to Adrian to elaborate on that as well.

Yes. Thanks, Rosty. It's exactly as you said, we have the pediatric use marketing authorization, which is specifically designed for older products repurposed for children and once there's an approved drug in most of the European markets compounding is illegal. As you can imagine, there was a lot of diligence done by the parties that were bidding for the European rights. And all of them came to the conclusion, obviously, including Norgine that compounding would not be an issue in Europe.

It makes sense. One quick follow-up then for you, Adrian or Rosty. With regard to the J-Code, nice to see that happen in April, and I appreciate all the caveats with regard to the timing of that going from effective to actually effective, but when you think about either the second quarter or the second half of this year, how would you measure success beyond the obvious of revenue? What are the key operating metrics that you're looking at to see that PEDMARK getting traction in the AYA population?

Great question, Charles. So let me kind of maybe tell you how I look at the business holistically. So we got several components to this. One is our medical education. So how well do we engage and educate the staff at the community center that historically has not treated for ototoxicity? So I think that's very, very critical. The second component is market access. And I think Adrian alluded to that in his comments, that's the payer coverage, which so far, we haven't had any significant issues with the company update, which is really important, then we have to deal with field reimbursement and ultimately pull through, and these are all ongoing activities. Then we have the logistics and distribution piece where we are working with the office, but importantly, we must listen to these offices to make sure we can provide PEDMARK despite a 6-hour gap between the cisplatin therapy and when PEDMARK is administered. And lastly, I think it's just establishing best practices and really learning from the experiences. It is very important that we get it right. So basically, I look at this as sort of a mini pilot at the moment, what we learned from that and how do we then scale it. And so -- and this goes back to the on-and-off switch that Adrian referred to. It's like, let's say, this thing right now. So then when it scales, we know how to exactly do this. So -- and then we can expect obviously a meaningful inflection point when all the barriers are sort of removed, and we've learned how to navigate through these. So I hope this is helpful.

Would that increase visibility occur in the second half of this year you anticipate, Rosty?

That will be my anticipation, correct.

Yes. As I said, I think it's taking between 60 to 90 days to get everything sort of loaded up into the electronic prescribing systems to get the compendia updated, just doesn't happen overnight. And once that's done, then we expect to see the inflection point. So I think you're right, second half of the year.

Next question comes from Chase Knickerbocker with Craig-Hallum.

So just maybe digging in a little bit on the inpatient side quickly. I understand the difficulty in signing up new customers, certainly on the inpatient side, if those potential customers are compounding. But If we just kind of look at existing customers in Q4, what drove utilization there down sequentially, at least that's kind of what it looks like on the top line number. Maybe just a little bit of color around existing customer utilization.

Yes. Let me take this. So I would say there are a couple of things. One is that Robert touched on the bad debt expense, and he can elaborate further on that. And then the second piece, of course, is I mean I can just tell you that the difference between our fourth quarter and first quarter sales without the bad debt expense is basically 3 to 5 patients. So that's sort of the delta you're looking at. And also historically, Chase, just to also add a little more color. If you look at kind of last year as well, maybe there's some seasonality to this as well. We had a stronger fourth quarter than we did first quarter. But it's too early to tell.

Yes. I would -- I would just add, Chase, that, as Rosty mentioned, the FDA publishing the do not substitute guidance on the website, on the PEDMARK label side of the website seems still had an impact. We've had a couple of really important pediatric hospitals just in the last week have ordered for the first time. So that's an encouraging trend. It's early days. But I think FDA publishing on the website has made an impact. But up until then, it really happened...

Right. Because the confusion came from we're getting this message communicated from these organizations instead of what is the FDA really saying to now look at what the FDA is really saying. But again, this is very early. We're dealing with a very challenging -- challenged hospital system with these expensive drug committees. So I want to make sure that we sort of have expectations on this. And as we're getting some of them to switch, obviously, that will be welcome news. But we have not -- obviously, we have been very, very patient with everyone, and we're working with the FDA to resolve all this. I think at one point, it would happen, Chase, I just don't know when.

Understood. And then, Robert, maybe can you just quantify what that return was as far as a headline -- a headwind to topline revenue, sorry. And then just to kind of dig in a little bit on those comments, you have seen some change in behavior in Q2, but really hasn't been material to revenue yet, but early signs of behavior changing. Is that kind of the right way to characterize it?

Correct, with a couple of larger accounts.

Yes, I'll start with your question, Chase, as well. Just from a framework perspective in Q4, we had gross sales of a little over $11 million and reported net sales of $9.7 million. In Q1, we had gross sales of $9.7 million and reported net sales of $7.4 million. So that delta and that jump up in percentage was, as I mentioned, largely as a result product that due to expiry, we had to give a credit to some distributors in the quarter.

Got it. And then maybe just trends in AYA, digging in a little bit more there. It sounds like Q3 should kind of be our expectation of when that accelerates and really kind of inflect in the model. And biggest driver there, it probably is going to take some more time to obviously get those clinics to stay open. So is the biggest driver kind of that compendium ad? Or just kind of walk us through what the big kind of unlock on the inflection is there?

Yes. I mean I would say it's all of the above that I listed in the previous question. It's really getting the medical education. I cannot stress the importance of that, to be honest, because we've got a -- we have people that want to listen to our message. It's important how well the message is delivered, how well we're engaging, because remember, these physicians are not treating for ototoxicity, they haven't treated historically because these are centers that are treating basically with chemo drugs, the patients. So that's one that's ongoing. And obviously, we're refining our strategy there. We're learning from them, et cetera. This -- so that engagement piece is critical. Then once they want to work with us, it's obviously all the logistics, the market access, making sure that all these pieces are together. And Compendia is a very important piece from that as well. There's also will be fuel reimbursement pull through a bunch of things that we kind of -- and we have seen actually in a few patients. Again, the sample size is relatively small. So we want to make sure that we have a larger sample size, as I mentioned, these are kind of like mini pilots, at least in my mind, because one thing we learned in this company historically, what's worked for us well is when we simplify things and we get it down to like the very, very basics. And the very basics here are you're treating one patient at a time, truly. And is that a success for the patient, for the center and ultimately for Fennec can create this win, win, win. And all these components are really critical to that. And we're working through those. And I think there will be an inflection point because when you look at the number of volume of patients in these centers are seeing it's actually quite encouraging that those numbers are substantially higher than what we've discussed with pediatrics. So this is really the opportunity ahead of us and then how do we accelerate it. Once we've established the best practices, how do we accelerate that through this network.

And then just last for me, maybe, Adrian, what are you hearing from the field around kind of willingness of these clinics to stay even longer, are you getting some pushback there? Or is it mainly just kind of working with the administration takes time to kind of change protocols there?

Yes, it's -- we're getting pushback when you speak to the people in the clinic because they don't have the authority to stay up longer. I see you've got to work your way up through the senior management to find the decision maker and then explain things to them. And it just is taking a longer time than initially anticipated, but it's happening. And in the meantime, as I said, in the prepared remarks, we've kind of -- we're searching for the centers that are open sort of 12 hours plus because then there's no issues, and that's where we're really seeing uptake now.

The other components -- yes, yes. No, the other component to this, and I just want to -- and this is again, credit to the team and how resourceful they are. We also have a relationship with a home infusion network that is able to provide the infusion of PEDMARK to the patient at home. And so we're just starting to utilize that, which is, to me, is also encouraging because, again, we're providing basically a suite of services, we're problem solving for a lot of places. And so there's initiatives ongoing there as well. But as Adrian mentioned, this takes a bit of time to work through all of these.

Our next question comes from Jason McCarthy with Maxim Group.

This is Michael Okunewitch on the line for Jason. I guess I'd like to see if you could give me a bit more color on how the value proposition varies between the under 15s and the adolescent young adult population. And then given that they do require more vials on average, is this something where you'd have to -- or where you expect you need additional discounts to adequately capture this larger market?

Yes. No, it's a very good question. So let me just sort of compare for you a disease which starts occurring from the age of 15, all the way to the age of 39, which is germ cell testicular cancer. So largely the -- how you treat the 15-year-old is the same as how you treat the adolescent -- the young adult and the adolescent as well as the older patient. What changes there, of course, is the body surface area and our drug is administered based on that. So typically, you have -- and also, there's a decision making there, whether they go in the 3 cycles or the 5 cycles, which also could vary. But bottom line is kind of when you compare it to the typical sort of pediatric patients versus you, the young adult or adolescent or older patients, you have a 3 to 4x more vials. Again, just to -- just to get a flavor for that. So when I truly mentioned the difference between the fourth quarter versus the first quarter numbers, it's really a difference of that [indiscernible] patients. Now in terms of giving discounts, and so now recall that you're dealing with the outpatient community where a discount, a meaningful discount is not really necessary because they have mechanisms in place by which they get to -- they get to make over 5% for this on the upfront. And of course, if you -- there's also some volume discounts available to them as well, but they're not meaningful relative to the opportunity to treat these patients. And again, these patients are reimbursed based on the NCCN Type 2A recommendation.

All right. And then as a follow-up, I just want to do a quick housekeeping question. With the EU partnered out now, should we expect that G&A line to start to come in a little bit in subsequent quarters?

And maybe that's over to you.

Thanks, Michael. Yes, that is the expectation after this quarter being Q2 that we're in, it should come in significantly. So we did see a step-up quite a bit in Q1, also some in Q4, and it's just tailing off here in Q2. But then yes, that's all being assumed by Norgine going forward.

Our next question comes from Raghuram Selvaraju H.C. Wainwright.

Just 2 very quick ones. Firstly, can you just give us a sense of what the repercussions would be, if any, for those hospitals and hospital systems that deliberately do not elect to follow the FDA's guidance? And secondly, if you can maybe elaborate upon the level of sales and marketing infrastructure that Norgine has communicated to you will be placed in the service of commercializing PEDMARQSI in its territories?

These are great questions. So the repercussions really are -- it's really are they causing harm and what that harm is and ultimately the parents filing a suit against the hospital for being -- for their child being treated with unauthorized copy of FDA-approved drug, which clearly states on its label to not substitute. And now there is a public message announcement as to why it's not a good idea to substitute. In terms of Fennec repercussions, legal repercussions, we're exploring all these options. But as you know, typically in business is not a best practice to go after your customers. So again, we have been very, very patient and we're working through the FDA with that. On the Norgine transaction, maybe Adrian can elaborate a little more in terms of their commitment to PEDMARK and how important that is for them in Europe, in particular.

Yes, this is one of the reasons why we picked Norgine and that they promised and have committed to resource the launch appropriately. What we understand is that it's north of 50 FTEs. And what I consider to be very appropriate level of spend in terms of promotional results. So it's much, much more firepower than Fennec could ever have done on our own. So I'm confident things are going to go off very well. And as a reminder, the launch is scheduled in Germany for October.

I'm not showing any further questions at this time. I'd like to turn the call back over to Rosty for any closing remarks.

Well, thank you all for today, and we look forward to updating everyone on our progress this quarter and beyond. But thank you for your patience with us and stay tuned. We're working very hard to get this right. Thank you.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.