Fennec Pharmaceuticals Inc. Q1 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Fennec Pharmaceuticals First Quarter 2024 Earnings and Corporate Update Conference Call. As a reminder, today's conference call is being recorded.

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 the 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 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 on the FDA page. Now it is clear that substitution poses 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 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, which is necessarily putting costs in front of children's safety. The majority of the hospitals are affiliated with the 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. Consequently, which we discussed in our call last quarter, there has been some confusion and some impact on 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 to specify 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 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 and 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 in the 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 offer many important benefits, including an upfront payment, further solidifying our balance sheet, providing meaningful participation in the ex-U.S. success of PEDMARQSI, and importantly, an experienced partner to successfully launch PEDMARQSI in the licensed territories.

Thanks, Rosty. As Rosty has said, in the first quarter, our sales force has switched the focus of their activities to the community-treated adolescent and young adult (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 four times 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 two important things to address this matter. First, they issued a new J-Code for the Hope STS product; and second, they amended Fennec's J-Code to specify PEDMARK. Encouragingly, CMS also stated that the two 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 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 for 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 six 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 seven 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. 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. We look forward to the acceleration in revenue in the coming months.

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 in 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 returned product was due to production and launch dynamics in the first year after launch, which we don't anticipate will continue beyond the first quarter of 2024. Total net sales for the first quarter were $25.4 million, which 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 three 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 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. 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.

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 the 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?

Yes, I'll take this. The FDA is taking the issue seriously following their announcement about the approval of PEDMARK. At pediatric hospitals, we face challenges with the expensive Drug Committee, which often includes members who are not pediatric oncologists or pharmacists. Their goal is generally to avoid funding costly medications, which they view PEDMARK to be. We're actively collaborating with the FDA on this matter, as they recognize the significant safety risks posed by compounded products for this vulnerable group, especially when making a large dose of potassium chloride for younger children. Our discussions with the FDA are ongoing, and we hope to have further updates soon. In Europe, the situation is somewhat different because we have pediatric use marketing authorization, which grants market exclusivity based on study data. Unlike in the U.S., where the approval is hospital-specific, the European system recognizes the broader healthcare framework that has already approved an older drug for pediatric use, providing a 10-year exclusivity. This creates significant value for this population due to our investment in studies. The single-payer system in Europe simplifies negotiations between Norgine and individual countries regarding pricing. Once approved, the drug should have no major issues with compounding in Europe. I can also pass it over to Adrian for further details on this.

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. 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. 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 regarding 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 to see that PEDMARK is gaining traction in the AYA population?

Great question, Charles. So let me kind of maybe tell you how I look at the business holistically. We have several components to this. One is our medical education. How well do we engage and educate the staff at the community center that historically has not treated for ototoxicity? This is very, very critical. The second component is market access, which Adrian alluded to in his comments; that's the payer coverage, where 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 ensure we can provide PEDMARK despite a six-hour gap between the cisplatin therapy and when PEDMARK is administered. Lastly, I think it's just establishing best practices and really learning from the experiences. It is very important that we get it right. I look at this as sort of a mini pilot at the moment; we aim to learn from that and how we scale it. This goes back to the on-and-off switch that Adrian referred to. When we find success, we will know how to replicate that and expect a meaningful inflection point when all the barriers are removed, and we’ve learned how to navigate through these challenges. I hope this is helpful.

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

That would be my anticipation, correct.

As I said, I think it's taking between 60 to 90 days to get everything sort of loaded into the electronic prescribing systems to get the compendia updated; it doesn't happen overnight. 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 look at existing customers in Q4, what drove utilization there down sequentially? It looks like on the top line number. Maybe just a little bit of color around existing customer utilization.

Yes. Let me take this. I would say there are a couple of things. One is that Robert touched on the bad debt expense, which he can elaborate further on. The second piece, of course, is I can just tell you that the difference between our fourth quarter and first quarter sales without the bad debt expense is basically three to five patients. So that's sort of the delta you're looking at. Also historically, Chase, there may be 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 just add, Chase, that as Rosty mentioned, the FDA publishing the do-not-substitute guidance on the website for the PEDMARK label seems to have had an impact. We've had a couple of important pediatric hospitals just in the last week order 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.

Right. Because the confusion came from the message communicated from these organizations instead of what the FDA really said. But again, this is very early. We're dealing with a challenged hospital system with these expensive drug committees. I want to ensure that we set proper expectations on this. As we're getting some of them to switch, obviously, that will be welcome news. But we have been very patient with everyone, and we're working with the FDA to resolve all of this. I think it will happen at one point, but I just don't know when.

Understood. Robert, could you quantify what that return was in terms of its impact on top-line revenue? Additionally, regarding your comments, there has been some change in behavior in Q2, but it hasn't significantly affected revenue yet. We're seeing early signs of changing behavior. Is that an accurate way to describe the situation?

Correct, with a couple of larger accounts.

Yes, I'll start with your question, Chase. 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 a result of products that were returned due to expiry.

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

Yes. I would say it's all of the above that I listed in the previous question. It's really getting the medical education right. I cannot stress the importance of that, to be honest, because we have people that want to listen to our message. It's important how well the message is delivered and how well we're engaging because remember, these physicians are not treating for ototoxicity; they haven’t historically treated because these are centers that administer chemotherapy drugs to the patients. So that's one that's ongoing. We're refining our strategy there, learning from them, etc. Once they want to work with us, it's obviously all about the logistics, market access, making sure that all these pieces are together. Compendia is a very important piece from that as well. There will also be fuel reimbursement pull-through and a bunch of other things that we have to manage. We've seen actually in a few patients already, but the sample size is relatively small. We want to ensure a larger sample size, as I mentioned, these are kind of like mini pilots. One thing we learned in this company historically is that what worked for us was simplifying things down to the basics. The very basics here are treating one patient at a time. Success for that patient, for the center, and ultimately for Fennec creates this win-win-win scenario. All these components are really critical, and we're working through them. I expect an inflection point because when we look at the patient volume in these centers, it's actually quite encouraging; those numbers are significantly higher than what we've discussed with pediatrics. So this is truly the opportunity ahead of us and how do we accelerate it. Once we've established best practices, we can accelerate that through this network.

And then just last for me, maybe, Adrian, what are you hearing from the field around the 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 change protocols there?

Yes, we're getting pushback when you speak to the people in the clinic because they don't have the authority to stay open longer. We need to work our way up through the senior management to find the decision maker and then explain things to them. This process is just taking longer than initially anticipated, but it's happening. In the meantime, as I said in the prepared remarks, we've been searching for centers that are open for 12 hours or more because there, we’re really seeing uptake.

The other component to this, and I just want to again credit the team for their resourcefulness. We also have a relationship with a home infusion network that can provide the infusion of PEDMARK to the patient at home. We’re just starting to utilize that, which is very encouraging because we’re essentially offering a suite of services; we’re addressing many challenges for those places. Those initiatives are ongoing as well.

Our next question comes from Jason McCarthy with Maxim Group.

This is Michael Okunewitch on the line for Jason. I would like to know if you could provide more insight into how the value proposition differs between those under 15 years old and the adolescent young adult population. Since they typically require more vials on average, do you anticipate needing additional discounts to effectively capture this larger market?

Yes. No, it's a very good question. So let me just sort of compare for you a disease that starts occurring from the age of 15, all the way to 39, which is germ cell testicular cancer. How you treat the 15-year-old is the same as how you treat the adolescent, the young adult, and the older patient. What changes is typically the body surface area, and our drug is administered based on that. So you have three to four times more vials for older patients. Just to give you a flavor for that. So when I mentioned the difference between the fourth quarter versus the first quarter numbers, it's really a difference of that few patients. Now in terms of giving discounts, 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 can retain over 5% on the upfront. There's also some volume discounts available to them, but they're not meaningful relative to the opportunity to treat these patients. These patients are reimbursed based on the NCCN Type 2A recommendation.

All right. 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 down 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 it should come down significantly. We did see a step-up quite a bit in Q1, as well as some in Q4, and it's tailing off here in Q2. That being said, yes, that will now all be assumed by Norgine going forward.

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

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

These are great questions. The repercussions really are about whether harm is caused and what that harm is, and ultimately whether parents might file a suit against the hospital for treating their child with an unauthorized copy of an FDA-approved drug, which clearly states on its label to not substitute. In terms of Fennec repercussions, legal repercussions, we're exploring all these options. But as you know, in business, it's typically not best practice to go after your customers, so again, we have been very patient and are working through the FDA on this. Regarding 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 we chose Norgine; they promised and have committed to appropriately resource the launch. What we understand is that it's north of 50 FTEs, which I consider to be a very appropriate level of spending in terms of promotional results. This is much more firepower than Fennec could have ever achieved on our own. I'm confident things are going to go well. 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. 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.