- Fennec Pharma's (FENC) lead drug sodium thiosulfate headed for U.S. FDA review in coming months and will likely be approved imminently based on strong Phase 3 trial results. Could generate $100-$200 million in annual sales.
- M&A in health care is heating up, and based on recent deals in sector FENC could be worth $24 or more in an acquisition scenario, or 200-300% higher than today's share price. Board has a history of selling companies, and shareholders include smart money like venBio and Sigma Tau.
- Rare FDA priority review voucher could add $5-6 in unanticipated upside. FENC could be worth close to $30 in a best-case scenario.
Rare disorders went unaddressed by pharmaceutical companies for decades, but all that has changed in the last few years as these drugs have become some of the most profitable and quickest to get approved, requiring smaller clinical trials and with higher sticker prices for approved drugs. Fennec Pharmaceuticals (FENC) is a name investors should know, operating in an unaddressed specialty oncology segment with their lead drug sodium thiosulfate, designed to decrease the risk of hearing loss in children receiving certain chemotherapies. The company has completed two Phase III clinical trials successfully and will file a drug approval application with the U.S. Food and Drug Administration later this year for a possible approval in the next 12-18 months.
This is an overlooked market, but could be highly profitable for the company or an acquirer, with peak sales potential of $160 million or more. The drug could be an easy sell, or a simple tuck-in for any oncology or specialty pharmaceutical company. For a company valued at just $160 million today, this could mean 2-3X of upside for FENC, and possibly more in an acquisition scenario or if the company can secure a coveted "Priority Review Voucher" that could be granted by the FDA when or if STS is approved. These have been bought for over $100 million by larger pharmaceutical companies, and it could be worth $5 to 6 per share. All told, FENC will be applying for an approval soon with a product worth significantly more than the stock price suggests today...at $8.00 FENC could be set to move higher soon.
First Drug To Stop Hearing Loss In Pediatric Oncology?
In some childhood cancers, primary treatment involves "platinum-based" chemotherapies, an old but effective type of chemotherapy that is today used in almost 50% of all cancers at some point. But platinum-based chemotherapies, like cisplatin, can cause hearing loss among younger patients as they travel throughout the body, including to the inner ear where they can wreak havoc on developing mechanisms.
Hearing loss among children receiving platinum-based chemotherapies is frequent, permanent and often severely disabling. The incidence of hearing loss or impairment in these children depends on the dose and duration of platinum chemotherapy, but many of them will require lifelong hearing aids or choclear implants, possibly leading to developmental and educational issues.
There is currently no established preventive agent for cisplatin-induced hearing loss, called "ototoxicity."
Fennec is developing a solution, called sodium thiosulfate (STS), that acts as a "mop" in the body to clean up errant platinum-based chemotherapies after infusion and help them exit the body before they can damage the inner ear. It's given by IV in the hours after a chemotherapy session and it irreversibly binds with cisplatin in the body to aid in the normal excretion process through urine. It's basically a sweeping drug, and it could be the first drug to save the hearing of pediatric and adolescent oncology patients.
This has been proven out in two Phase III studies, and amazingly, Fennec has had the good fortune of having both studies paid for by outside investigational groups--the International Childhood Liver Tumor Strategy Group, known as SIOPEL, and the Children's Oncology Group--both of which demonstrated that STS strongly reduces the incidence of hearing loss in children treated with platinum-based chemotherapies, namely cisplatin.
In the Childhood Oncology Group's "ACCL0431" Study, 104 childhood cancer patients being treated for a range of solid tumors with cisplatin (including neuroblastoma, hepatoblastoma, and osteosarcoma among others) were randomized to receive STS or a placebo in conjunction with their chemotherapy regimen. The study measured the change in hearing thresholds for the two groups of patients four weeks after they completed their chemotherapy treatment.
Only 28.6% of the patients who received STS after their cisplatin dose had hearing loss, compared to 56.4% of the patients who did not receive this "mopping agent" (statistically significant at p=0.00022)! In other words, adding STS to a cisplatin treatment course reduced the risk of hearing loss roughly by half! This is a profound finding for the thousands of children in the U.S. who could be affected by cisplatin. These results were made public in 2016 in Lancet Oncology.
In SIOPEL's "SIOPEL 6" Study, which was just completed in 2017, adding STS to cisplatin treatment also significantly reduced the incidence of cisplatin-induced hearing loss. 67% of patients treated with cisplatin alone had hearing loss, versus only 37% of those treated with cisplatin + STS, for a "relative risk" of hearing loss of 0.56 (statistically significant at p=0.0033).
With these results in hand, Fennec plans to file a new drug application to pursue FDA approval with the U.S. FDA in the second half of 2018; considering the unmet need, this could receive an approval by the middle of 2019. The drug already has Orphan Drug Designation from the FDA, which means that the company has seven years of exclusive time on the market, where no cheap generic drugs can be approved, and the FDA could view this as a priority, shortening the normal 10-month review time to 6 months under "Priority Review."
The company could also apply for Breakthrough Therapy Designation, another powerful benefit from the FDA that would speed up the approval process further and give the company more communication with the FDA as they prepare to submit their drug application.
Small Numbers May Add Up To Big Sales...
Professional biotech investors usually think about a drug and drug stock valuation based on a drug's sales potential, often measured by peak sales... a measure of the number of patients treated times the cost of the drug, at their peak.
Just what could STS be worth? It may seem small, but the opportunity for a new drug that can eliminate or reduce hearing loss in cisplatin treated children could be big for such a small company. Fennec believes there are about 5,000 eligible solid tumor cases treated with platinum-based drugs in the U.S. each year, and about 6,000 in the major European markets. Of these, about 60-70% would be considered "low risk", where doctors may use lower doses of cisplatin or shorter courses of therapy...that makes for an addressable population of 6,600 to 7,700 each year.
In the case of STS, Fennec could conceivably charge between $50,000 and $75,000 per course of treatment based on the cost savings from avoiding hearing loss. Hearing aids can run $4,000 to $8,000 up front, plus hundreds of dollars in yearly maintenance fees and doctor visits, for tens of thousands of dollars over a patient's lifetime. Cochlear implants can cost $65,000 to $85,000, and offer only marginal benefits to hearing.
Fennec won't get all 6,000 to 7,000 patients using STS through their cisplatin treatment, but the numbers get attractive even with moderate uptake. At $70,000 per patient, and just 2,300 patients receiving the drug (30% of 7,700), the company could be looking at peak sales of $161 million. At $50,000 per patient, this is still a $115 million opportunity!
...And Could Be Worth 3-4X In Takeout Scenario
Large pharmaceutical companies have been on a buying spree in 2018 now that new tax laws are in place, and small companies with drugs ready for approval, or freshly approved, are the hottest buys. Think of Celgene (CELG) for Juno Therapeutics (JUNO) recently for their freshly approved CAR T drug, and Mallinkcrodt (MNK) for Sucampo Pharmaceuticals (SCMP) already this year.
FENC could be on the auction block, with a niche product that easily tucks into any pharmaceutical oncology or specialty pharmaceutical sales program. For a small indication, the marketing costs would be low, and it could be a great portfolio product for the right company.
Importantly, Fennec's board has a history of selling companies. Chairman Khalid Islam sold Gentium to Jazz Pharma (NASDAQ:JAZZ) for $1 billion in 2013, and director Chris Rallis was at Triangle Pharmaceuticals when it was sold to Gilead Sciences for $464 in 2002. Director Dr. Marco Brughera is the Global Head of Leadiant Bio (of Sigma Tau Rare Disease), which has a track record of out licensing and selling drug products.
This board has the connections to make deals happen.
Recent M&A in the health care sector and oncolgoy space specifically indicate FENC could have big upside. Celgene (CELG) bought Juno Therapeutics (JUNO) for $9 billion in January, estimated at about 3 to 4X their lead drug's sales potential. Gilead Sciences (GILD) bought Kite Pharmaceuticals (KITE) for $12 billion last August, also at about 3-4X the company's lead drug sales estimates. Takeda bought Ariad Pharma (ARIA) for about 5X peak sales estimate, and Teva Pharmaceutical Industries (TEVA) purchased Auspex Pharmaceuticals (ASPX) for $3.5 billion, again about 3 times peak sales expectations from Wall Street.
Applying a similar 3-4X acquisition multiple on peak sales estimates for STS demonstrates that STS and FENC could be worth $480 to $640 million to the right buyer. At $8.00, the company is valued at $165 million today...FENC could be worth $24 or more in an acquisition scenario.
Pediatric Review Voucher Could Be Worth Another $5 to Stock
The icing on the cake for FENC could be a rare but valuable facet of the US Food and Drug Administration's review for certain drugs. Since 2007, the FDA has issued a small number of special "priority review" vouchers which allow their owners to speed up the review of any one of their new drug products from 10 months down to 6 months. The rare pediatric voucher was created in 2012 under the Food and Drug Administration Safety and Innovation Act (FDASIA), and specifically targets the need for additional therapies for rare pediatric subsets of other diseases. A "rare pediatric disease" is defined as one that "primarily affects individuals aged from birth to 18 years, including age groups often called neonates, infants, children and adolescents," and is a rare disease according to federal law (200,000 or fewer people in the US). The rare pediatric voucher can be transferred or sold an unlimited number of times.
This is the clincher for FENC...the first voucher ever to be sold went for $67 million. In May of 2015, Sanofi purchased another voucher for a record-setting $245 million, and in August 2015, AbbVie shattered that record by paying $350 million for another voucher. Since then, more vouchers have been released, and the price has come down, but they're still selling for over $100 million. Gilead paid $200 million for a voucher in 2016, and $125 million for one in February of 2017.
Ototoxicity associated with cisplatin use could be considered a rare pediatric setting based on the FDA's parameters above. If the company were awarded a review voucher based on the approval of STS, this could be worth $125 million in a sale. Fennec has about 21 million shares outstanding, meaning this cash could be worth $6.00 per FENC share.
The Smart Money Is In, And Has Added More
One way to source investment ideas is to look at institutional "smart money" and Fennec has a bevy of health care focused hedge funds involved. VenBio Select Advisor, for example, just added to their stock position in the company, taking their ownership to 6.1% of the entire company. VenBio has recently been known for their homerun win in ImmunoMedics (NASDAQ: IMMU), which has risen from $2 to $15 in about 14 months! Southpoint Capital also owns 22% of Fennec, Sigma Tau Finanziaria S.p.A. (now called Essetifin) 17%, Manchester management 9%, and 683 Capital about 5%.
Sigma Tau is not well known in the U.S., but has a history of selling portfolio drugs, which could portend well for Fennec.
There are risks, of course, to an investment in FENC. Although unlikely, the FDA may not look favorably on the company's phase 3 results, which included a small imbalance in long-term survival for patients in the COG study, though this appears to have been limited to high-risk cancer patients with metastases that had spread throughout their body. An acquisition may not materialize either, and the company could have to sell the drug by themselves, which would be harder than an acquisition.
All told, Fennec is an under-the-radar healthcare company with big potential in sodium thiosulfate. With an FDA filing soon, an approval possible shortly thereafter, and the outside chance that the company gets a priority review voucher, FENC could be on the verge of a breakout, like Fossil Group (NASDAQ: FOSL) is experiencing this week. The fundamentals may support 200-300% of near term upside, or even more in a best case scenario.
About One Equity Stocks:
One Equity Stocks is a leading provider of research on publicly traded emerging growth companies. Our team is comprised of sophisticated financial professionals that strive to find the companies and management teams that will outperform the market and deliver investment returns to our subscribers. We are not a licensed broker-dealer and do not publish investment advice and remind readers that investing involves considerable risk. One Equity Stocks encourages all readers to carefully review the SEC filings of any issuers we cover and consult with an investment professional before making any investment decisions. One Equity Stocks and/or its affiliates are long FENC. Please contact us at info@investorclick.net for additional information or to subscribe to our intelligence service.
Related Stories
