Item 2. Management’s Discussion and Analysis
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .
CAUTIONARY STATEMENT
This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 under the heading “Risk Factors.” We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 and the condensed consolidated financial statements and accompanying notes included elsewhere in this report.
Overview
We are a commercial-stage biopharmaceutical company focused on our only product PEDMARK ® . On September 20, 2022 we received approval from the FDA for PEDMARK ® (sodium thiosulfate injection) to reduce the risk of ototoxicity associated with cisplatin in pediatric patients one month of age and older with localized, non-metastatic solid tumors. This approval makes PEDMARK ® the first and only treatment approved by the FDA in this area of significant unmet medical need. On October 17, 2022 we announced commercial availability of PEDMARK ® in the United States.
We sell our product through an experienced field force including Regional Pediatric Oncology Specialists and medical science liaisons who are helping to educate the medical communities and patients about cisplatin induced ototoxicity and our programs supporting patient access to PEDMARK ® .
Further, the Company has established Fennec HEARS™, a comprehensive single source program designed to connect PEDMARK patients to both patient financial and product access support. The program offers assistance and resources, regardless of insurance type, that can address co-pays or lack of coverage when certain eligibility requirements are met. Fennec HEARS also provides access to care coordinators that can answer insurance questions about coverage for PEDMARK and provide tips and resources for managing treatment.
We currently have two patents listed for PEDMARK ® in the FDA’s Orange Book. In March 2020, the United States Patent and Trademark Office, or USPTO, allowed Patent No. 10,596,190 (“US ‘190”), which is exclusively in-licensed from Oregon Health & Science University (“OHSU”) and relates to a method of using our PEDMARK ® product. In September 2022, the USPTO issued Patent No. 11,291,728 (“728”) which is a formulation patent. The “190” and “728” patents will expire in 2038 and 2039, respectively, unless held invalid or unenforceable by a court or final jurisdiction. Further, on September 14, 2022, the USPTO issued Notices of Allowance to us for two additional patent applications that cover the PEDMARK ® pharmaceutical formulation. We expect these two additional U.S. patents to issue in Q4 of 2022 or Q1 of 2023. These patents will expire in 2039, unless held invalid or unenforceable by a court of final jurisdiction. We are also pursuing additional patent applications in both the U.S. and internationally for PEDMARK ® .
Hearing loss among children receiving platinum-based chemotherapy is frequent, permanent and often severely disabling. The incidence of hearing loss in these children depends upon the dose and duration of chemotherapy, and many of these children require lifelong hearing aids. In addition, adults undergoing chemotherapy for several common malignancies, including ovarian cancer, testicular cancer, and particularly head and neck cancer and brain cancer, often receive intensive platinum-based therapy and may experience severe, irreversible hearing loss, particularly in the high frequencies.
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In the U.S. and Europe, it is estimated that, annually, over 10,000 children may receive platinum-based chemotherapy. The incidence of ototoxicity depends upon the dose and duration of chemotherapy. There is currently no established preventive agent for this hearing loss and only expensive, technically difficult and sub-optimal cochlear (inner ear) implants have been shown to provide some benefit. Infants and young children that suffer ototoxicity at critical stages of development lack speech language development and literacy, and older children and adolescents lack social-emotional development and educational achievement.
In August 2018, the Pediatric Committee (“PDCO”) of the European Medicines Agency (“EMA”) accepted our pediatric investigation plan (“PIP”) for sodium thiosulfate with the trade name Pedmarqsi for the condition of the prevention of platinum-induced hearing loss. An accepted PIP is a prerequisite for filing a Marketing Authorization Application (“MAA”) for any new medicinal product in Europe. The indication targeted by our PIP is for the prevention of platinum-induced ototoxic hearing loss for standard risk hepatoblastoma (“SR-HB”). Additional tumor types of the proposed indication will be subject to the Committee for Medicinal Products for Human Use (“CHMP”) assessment at the time of the MAA. No deferred clinical studies were required in the positive opinion given by PDCO. We were also advised that sodium thiosulfate (tradename to be determined) is eligible for submission of an application for a Pediatric Use Marketing Authorization (“PUMA”). A PUMA is a dedicated marketing authorization covering the indication and appropriate formulation for medicines developed exclusively for use in the pediatric population and provides data and market protection up to 10 years. Therefore, this decision allows us to proceed with the submission of a PUMA in the European Union (“EU”) with incentives of automatic access to the centralized procedure and up to 10 years of data and market protection. In February 2020, we announced that we had submitted a MAA for the prevention of ototoxicity induced by cisplatin chemotherapy patients 1 month to < 18 years of age with localized, non-metastatic, solid tumors. The EMA continues its review of our MAA.
Capital Funding
We have not received revenues from the sale of PEDMARK ® as of September 30, 2022. Now that we have obtained applicable regulatory approval to sell PEDMARK ® , we recognize there may still be a need to establish collaborations that provide us with up-front payments, licensing fees, milestone payments, royalties or other revenue.
We generated a net loss of approximately $16.9 million for the nine months ended September 30, 2022, and a net loss of $12.9 million for the nine months ended September 30, 2021. As of September 30, 2022, our accumulated deficit was approximately $196.3 million ($179.5 million at December 31, 2021).
We believe that our cash and cash equivalents as of September 30, 2022, which totaled $29.8 million, plus the remaining available Petrichor Financing of $20 million in convertible notes (see Note 1 and Note 7 to condensed consolidated financial statements contained elsewhere in this report), will be sufficient to meet our cash requirements through at least the next twelve months, including commercial launch of PEDMARK ® in the United States. Our projections of our capital requirements are subject to substantial uncertainty, and more capital than we currently anticipate may be required thereafter. To finance our continuing operations, we may need to raise substantial additional funds through either the sale of additional equity, the issuance of debt, the establishment of collaborations that provide us with funding, the out-license or sale of certain aspects of our intellectual property portfolio or from other sources. We may not be able to raise the necessary capital, or such funding may not be available on financially acceptable terms if at all. If we cannot obtain adequate funding in the future, we might be required to further delay, scale back or eliminate certain research and development studies, consider business combinations, or even shut down some, or all, of our operations.
Our operating expenses will depend on many factors, including the progress of our commercialization efforts and efficiency of our operations and current resources. Our research and development expenses, which include expenses associated with our clinical trials, drug manufacturing to support clinical programs, consulting fees, sponsored research costs, toxicology studies, license fees, milestone payments, and other fees and costs related to the development of our product candidate, will depend on the availability of financial resources, the results of our clinical trials, and any directives from regulatory agencies, which are difficult to predict. Our general and administration expenses include expenses associated with the compensation of employees, stock-based compensation, professional fees, consulting fees, insurance and other administrative matters associated in support primarily of our commercialization of PEDMARK ® .
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Results of Operations
Three months ended September 30, 2022 versus three months ended September 30, 2021:
Three Months Ended
Three Months Ended
In thousands of U.S. Dollars
September 30, 2022
%
September 30, 2021
%
Change
Revenue
$
—
$
—
$
—
Operating expenses:
Research and development
846
11
%
1,242
30
%
(396)
General and administration
7,053
89
%
2,931
70
%
4,122
Total operating expense
7,899
100
%
4,173
100
%
3,726
Loss from operations
(7,899)
(4,173)
(3,726)
Unrealized (loss)/gain on securities
(27)
39
(66)
Foreign currency transaction loss
(4)
(1)
(3)
Amortization expense
(64)
(8)
(56)
Interest expense
(119)
(55)
(64)
Interest income
24
13
11
Net loss
$
(8,089)
$
(4,185)
$
(3,904)
Research and development expenses decreased by $396 for the three months ended September 30, 2022, compared to the same period in 2021. The Company’s research and development activities during three months ended September 30, 2022 decreased as the Company’s efforts on a year over year basis were more focused on commercial readiness for the launch of PEDMARK rather than development and regulatory activities. General and administrative expenses increased by $4,122 over same period in 2021. There was an increase in non-cash equity compensation of $970 for the three months ended September 30, 2022, over the same period in 2021. This increase is attributable to grants to new employees and the expense associated with equity awards which vested upon FDA approval of PEDMARK ® . Salaries and wage expense increased by $1,212 for the three months ended September 30, 2022 over the same period in 2021. This increase was a result of increased headcount primarily related to the commercial team. Legal expenses increased $341 over same period in the prior year primarily as a result of the class action suits and patent defense. Sales and marketing activities increased by $620 over the same period in prior year as commercialization readiness activities increased.
The Company holds shares of Processa (NASDAQ: PCSA) which are marked to market each balance sheet date and unrealized gains or losses are recognized at that time. The unrealized loss on those shares for the three months ended September 30, 2022 was $27. The Company has vendors that transact in Euros, Great British Pounds and Canadian Dollars. There was a foreign currency transaction loss of $4 for the three months ended September 30, 2022, compared to a $1 loss for the same period in 2021. Amortization expense is a non-cash expense and relates to amortization of the deferred issuance cost of the loan facilities with Bridge Bank and Petrichor. Amortization expense increased by $56 for the three months ended September 30, 2022, compared to the same period in 2021. Interest expense increased by $64 for the three months ended September 30, 2022, over the same period in 2021. The increase relates to the interest being paid on the Bridge Bank loan facility and the Petrichor notes. Interest income was $11 higher for the three months ended September 30, 2022, compared to the same period in 2021. This was driven mainly by higher average cash balances and higher interest rates, for the three months ended September 30, 2022 compared to the same period in 2021.
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Nine months ended September 30, 2022 versus nine months ended September 30, 2021:
Nine Months Ended
Nine Months Ended
In thousands of U.S. Dollars
September 30, 2022
%
September 30, 2021
%
Change
Revenue
$
—
$
—
$
—
Operating expenses:
Research and development
3,414
21
%
4,458
34
%
(1,044)
General and administration
13,040
79
%
8,558
66
%
4,482
Total operating expenses
16,454
100
%
13,016
100
%
3,438
Loss from operations
(16,454)
(13,016)
(3,438)
Unrealized (loss)/gain on securities
(126)
137
(263)
Foreign currency transaction gain/(loss)
(6)
(9)
3
Amortization expense
(79)
(8)
(71)
Interest expense
(234)
(64)
(170)
Interest income
42
41
1
Net loss
$
(16,857)
$
(12,919)
$
(3,938)
Research and development expenses decreased by $1,044 for the nine months ended September 30, 2022, compared to the same period in 2021. The main drivers of this decrease were a decline in manufacturing activities and regulatory expenses. General and administrative expenses increased by $4,482 over the same period in 2021 primarily related to legal expenses, non-cash equity compensation and higher wages from increased headcount.
The Company holds shares of Processa (NASDAQ: PCSA) which are marked to market each balance sheet date and unrealized gains or losses are recognized at that time. The unrealized loss on those shares for the nine months ended on September 30, 2022 was $126, which is in contrast to the $137 gain for the same period in 2021. Foreign currency transaction loss was $6 for the nine months ended September 30, 2022 ($9 loss for same period in 2021). Amortization expense was $79 for the nine months ended September 30, 2022 compared to $8 for the same period in 2021. In 2022, the Company wrote off the remaining unamortized balance associated with the Bridge Bank facility after it was paid off. At the same time, the Company started to amortize the debt issuance costs associated with the Petrichor notes. Interest expense increased $170 for the nine months ended September 30, 2022 over same period in 2021. The expense relates to interest on the Bridge Bank loan facility and the Petrichor convertible notes. Interest income was $1 higher for the nine months ended September 30, 2022, compared to the same period in 2021. This was driven mainly by higher interest rates for the nine months ended September 30, 2022 compared to the same period in 2021.
Liquidity and Capital Resources
As of
As of
Selected Asset and Liability Data (thousands):
September 30, 2022
December 31, 2021
Cash and equivalents
$
29,752
$
21,100
Other current assets
401
1,287
Current liabilities
2,927
1,654
Working capital (1)
27,226
20,733
(1) [Current assets – current liabilities]
Selected Equity:
Common stock and additional paid in capital
197,902
194,015
Accumulated deficit
(196,343)
(179,486)
Shareholders’ equity
2,802
15,772
Cash and cash equivalents were $29,752 at September 30, 2022 and $21,100 at December 31, 2021. The increase in cash and cash equivalents between September 30, 2022 and December 31, 2021 is the result of expenses related to the development and preparation of the NDA resubmission of PEDMARK ® and general and administrative expenses, which
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was offset by inflows from the Petrichor notes and modest cash inflows of $249 from various option exercises. There was a decrease of $886 in other current assets between September 30, 2022 and December 31, 2021.
Current liabilities increased by $1,273 between September 30, 2022 and December 31, 2021. The increase was driven mainly by increased expenses as we neared the anticipated PEDMARK ® commercialization.
Working capital increased between December 31, 2021 and September 30, 2022 by $6,493. The increase relates to a net cash inflow from the Petrichor notes and various option exercises, offset by expenditures for operating activities for the nine months ended September 30, 2022. The Company expects increases in cash outflows related to commercialization activities in the coming quarters as the Company expands its commercialization efforts related to PEDMARK ® .
The following table illustrates a summary of cash flow data for the three and nine month periods ended September 30, 2022 and 2021:
Selected Cash Flow Data
Nine Months Ended September 30,
(dollars in thousands)
2022
2021
Net cash used in operating activities
$
(11,256)
$
(10,977)
Net cash provided by investing activities
—
—
Net cash provided by financing activities
19,908
4,968
Net cash flow
$
8,652
$
(6,009)
Net cash used in operating activities for the nine months ended September 30, 2022 primarily reflected a net loss of $16,857. The nine month losses were adjusted for the add back of non-cash items consisting of $3,363 in stock-based compensation expense, amortization expense of $79, and unrealized loss on securities of $126 added back for the nine months ended September 30, 2022. For the nine months ended September 30, 2022, there was a net change in prepaid and other assets of $756, coupled with a net increase in current liabilities of $1,273. Nine month cash flows from operating activities were negative $11,256 for the period ended September 30, 2022. Net cash provided by financing activities for the nine months ended September 30, 2022, was $19,908. Financing activities consisted of proceeds from the Petrichor notes, net of capitalized costs, cash paid for taxes on restricted share releases and exercises of various options. Net cash flows from the nine month period ended September 30, 2022 were $8,652.
We continue to pursue various strategic alternatives including potential collaborations with other pharmaceutical and biotechnology companies. Our projections of further capital requirements are subject to substantial uncertainty. Our working capital requirements may fluctuate in future periods depending upon numerous factors, including: sales volume of our product, our ability to obtain additional financial resources; our ability to enter into collaborations that provide us with up-front payments, milestones or other payments; results of our research and development activities; progress or lack of progress in our preclinical studies or clinical trials; unfavorable toxicology in our clinical programs; our drug substance requirements to support clinical programs; change in the focus, direction, or costs of our research and development programs; headcount expense; the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing our patent claims; competitive and technological advances; the potential need to develop, acquire or license new technologies and products; our business development activities; new regulatory requirements implemented by regulatory authorities; the timing and outcome of any regulatory review process; and potential expanded commercialization activities.
Financial Instruments
We invest excess cash and cash equivalents in high credit quality investments held by financial institutions in accordance with our investment policy designed to protect the principal investment. At September 30, 2022, we had approximately $438 in our cash accounts and $29,314 in savings and money market accounts. While we have never experienced any loss or write down of our money market investments since our inception, the amounts we hold in money market accounts are substantially above the $250 amount insured by the FDIC and may lose value.
Our investment policy is to manage investments to achieve, in the order of importance, the financial objectives of preservation of principal, liquidity and return on investment. Investments may be made in U.S. or Canadian obligations and bank securities, commercial paper of U.S. or Canadian industrial companies, utilities, financial institutions and
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consumer loan companies, and securities of foreign banks provided the obligations are guaranteed or carry ratings appropriate to the policy. Securities must have a minimum Dun & Bradstreet rating of A for bonds or R1 low for commercial paper. The policy also provides for investment limits on concentrations of securities by issuer and maximum-weighted average time to maturity of twelve months. This policy applies to all of our financial resources.
The policy risks are primarily the opportunity cost of the conservative nature of the allowable investments. As our main purpose is preservation of capital while we endeavor to become cash flow positive through the sale of our product, we have chosen to avoid investments of a trading or speculative nature.
Since our inception, we have not had any material off-balance sheet arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such activities.
Research and Development
Our research and development efforts have been focused on the development of PEDMARK since 2013.
We have established relationships with contract research organizations, universities and other institutions, which we utilize to perform many of the day-to-day activities associated with our drug development. Where possible, we have sought to include leading scientific investigators and advisors to enhance our internal capabilities. Research and development issues are reviewed internally by our executive management and supporting scientific team.
Research and development expenses for the three and nine months ended September 30, 2022 was $846 and $3,414, respectively. For the same periods in 2021, research and development expense was $1,242 and $4,458, respectively. We have decreased our research and development expenses related to PEDMARK ® as our efforts have shifted to commercial readiness activities.
PEDMARK ® still requires significant, time-consuming and costly research and development, testing and regulatory clearances. In developing PEDMARK ® , we are subject to risks of failure that are inherent in the development of products based on innovative technologies. For example, it is possible that our product candidate will be ineffective or toxic, or will otherwise fail to receive the necessary regulatory clearances. There is a risk that PEDMARK ® will be uneconomical to manufacture or market or will not achieve market acceptance. There is also a risk that third parties may hold proprietary rights that preclude us from marketing our product candidate or that others will market a superior or equivalent product. As a result of these factors, we are unable to accurately estimate the nature, timing and future costs necessary to complete the development of this product candidate. In addition, we are unable to reasonably estimate the period when material net cash inflows could commence from the sale, licensing or commercialization of such product candidate, if ever.
Critical Accounting Policies and Use of Estimates
A summary of our critical accounting policies and use of estimates are presented in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (filed February 28, 2022). There have been no material changes to our critical accounting policies and use of estimates during the nine months ended September 30, 2022.
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