Item 2. Management’s Discussion and Analysis
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .
Caution Concerning Forward-Looking Statements
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 29, 2023 (the “Annual Report”) and our unaudited interim condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q (the “Quarterly Report”). Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to the Company’s plans and strategy for its business, includes, and our officers and representatives may from time to time make, forward looking statements, within the meaning of the of the safe harbor provisions of the U.S. 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,” “seeks,” “goals,” “projects,” “strategy,” “likely,” “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. As a result of many factors, including those factors set forth in Part I, Item 1A of the Annual Report under the heading “Risk Factors”, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.
The following discussion should be read in conjunction with our Annual Report 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 US Food and Drug Administration (“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 unmet medical need. On October 17, 2022, we announced commercial availability of PEDMARK ® in the U. S. In addition, in January 2023, PEDMARK was included in the National Comprehensive Cancer Network (NCCN) clinical practice guidelines for Adolescent and Young Adult (AYA) Oncology with a category 2A recommendation.
In June 2023, we received European Commission Marketing Authorization for PEDMARQSI TM (known as PEDMARK ® in the U.S.) Further, the decision included the receipt of a Pediatric Use Marketing Authorization (“PUMA”) in the European Union (“EU”) with up to 10 years of data and market protection. The Company is currently preparing for an EU launch of PEDMARQSI TM in 2024.
In the U.S., 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 ® . Now that we have obtained applicable regulatory approval to sell PEDMARK ® in the U. S. and authorization from the European Commission Marketing Authorization for PEDMARQSI TM in the EU, 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.
Further, we have 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.
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We received Orphan Drug Exclusivity for PEMARK in January 2023, which provides seven years of market exclusivity from its FDA approval on September 20, 2022 until September 20, 2029. We currently have three patents listed for PEDMARK ® in the FDA’s Orange Book. In September 2022, the USPTO issued Patent No. 11,291,728 (the “US ‘728 Patent”), in December 2022, the USPTO issued Patent No. 11,510,984 (“US ‘984 Patent”) and in April 2023, the USPTO issued Patent No. 11,671,793 (“US ‘793 Patent”) that covers PEDMARK ® pharmaceutical formulation. The US ‘728 Patent, US ‘984 Patent and US ‘793 Patent will expire in 2039. We are also pursuing additional patent applications in both the U.S. and internationally for PEDMARK ® .
PEDMARK ® Product Overview
PEDMARK ® is the first and only therapy approved by the FDA indicated to reduce the risk of ototoxicity associated with cisplatin treatment in pediatric patients with localized, non-metastatic, solid tumors. Further, PEDMARQSI TM , known as PEDMARK ® in the U.S. was granted marketing authorization by the European Commission in June 2023. PEDMARK ® is a unique formulation of sodium thiosulfate in single-dose, ready-to-use vials for intravenous use in pediatric patients. PEDMARK ® is also the only therapeutic agent with proven efficacy and safety data with an established dosing paradigm, across two open-label, randomized Phase 3 clinical studies, the Clinical Oncology Group (“COG”) Protocol ACCL0431 and SIOPEL 6.
In the U.S. and Europe, it is estimated that more than 10,000 children annually may receive platinum-based chemotherapy. The incidence of ototoxicity depends upon the dose and duration of chemotherapy, and many of these children require lifelong hearing aids. 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.
PEDMARK ® has been studied by co-operative groups in two Phase 3 clinical studies of survival and reduction of ototoxicity, COG ACCL0431 and SIOPEL 6. Both studies have been completed. The COG ACCL0431 protocol enrolled childhood cancers typically treated with intensive cisplatin therapy for localized and disseminated disease, including newly diagnosed hepatoblastoma, germ cell tumor, osteosarcoma, neuroblastoma, medulloblastoma, and other solid tumors. SIOPEL 6 enrolled only hepatoblastoma patients with localized tumors.
Cisplatin Induced Ototoxicity
Cisplatin and other platinum compounds are essential chemotherapeutic agents for the treatment of many pediatric malignancies. Unfortunately, platinum-based therapies can cause ototoxicity, or hearing loss, which is permanent, irreversible, and particularly harmful to the survivors of pediatric cancer.
The incidence of ototoxicity depends upon the dose and duration of chemotherapy, and many of these children require lifelong hearing aids or cochlear implants, which can be helpful for some, but do not reverse the hearing loss and can be costly over time. Infants and young children that are affected by ototoxicity at critical stages of development lack speech and language development and literacy, and older children and adolescents often lack social-emotional development and educational achievement.
Liquidity
We generated a net loss of approximately $13.4 million for the nine months ended September 30, 2023, and a net loss of $16.9 million for the same period in 2022. As of September 30, 2023, our accumulated deficit was approximately $216.6 million ($203.2 million at December 31, 2022). We believe that our cash and cash equivalents as of September 30, 2023, which totaled $12.4 million, cash from product sales, plus the remaining Petrichor Financing of $20 million in convertible notes subject to mutual agreement between us and Petrichor (see Note 1 and Note 7 to our unaudited interim condensed consolidated financial statements contained elsewhere in this Quarterly Report), will be sufficient to meet our cash requirements through at least the next twelve months. 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,
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we may need to raise substantial additional funds through either the sale of additional equity, the issuance of debt, the establishment of collaborations, the out-license or sale of certain aspects of our intellectual property portfolio or from other sources.
Our operating expenses will depend on many factors, including the progress of our commercialization efforts abroad 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 commercialization of our product, 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, which include legal fees, consulting fees, insurance and other administrative matters associated in support primarily of our commercialization of PEDMARK ® . Our selling and marketing expenses include remuneration of our sales and marketing employees, dollars spent on marketing campaigns (sponsorships, trade shows, presentations, etc.), and any activities to support marketing and sales activities.
Results of Operations
Three months ended September 30, 2023 versus three months ended September 30, 2022:
Three Months Ended
Three Months Ended
In thousands of U.S. Dollars
September 30, 2023
%
September 30, 2022
%
Change
PEDMARK® product sales, net
6,515
—
6,515
Cost of product sales
(331)
5
%
—
—
%
(331)
Gross profit
$
6,184
$
—
$
6,184
Operating expenses:
Research and development
12
—
%
846
11
%
(834)
Selling and marketing
3,384
47
%
—
—
%
3,384
General and administration
3,805
53
%
7,053
89
%
(3,248)
Total operating expense
7,201
100
%
7,899
100
%
(698)
Loss from operations
(1,017)
(7,899)
6,882
Unrealized loss on securities
(13)
(27)
14
Amortization expense
(72)
(64)
(8)
Interest expense
(856)
(119)
(737)
Unrealized foreign exchange loss
(11)
(4)
(7)
Interest income
102
24
78
Net loss
$
(1,867)
$
(8,089)
$
6,222
We reported net product sales for the three month period ended September 30, 2023 of $6,515 and gross profit of $6,184 after applying cost of product sales of $331. Research and development expenses decreased by $834 for the three months ended September 30, 2023, compared to the same period in 2022. Our research and development activities for this period consisted of costs associated with investigator initiated clinical trials. During the same period in 2022 and prior to approval of PEDMARK ® , manufacturing costs pertaining to PEDMARK ® were expensed to R&D expense in the period incurred, and following approval are reflected in inventory. Selling and marketing expenses were $3,384 for the three months ended September 30, 2023. Selling and marketing expenses include remuneration of our sales and marketing employees, dollars spent on marketing campaigns (sponsorships, trade shows, presentations, etc.), and any activities to support marketing and sales activities. General and administrative expenses decreased by $3,248 compared to the same period in 2022, which was primarily driven by a decrease of non-cash employee remuneration of $1,000 and a decrease in legal expense by $707 as well as a major difference relating to the allocation of sales and marketing expenses to G&A for the period ended September 30, 2022 as we did not launch product until Q4 of 2022.
Interest expense increased $737 compared to the same period in 2022. This increase is associated with higher interest rates and $20,000 more in funded debt than in the same period in 2022. Further, we hold shares of Processa (NASDAQ: PCSA)
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which are marked to market each balance sheet date and unrealized gains or losses are recognized at that time. The value of the Processa shares held by the Company was down by $13 for the three month period ending September 30, 2023, as opposed to a decrease of $27 during the same period in 2022. Other losses were driven mainly by unrealized losses related to our foreign currency transactions. We have vendors that transact in Euros, Great British Pounds and Canadian Dollars. There was an increase of $7 in other losses for the three months ended September 30, 2023, compared to the same period in 2022. Amortization expense is also a non-cash expense and relates to amortization of the deferred issuance costs of the loan facilities with Petrichor. Amortization expense increased by $8 for the three months ended September 30, 2023 compared to the same period in 2022. Interest income was up $78 for the three months ended September 30, 2023, compared to the same period in 2022. This was driven mainly by higher interest rates for the three months ended September 30, 2023 compared to the same period in 2022.
Nine months ended September 30, 2023 versus nine months ended September 30, 2022:
Nine Months Ended
Nine Months Ended
In thousands of U.S. Dollars
September 30, 2023
%
September 30, 2022
%
Change
PEDMARK® product sales, net
$
11,517
$
—
$
11,517
Cost of product sales
(574)
5
%
—
—
%
(574)
Gross profit
10,943
—
10,943
Operating expenses:
Research and development
24
—
%
3,414
21
%
(3,390)
Selling and marketing
8,255
38
%
—
—
%
8,255
General and administration
13,617
62
%
13,040
79
%
577
Total operating expenses
21,896
100
%
16,454
100
%
5,442
Loss from operations
(10,953)
(16,454)
5,501
Unrealized loss on securities
(43)
(126)
83
Amortization expense
(217)
(79)
(138)
Interest expense
(2,479)
(234)
(2,245)
Unrealized foreign exchange loss
3
(6)
9
Interest income
326
42
284
Net loss
$
(13,363)
$
(16,857)
$
3,494
We reported net product sales for the nine month period ended September 30, 2023 of $11,517 and gross profit of $10,943 after applying cost of product sales of $574. Research and development expenses decreased by $3,390 for the nine months ended September 30, 2023, compared to the same period in 2022. Research activities, since the launch of PEDMARK ® have been limited to investigator initiated clinical trials. Selling and marketing expenses were $8,255 for the nine months ended September 30, 2023. Selling and marketing expenses include remuneration of our sales and marketing employees, dollars spent on marketing campaigns (sponsorships, trade shows, presentations, etc.), and any activities to support marketing and sales activities. General and administrative expenses increased by $577 over the same period in 2022. This difference was primarily driven by an increase in non-cash equity compensation and higher wages in the amount of $1,448 for the nine months ended September 30, 2023 over the same period in 2022. For the nine months ended September 30, 2023, there was a decrease in legal expense of $399. The rest of the difference primarily relates to sales and marketing expenses being included in G&A in 2022 before product launch in Q4 of 2022.
The unrealized loss on our shares of Processa for the nine months ended on September 30, 2023 was $43, which is in contrast to the $126 loss for the same period in 2022. Foreign currency transaction gain was $3 for the nine months ended September 30, 2023 ($6 loss for same period in 2022). Amortization expense was $217 for the nine months ended September 30, 2023, compared to $79 for the same period in 2022. Our amortization expense relates to the capitalized debt issuance costs associated with the Petrichor notes. Interest expense increased $2,245 for the nine months ended September 30, 2023, over same period in 2022. We replaced the $5 million loan facility with Bridge Bank with a larger facility, $25 million, with Petrichor. We took on this convertible debt load in a rising interest rate environment. Interest income was $284 higher for the nine months ended September 30, 2023, compared to the same period in 2022. This was driven mainly by higher interest rates for the nine months ended September 30, 2023 compared to the same period in 2022.
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Liquidity and Capital Resources
As of
As of
Selected Asset and Liability Data (thousands):
September 30, 2023
December 31, 2022
Cash and equivalents
$
12,399
$
23,774
Other current assets
6,547
2,954
Current liabilities
(3,913)
(4,608)
Working capital (1)
15,033
22,120
(1) [Current assets – current liabilities]
Selected Equity:
Common stock and additional paid in capital
204,789
199,388
Accumulated deficit
(216,563)
(203,200)
Stockholders’ deficit
(10,531)
(2,569)
Cash and cash equivalents were $12,399 at September 30, 2023 and $23,774 at December 31, 2022. The decrease in cash and cash equivalents between September 30, 2023 and December 31, 2022 is the result of expenses related to our normal operations, offset by inflows of cash generated from net product sales of $11,517 and $969 from various option exercises. There was an increase of $3,593 in other current assets between December 31, 2022, and September 30, 2023.
Current liabilities decreased by $695 between December 31, 2022, and September 30, 2023. The decrease was driven mainly by an increase in accounts payable ($551), offset by a large decrease of $1,268 in accrued expenses.
Working capital decreased between December 31, 2022, and September 30, 2023, by $7,087. The decrease relates to a net cash inflow from product sales and various option exercises, offset by expenditures for operating activities for the nine months ended September 30, 2023.
The following table illustrates a summary of cash flow data for the nine month period ended September 30, 2023 and 2022:
Selected Cash Flow Data
Nine Months Ended September 30,
(dollars and shares in thousands)
2023
2022
Net cash used in operating activities
$
(12,283)
$
(11,256)
Net cash provided by investing activities
—
—
Net cash provided by financing activities
908
19,908
Net cash flow
$
(11,375)
$
8,652
Net cash used in operating activities for the nine months ended September 30, 2023 and 2022, primarily reflected a net loss of $13,363 and $16,857, respectively. The nine month losses were adjusted for the add back of non-cash items consisting of $4,497 and $3,363, respectively, in stock-based compensation expense, with unrealized loss on securities of $43 and $126, respectively, and amortization expense of $217 and $79, respectively, for the nine months ended September 30, 2023, and 2022. For the nine months ended September 30, 2023 there was an increase in other current assets of $3,593 and a decrease of $756 during the same period in 2022. For the nine months ended September 30, 2023, there was a net decrease in current liabilities of $696, with a net increase of $1,273 during that same period in 2022. Nine month negative cash flows from operating activities were $12,283 and $11,256, respectively, for the periods ended September 30, 2023 and 2022. Net cash provided by financing activities for the nine months ended September 30, 2023, were $908 and $19,908, respectively. Net cash flows from the nine month period ended September 30, 2023 and 2022, were negative $11,375, and positive $8,652, respectively.
We continue to pursue various strategic alternatives including 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: our ability to obtain additional financial resources; our ability to enter into collaborations that provide us with up-front payments, milestones or other payments; progress or lack of progress in our preclinical studies or clinical trials; unfavorable toxicology in our clinical
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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 commercialization activities, if any.
Outstanding Share Information
Our outstanding share data as of September 30, 2023 and December 31, 2022 was as follows (in thousands):
September 30,
December 31,
Outstanding Share Type
2023
2022
Change
Common shares
26,633
26,361
272
Warrants
150
150
—
Stock options
5,005
4,539
466
Total
31,788
31,050
738
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, 2023, we had approximately $2,007 in our cash accounts and $10,392 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 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. Until we are cash flow positive from operations, we have chosen to avoid investments of a trading or speculative nature.
We classify fixed income investments with original maturities at the date of purchase greater than three months which mature at or less than twelve months as current. We carry investments at their fair value with unrealized gains and losses included in other comprehensive income (loss); however, we have not held any instruments that were classified as short-term investments during the periods presented in this Quarterly Report.
Off-Balance Sheet Arrangements
Since our inception, we have not had any material off-balance sheet arrangements.
Contractual Obligations and Commitments
None, other than the OHSU Agreement and lease agreements described in our unaudited interim condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report, and the severance amounts as disclosed in the Annual Report.
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Critical Accounting Policies and 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. There have been no material changes to our critical accounting policies and use of estimates during the nine months ended September 30, 2023.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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