TFF Pharmaceuticals (TFFP) Stock: Undefeatable To Speculative

In my prior article, TFF Pharmaceuticals: A Highly Attractive Basket Of Options, I presented the bullish case for TFF Pharmaceuticals (NASDAQ:TFFP). Unfortunately, just about everything has gone wrong since and investors had to endure painful losses. In this piece, I would like to provide an update on recent developments or lack thereof and make the case that TFFP is now a speculative buy with significant risks but strong upside. As a reminder, TFFP commands a technology called Thin Film Freezing that enables to turn a vast amount of drugs into powder form while keeping functionality and efficacy. In fact, very often the TFF version is even more efficacious as the drug can be directly applied to where it is needed like in the lungs.

What?

In the risk section of my prior piece, I mentioned funding and lack of deal being closed. Both have materialized in a way much worse than I could have imagined.

First of all, the company has not been able to close any agreement, deal or partnership, that would bring urgently needed revenues and cash, whatsoever. Not even the option agreement on Niclosamide with Union Therapeutics got exercised.

With respect to the niclosamide inhaled powder program, we and our partner, Union Therapeutics, have not further progressed TFF niclosamide, pending the party’s further review of the Phase I results, animal data and antiviral market opportunities.

Even worse, TFFP was forced to announce significant delays in the clinical programs of both VORI and TAC, the major parts of the internal development program. A highly questionable communication failure, considering these are open label studies and CEO Glenn Mattes was eager to confirm the timeline until almost the last minute. Results are now expected in Q1 and Q2 2023 and any partnership on those drugs will have to wait until then as well. The consequence was of course that the cash runway was too short to bridge the additional gap and the company saw it necessary to do a highly dilutive offering with half warrants at $1.15. The fully diluted share count is thus up by about 70%.

What is more, there is still no guarantee, that the raised funds will be sufficient:

We expect we will need additional financing following this offering to execute our business plan and fund operations, which additional financing may not be available on reasonable terms or at all. As of September 30, 2022, we had total assets of approximately $20.2 million and working capital of approximately $14.9 million. As of September 30, 2022, our working capital included approximately $13.1 million of cash and cash equivalents. We believe that the net proceeds of this offering, plus our cash on-hand as of the date of this prospectus supplement, is sufficient to fund our proposed operating plan for, at least, the 12 months following the date of this prospectus supplement. However, as of the date of this prospectus supplement, we believe that we will need additional capital to fund our operations through to the marketing approval for TFF Vori and TFF Tac-Lac, assuming such approval can be obtained at all, and to engage in the substantial development of any other of our drug candidates, such as formulation, early stage animal testing and formal toxicology studies. We intend to seek additional funds through various financing sources, including the sale of our equity and debt securities, licensing fees for our technology and co-development and joint ventures with industry partners, with a preference towards licensing fees for our technology and co-development and joint ventures with industry partners

With the current burn rate they will run out of cash within a year and at this point, investors seem to have lost faith in the CEO completely, certainly I have.

So What?

But is the stock now a buy or a sell? Investors have to ask themselves if the technology has lost any attractiveness, if the internal pipeline is still promising, if there is still scope to close deals besides the internal pipeline, and how all that compares to the current market capitalization after the most recent significant dilution.

On the first, the answer has to be no. Despite all the bad news, the technology itself is still undefeated. To company has yet to report any kind of failure to achieve stable powders from drugs. So why did no deals get executed yet? One reason could be that the technology is a failure and does not work. Yet we have no evidence at all for this, to the contrary. If we assume the technology does indeed work as promised, which has to be the base case, then there are a number of reasons for the lack of deals. It could be that TFFP has too high expectations in terms of pricing and pharma companies are not willing to pay significant royalties and milestones. Another reason is just corporate inertia, whereby adoption of new technologies, especially in larger corporations, is simply painfully slow. A more sinister reason would be that any potential partner can see the balance sheet of TFFP along with its significant cash burn, and delay the process to extract better terms. Further, it is likely the rapid developments as it relates to Covid and its mutations attracted all the attention of pharma companies in terms of developing new vaccines and therapeutics formulations that are adapted to these new mutations, so that alternative ways of administration such as thin film frozen powder, were simply not in focus.

The bottom line is that there are many possible explanations for the lack of closed deals despite the technology working. To be conservative I would thus assume that no deals will close at all or only with small likelihood and just the internal pipeline remains. And in fact, we had some good news on that front amongst all the bad as well in form of a Second Patient Successfully Treated with Voriconazole Inhalation Powder Through Compassionate Use Program.

In my prior piece I made the case that based on a conservative 1 times peak sales multiple for VORI and TAC the potential value would be $1.4B, which under a 50% chance of approval becomes $700M, and I still believe this to be a valid approach. Of course, TFFP has proven disastrous in closing any deal and partners will demand significant concessions as TFFP is in possibly its worst negotiation position ever. Therefore we need to consider that possibly much less than my prior assumption of 50% of the economics will accrue to TFFP. If we take 25% the result is $175M. This nonetheless compares very favorably to the fully diluted market cap – even after the recent dilution – of just about $50M. The stock would even be attractive, if 50% more dilution was needed by those estimates.

But!

Does that make TFFP a screaming buy here? Absolutely not, since significant risks remain. On a technical note, the warrants issued in the recent offering could provide a significant overhang and impede share appreciation. Further, we cannot be sure if TFFP will be able to partner on VORI and TAC at all, and I would not be willing to be invested in the stock in a scenario where they have to progress clinical development towards approval themselves and even perform marketing and sales. As mentioned before, it is also not unlikely that another dilutive raise will be needed, which would certainly hurt the performance of the stock in short to medium term and the degree of dilution cannot be know in advance (my prior, now obsolete, estimate of only 25% more dilution needed clearly shows this). What is more, for me it is impossible to make the case that any stock is a strong buy, where I have no faith in the CEO any more, and after Glenn’s apparently disastrous performance and communication the stock can only be a speculative buy in my opinion.

Then What?

Putting it all together, the stock and the company have been a severe disappointment. Failure to execute, delays and painful dilution have worsened the investment case and destroyed confidence in the CEO with many investors. Yet, even with conservative assumptions for the internal pipeline, specifically VORI and TAC, the potential for a good return is still very much present considering the low shares price. And while significant risks make this stock very risky, a speculative position may well be justified. This would be all the more true, if the company surprises to the upside by closing deals outside the internal pipeline. A recent announcement of Collaboration with Aptar Pharma is just one example of many showing that this is still very much possible in the future. Presumably, the company has expanded its R&D operations for good reason as well. Most certainly, any success on that front is not priced in and could provide patient shareholders with a happy surprise.