Twice Validated and Now Building From a Position of Strength

On August 12, 2021, KemPharm, Inc. (NASDAQ: KMPH) reported financial results for the second quarter ended June 30, 2021. These results provide confirmation that KemPharm is in the strongest position, both fundamentally and financially, in the company’s history. 

Earlier in the year the U.S. FDA approved AZSTARYS™ (serdexmethylphenidate and methylphenidate capsules) for the treatment of Attention Deficit Hyperactivity Disorder (ADHD). The approval of AZSTARYS™ further validates KemPharm’s LAT® (Ligand Activated Therapy) platform technology. The LAT® platform technology marries KemPharm’s expertise in medicinal chemistry and drug delivery to create prodrugs, which are inactive new chemical entities that release existing FDA approved drugs and impart improved properties compared to the parent drug. These prodrugs are activated by normal metabolic processes inside the body, often resulting in greatly improved safety and efficacy compared to the original medications. This is the second approval using the company’s LAT® platform technology following the U.S. FDA approval of APADAZ® (benzhydrocodone and acetaminophen) back in February 2018.

In July 2021, KemPharm’s commercial partner, Corium Inc., launched AZSTARYS™ with a focused effort on select prescribers in a few states around the U.S. Corium plans to expand the roll-out of AZSTARYS™ once they have obtained insurance coverage and reimbursement, but the initial feedback suggests high receptivity based on the product’s differentiated profile versus standard methylphenidate formulations. Accordingly, KemPharm is now in position to receive both commercial milestones of up to $590M and royalties on net sales of AZSTARYS™ ranging from high single-digits to mid-twenties. These milestones and royalties are expected to commence in a meaningful way in 2022, and KemPharm believes that peak sales of AZSTARYS™ may be higher than originally forecasted. 

A key marketing message and driver of the differentiated AZSTARYS™ profile was confirmed in May 2021 when the DEA classified serdexmethylphenidate (SDX), the prodrug that comprises 70% of AZSTARYS™, as a Schedule IV controlled substance. This is the second-lowest scheduling for approved medications and below the current Schedule II status for other CNS stimulants, including methylphenidate and amphetamine. Importantly, the Schedule IV listing for serdexmethylphenidate, or “SDX”, bodes well for KemPharm’s future development plans with the molecule for other indications outside of ADHD. 

The FDA approval and DEA scheduling provided $20 million in cash milestones to KemPharm from Corium during the first half of the year. In fact, the cash position as of June 30, 2021, totaled $132.3 million, which was a substantial $56.4 million increase as compared to the end of the first quarter, driven by a combination of AZSTARYS™ milestones from Corium and $40.6 million in cash from warrant exercises during the second quarter. Revenues in the quarter totaled $12.0 million, which led to net income of $6.2 million, or $0.18 per share. This solid financial position, along with the potential to receive future milestones and royalties on AZSTARYS™ for up to the next 16 years, to the final patent expiration in 2037 further strengthens the company’s financial position. 

It is this strong financial position, along with a low cash burn rate (projected at only $1 to $1.5 million per quarter over the near term) and future potential to raise cash, if necessary, that creates an exciting backdrop to the KemPharm story. As a reminder, KemPharm management worked successfully to improve the balance sheet and restructure the organization over the past year. 

At the end of 2020, KemPharm had $68.2 million in convertible debt and the common stock was listed on the OTC markets. Earlier in the year, KemPharm was able to complete a debt restructuring and a series of public offerings which allowed for these notes to ultimately be extinguished and to facilitate listing of the common stock on the NASDAQ Capital Market, in addition to building the Company’s substantially improved cash position. This was a momentous achievement and greatly improved the future financial flexibility of the company. In June 2021, KemPharm was added to both the Russell 2000® and Russell 3000® indexes, two widely used benchmarks for active portfolio managers focusing on small- and mid-cap growth companies.  

And KemPharm is now squarely in growth mode. With AZSTARYS™ in the hands of Corium and APADAZ® in the hands of KVK Tech, Inc., KemPharm management is now turning its attention to growing the internal pipeline, which includes the opportunity to expand upon the development of SDX thanks to the favorable DEA Schedule IV classification. Two of these new product candidate opportunities include KP879 for the treatment of stimulant use disorder (SUD) and KP1077 for the treatment of idiopathic hypersomnia with KP1077. 

Equally as exciting is the opportunity to in-license new assets where the company’s LAT® platform technology can improve the therapeutic profile of existing FDA-approved drugs, much like KemPharm has done with APADAZ® and AZSTARYS™. The LAT® platform technology is applicable to hundreds of other FDA-approved medications where efficacy and/or safety (e.g. abuse potential, tolerability, etc...) can be improved upon. This in-licensing opportunity wasn’t really an option for the company until the recent improvements to the balance sheet and bolstered cash position over the past several months.

As noted above, the favorable DEA Schedule IV listing opens up the opportunity to investigate single-agent SDX (serdexmethylphenidate) into indications outside of ADHD. One area of interest is in stimulant use disorder with KP879. SUD includes those marked by abuse/misuse of cocaine, methamphetamines, prescription stimulant products that contain methylphenidate or amphetamine, and numerous other designer drugs like methylenedioxypyrovalerone (MDPV) and mephedrone. According to the Substance Abuse and Mental Health Services Administration (SAMHSA), in 2018, approximately 2.6 million Americans over 12 years of age had a SUD attributed to their use of methamphetamine (1,100,000), cocaine (977,000), or prescription stimulants (561,000). 

There are no FDA-approved medications for the treatment of SUD. Earlier in the year, KemPharm received FDA clearance to conduct a Phase 1 study with KP879. Data from this study, which deploys higher doses of SDX than tested in the AZSTARYS™ clinical studies, will provide important pharmacokinetic and pharmacodynamic information on single-agent SDX for the potential use in SUD. Data outputs are expected before the end of the year. 

Data from this Phase 1 study will also provide important analysis on the potential application of SDX for the treatment of idiopathic hypersomnia (IH). Management believes that this formulation of SDX, dubbed KP1077, has significant potential for the treatment of IH, which is an incapacitating neurological disorder marked by significant detrimental effects on nighttime sleep as well as daytime sleepiness/wakefulness. This is an incredibly interesting opportunity for KemPharm because existing treatment options are limited, with currently only one FDA-approved medication in Jazz Pharmaceuticals’ XYWAV®. XYWAV® is the new low-sodium formulation of Jazz’s XYREM®, a product that sold $1.6 billion in 2020 primarily for the treatment of narcolepsy. Physicians have been prescribing XYREM® and other narcolepsy drugs off-label to IH patients. None of these drugs treat the underlying disease and only partially help manage symptoms. KP1077 has the potential to address IH via an entirely different mechanism. 

However, what is most interesting is the potential for KemPharm to shift focus from “mass market” opportunities like ADHD or acute pain to “orphan diseases” like IH, which is a focused enough population that KemPharm can take the development of KP1077 all the way to FDA approval and even commercialize the drug themselves (versus the out-licenses that the company did with APADAZ® and AZSTARYS™). As with other prodrugs developed by KemPharm, both KP879 and KP1077 have long-lived composition of matter patent protection, which further strengthens the value proposition should KemPharm gain approval for and commercialize either asset themselves. 

Finally, with the strong current balance sheet and expected access to future cash through AZSTARYS™ milestones and royalties, KemPharm can look to deploy resources to generate additional value streams for shareholders by in-licensing and acquiring new assets. KemPharm has now twice proven the commercial validity of its LAT® platform technology and there are literally hundreds of APIs (active pharmaceutical ingredient) where management believes the LAT® platform technology can improve either the safety, efficacy or both of FDA-approved drugs.  

This is something that current CEO, Travis Mickle, Ph.D. has proved he can do even before he co-founded KemPharm in 2006. Dr. Mickle was a principal inventor of VYVANSE®, a prodrug of amphetamine for ADHD, developed by New River Pharmaceuticals. Shire Pharmaceuticals acquired New River for $2.6 billion in 2007 on the strength of VYVANSE®, and Shire was later acquired by Takeda for $30 billion in 2019. 

Similar to the potential path forward with SDX, KemPharm is seeking potential opportunities to in-license or acquire assets and apply its LAT® platform technology. Opportunities are focused in the CNS area where the company has internal development expertise, with a focus on rare or orphan diseases where there is a high unmet need and development can progress rapidly, efficiently, and commercialization can be handled in-house to maximize shareholder return. Just like with AZSTARYS™, applying the LAT® platform technology allows for new intellectual property and extended patent protection to further maximize the economics to KemPharm. 

In conclusion, the future looks bright for KemPharm. AZSTARYS™ is in the hands of a capable commercial partner and management sees upside to the current sales models proposed by financial analysis. The balance sheet is solid, the stock is listed on the Nasdaq and included in two important Russell indexes. More importantly, never has the company been in such a solid financial position with no debt and substantial cash reserves providing the potential to transition from a small developer of drugs for out-licensing to a larger pharmaceutical company, to a - twice-proven - developer of drugs, with an internal pipeline, and one looking to in-license and acquire additional assets, to drive growth for the next decade.