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Twice Validated and Now Building From a Position of Strength

KemPharm’s strong financial position opens up opportunities for the company to expand its development pipeline, including evaluation of its internally-developed candidates and other potential external assets via in-license or acquisition.
Key Takeaways
  • KemPharm is in the strongest financial position in the company’s history, with $132 million in cash as of June 30, 2021.
  • With the approval and launch of AZSTARYS™ KemPharm is in position to receive commercial milestones and royalties on net product sales by partner Corium.
  • Favorable DEA Schedule IV listing for serdexmethylphenidate (SDX) opens up the opportunity to investigate the single agent in indications outside of ADHD, such as stimulant use disorder and/or idiopathic hypersomnia.

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.

About KemPharm: 
KemPharm is a specialty pharmaceutical company focused on the discovery and development of proprietary prodrugs to treat serious medical conditions through its proprietary LAT® (Ligand Activated Therapy) platform technology. KemPharm utilizes its proprietary LAT® platform technology to generate improved prodrug versions of FDA-approved drugs as well as to generate prodrug versions of existing compounds that may have applications for new disease indications. KemPharm's prodrug product candidate pipeline is focused on the high need areas of attention deficit hyperactivity disorder, or ADHD, stimulant use disorder (SUD), and CNS rare diseases, including idiopathic hypersomnia (IH). KemPharm's lead clinical development candidate for the treatment of SUD, KP879, is based on its prodrug of d-methylphenidate, known as serdexmethylphenidate (SDX). In addition, KemPharm has received FDA approval for AZSTARYS™, a new once-daily treatment for ADHD in patents age six years and older, and for APADAZ®, an immediate-release combination product containing benzhydrocodone, a prodrug of hydrocodone, and acetaminophen.  

Forward-Looking Statements:
This company narrative may contain forward-looking statements made in reliance upon the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements include all statements that do not relate solely to historical or current facts, including without limitation and can be identified by the use of words such as “may,” “will,” “expect,” “project,” “estimate,” “anticipate,” “plan,” “believe,” “potential,” “should,” “continue” or the negative versions of those words or other comparable words.  Forward-looking statements are not guarantees of future actions or performance.  These forward-looking statements include statements regarding the potential commercial success of AZSTARYS™, the market outlook for AZSTARYS™, potential sales milestone and royalty payments pursuant to the License Agreement with an affiliate of Gurnet Point Capital, the potential benefits of AZSTARYS™, the clinical development of KP879 and KP1077, the potential benefits of SDX being classified as a Schedule IV controlled substance, and KemPharm’s forecasted cash runway.  These forward-looking statements are based on information currently available to KemPharm and its current plans or expectations and are subject to a number of uncertainties and risks that could significantly affect current plans. Risks concerning KemPharm’s business are described in detail in the “Risk Factors” section of KemPharm’s Annual Report on Form 10-K for the year ended December 31, 2020, KemPharm’s Quarterly Report for the quarter ended June 30, 2021, and KemPharm’s other filings with the Securities and Exchange Commission.  KemPharm is under no obligation to, and expressly disclaims any such obligation to, update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.
This company narrative also may contain estimates and other statistical data made by independent parties and by us relating to market size and other data about our industry. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the markets in which we operate are necessarily subject to a high degree of uncertainty and risk.  Copyrights and trademarks are held by their respective owners.

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Key Takeaways
  • KemPharm is in the strongest financial position in the company’s history, with $132 million in cash as of June 30, 2021.
  • With the approval and launch of AZSTARYS™ KemPharm is in position to receive commercial milestones and royalties on net product sales by partner Corium.
  • Favorable DEA Schedule IV listing for serdexmethylphenidate (SDX) opens up the opportunity to investigate the single agent in indications outside of ADHD, such as stimulant use disorder and/or idiopathic hypersomnia.
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