History of KemPharm
KemPharm (KMPH) was founded in 2006 by Travis and Christal Mickle, both formerly of New River Pharmaceuticals. Travis Mickle is a PhD and was the principal inventor of Vyvanse, a prodrug amphetamine stimulant. Vyvanse is the top selling branded stimulant on the market today that is owned and marketed by Shire (SHPG). Shire obtained Vyvanse by purchasing New River Pharmaceuticals for $2.6 billion. Vyvanse had record sales of over $2 billion in 2016 alone. It is the third leading prescribed stimulant overall with ~18% market share in a market where only about 26% of scripts are written for branded medications. The next highest branded stimulant has less than 5% of the market. Why has Vyvanse been so successful? Part of this is due to the marketing power of Shire (and its history with Adderall), but part of it is the fact that Vyvanse is a prodrug. Vyvanse is l-lysine-dextroamphetamine, or lisdexamfetamine for short.
The prodrug properties cause Vyvanse to have three distinct advantages over Adderall XR. The first is that it lasts somewhat longer. Clinically, I observe that it generally lasts about two hours longer than Adderall XR in most of my patients. Second, Vyvanse is “smoother” than Adderall XR and therefore does not have as much of a “kick” in or a “rebound” as it wears off. Third, in part due to the lack of a kick, Vyvanse is not as popular as Adderall or Adderall XR among those who wish to abuse stimulants. Shire has not been able to market this as the FDA has strict rules on labeling and promoting a drug as abuse deterrent (more on this later). However, physicians (including myself) have had several years of science and most can “connect the dots” when the mechanism of action is described.
Travis Mickle wasted no time in moving on from New River to KemPharm. In fact, he actually founded KemPharm before New River was officially sold to Shire. Building on his success with Vyvanse and other prodrugs at New River, Dr. Mickle launched KemPharm as another prodrug company (this time with “Ligand Activated Therapy” prodrugs) emphasizing ADHD. By 2009, Dr. Mickle and KemPharm had already produced Phase 1 data on another amphetamine prodrug, KP-106. KP-106 appeared to be headed down the same road as Vyvanse and would have represented a direct competitor to Vyvanse. The initial data suggested it may have an “improved side effect profile and lower propensity for drug abuse” compared to Vyvanse. Shire took exception to this and sued KemPharm and Dr. Mickle in September 2010 for violating a non-compete clause. KemPharm then counter-sued Shire in March 2011 for unfair competition and antitrust violations. Not long after this, KemPharm announced that it was converting KP-106 to an oral film product. Then, in May 2012, KemPharm announced that it had settled the lawsuit with Shire and would be focusing on its pain medication prodrugs. KP-106 disappeared from its pipeline and has not returned. One could assume that this was part of the settlement although I could not find where this was stated as fact.
According to the Wayback Internet Archive, KemPharm’s website was then fairly dormant for much of 2012 and 2013. The company went public in April 2015 with an IPO price of $11/share. At that time, its lead candidate was what is now called Apadaz and it was planning its initial NDA for it. The rest of its portfolio was all pre-clinical but ADHD had crept back in the list with a new drug called KP415.
From Pain-Focused Back to ADHD-Focused
For much of 2015, KemPharm was on a roll with its pain franchise. It demonstrated the tamper-resistant properties of Apadaz (aka KP201/APAP). It then demonstrated positive results in intranasal human abuse liability studies. This culminated in the submission of its NDA for Apadaz. The stock performed well and topped $20/share during 2015. In early 2016, it secured an $86 million Senior Convertible Note (dropping the stock price back to the IPO of $11/share), but then announced FDA priority review and returned to almost $20/share over the next two months. Then, in early May 2016, the hammer fell with an 18 to 2 vote against including abuse deterrent labeling on Apadaz. The stock plummeted to under $7/share and continued down to $6/share over the following days. KemPharm requested to amend the NDA and the FDA responded with a Complete Response Letter in June. The stock sunk to $4/share and has been between there and a low of about $2.50 per share ever since. Recently, it has been stuck in a narrow range of $3.50 to $4 per share.
A little over a year ago, KemPharm appealed the CRL by initiating a dispute resolution process. Basically, KemPharm argued that the standards for abuse deterrent labeling are too specific and that its data should have been sufficient. It argued for approval of Apadaz as a bioequivalent product with the abuse deterrent labeling. This appeal was denied, but feedback was provided that led to the September resubmission of the Apadaz NDA a PDUFA date of February 23, 2018. On November 21st, the FDA issued updated guidelines regarding abuse-deterrent medications. It is quite possible that KemPharm may have been aware of some of these standards when making its decision to refile its NDA. In addition to Apadaz, KemPharm is also pursuing five other abuse-deterrent prodrug opioids. One of these may be ready for a NDA in 2018 with two additional ones potentially ready in 2019.
Despite still pursuing the abuse-deterrent prodrug opioids, KemPharm has shifted to referring to other drugs as its lead candidates. The “new” lead candidates are now KP415 and the newly identified KP484. KP415 and KP484 are two prodrug versions of d-threo-methylphenidate (aka dexmethylphenidate). Dexmethylphenidate is better known by its brand name Focalin. Essentially, KP415 is to Focalin XR what Vyvanse is to Adderall XR. KP415 is likely longer acting, smoother, and has less of a “kick” than Focalin XR. KP484 is an ultra-long acting version intended for adults. KP484 is intended to be a prodrug like KP415 and Vyvanse while also being the longest acting methylphenidate on the market (and comparable to what Shire’s Mydayis is for amphetamines in terms of duration). By pursuing KP415 and KP484, Dr. Mickle is back to what made him so successful with Vyvanse (this time without Shire legal challenges to this point).
KemPharm’s ADHD Compounds Face Fewer Challenges Than the Pain Prodrugs
KP415 and KP484 should have a much cleaner pathway to approval than the prodrug opioids. While both opioids and stimulants are crowded markets, opioid approval almost requires abuse deterrent criteria to be met at this point. There is rightfully significant concern about new opioids being added to the market due to the high number of deaths caused by opioid overdose in the United States. There are far fewer stimulant overdose deaths (although they still do occur). Therefore, there has not yet been as much pressure for abuse deterrence as a near-requirement for FDA approval. To date there have not been any stimulants labeled for abuse deterrence (although several current ones have some deterrent technologies).
Stimulant studies are also fairly straightforward and easy to do. The high prevalence of ADHD makes finding study participants rather easy and the studies do not generally require long-term treatment. Focalin is already shown to work, so the only real question with KP415 and KP484 will be if the prodrug successfully converts to the active drug at an adequate dose to produce the positive results. Initial studies seem to indicate that KP415 does this and KP484 likely will follow. Assuming that this is consistent and dosing is correct, the pivotal studies for both of these drugs should be resoundingly positive. KemPharm is projecting that it could have these results and file a NDA for KP415 as soon as late 2018. It is projecting a potential NDA in 2019 for KP484. These goals are somewhat ambitious, but definitely reachable.
If approved, KP415 and KP484 would help fill spaces in the methylphenidate stimulant market that have already been filled in the amphetamine side of the stimulant market. KP415 would be the Vyvanse-like methylphenidate while KP484 might combine the best attributes of Vyvanse with the duration of Mydayis in the methylphenidate side. KP415 would compete with the longest acting methylphenidate stimulants, which are currently the generic of Concerta, Quillivant/QuilliChew by Pfizer (NYSE:PFE), and Cotempla by Neos Therapeutics (NASDAQ:NEOS). However, even without the labeling, it could gain the reputation of being the most abuse deterrent of the group similar to the way that Vyvanse did (based off of it being the only prodrug). KP484 would then trump all of them on duration and be equaled by only Mydayis (an amphetamine). Again, KP484 would have the advantage in that it is a prodrug and Mydayis is not. Key disadvantages would be having to go against the preexisting marketing forces of Shire, Pfizer, and Neos. However, just as New River was bought out by Shire, KemPharm would likely also be a buyout consideration at that point.
In my opinion, KP415 and KP484 would be able to get a strong market presence even without the abuse deterrent labeling. I would estimate this at $300-500 million per year in sales. However, if it was able to get the abuse deterrent labeling, then it could potentially get to a top-end of around 10% market share in stimulants (equivalent to ~$1 billion/year in sales). There are very few potential stimulants for which I would say this is possible, but the history of Vyvanse makes me believe that it is. Vyvanse was able to get to almost 1/3 of the amphetamine market. If KP415 + KP484 could get close to 1/3 of the methylphenidate market, then this would be about 10% of the overall stimulant market.
The Valuation of KemPharm is What Makes it an Attractive Buy
KemPharm is currently valued at $3.80 per share, which is a market cap of only $55.7 million. Its current cash position is about $50.2 million. It does have $92.3 million in debt that is at a 5.5% interest rate. The debt is in the form of Senior Convertible Notes which can be converted to stock at the option of the holders. The notes mature in 2021 unless converted prior to that time. So, effectively, this debt is being factored in and makes the enterprise value somewhere around $148 million. KemPharm is losing $10 million/quarter currently, which would mean it has enough cash to get through about the end of 2018. As it is unlikely to have revenues by that time, it will either need to raise cash through dilution or partner one of its drugs before the end of 2018.
If KemPharm is able to get KP415 approved (which would also bode well for the future of KP484), then it alone could justify a market cap around $300 million (comparable to the current market cap of Neos). Of course, this is over a year away and requires a positive study. I believe that the chances of eventual approval here are very good and, therefore, I would consider investing on this fact alone.
However, I always like there to be additional “shots on goal” and KemPharm provides these. The price drop from $15-20 per share down to less than $4 a share is a good indication that the market has given Apadaz little chance of success (assuming approval was “priced in” at $15-20 per share). While unlikely, the Trump FDA could approve Apadaz with the abuse deterrent label in February 2018. This would likely return the share price to the $15-20 range. Approval without the abuse deterrent label could improve the share price to $7/share or more, which is where it was after the panel vote and before the CRL. The worst case scenario is denial by the FDA being able to trigger a debt call by Senior Convertible Note holders. I am not sure of the full terms of the Senior Convertible Notes, but it could mandate significant dilution by KemPharm in order to survive financially. I suspect this would drop the stock price back to the $2.50 range again. However, if the debt was out of the way, I personally would double down if this happened as the future of KP415 is bright.
In addition to Apadaz, KemPharm could find success with one of its other prodrug opiates within the next 1-2 years. However, if the FDA does not approve Apadaz, then it would likely mean that more studies would be needed for these drug candidates than what was done with Apadaz. This would likely slow the process down and the 1-2 year goals would likely be too optimistic.
KemPharm is also in preclinical stages with a prodrug version of quetiapine (Seroquel). Seroquel is an effective atypical antipsychotic that has several side effect issues (especially metabolic syndrome ones). It is also abused on occasion because it has somewhat of a “kick.” A prodrug version of Seroquel would be most interesting if it not only eliminated the “kick,” but also reduced the severity of the metabolic side effects. This compound will likely have a longer pathway than the others that KemPharm is pursuing, but could have significant potential if it met these goals.
Finally, KemPharm recently partnered with Genco Sciences to develop a prodrug amphetamine for the combination of ADHD and Tourette’s. Little is known about this partnership yet other than that it will utilize some Genco technology (likely from this patent) in an amphetamine compound. While this compound is unlikely to be the resurrection of KP-106 itself, it does likely represent KemPharm reentering the direct space of Vyvanse. This compound should provide further depth to the portfolio – although the combo of ADHD and Tourette’s is more of a challenge both from the standpoint of difficulty to treat and population size.
Bullish Factors (Upsides):
- Travis Mickle has had success before and is now back on a very similar path that led to Vyvanse and the sale of New River Pharmaceuticals to Shire.
- KP415 and KP484 have a relatively straightforward path to approval that includes studies that are not generally time consuming.
- Apadaz failure is nearly completely priced in and any positive news with regards to its NDA would likely result in a stock price increase.
- If a window is left open for prodrug opiates as abuse deterrent compounds, then KemPharm has a deep pipeline for these.
- The prodrug version of quetiapine (Seroquel) and the partnership with Genco Sciences should add additional “shots on goal” in the future.
- KemPharm is on a path to make itself an attractive acquisition target much like New River Pharmaceuticals.
Bearish Factors (Risks):
- The Convertible Note debt is a significant concern and could lead to a significant dilution under some circumstances.
- While Apadaz failure seems to be largely priced in, denial could trigger a chain of events with the debt that would lead to new all-time lows.
- Even with success, KemPharm may require cash raised through dilution in mid-late 2018.
- Failure of the prodrug KP415 to convert to active compound could result in study failure – while unlikely, this would likely sink the company if Apadaz had also been denied.
- Shire has sued Dr. Mickle and KemPharm before. While this was settled, there could possibly be additional lawsuits in the future that would impact the direction/success of the company.
Based on my findings as above, I decided to initiate a starter long position in KemPharm. In the event that Apadaz failure or a dilution led to a significant pullback, I would likely double or even triple this position. I view KP415 as the key drug moving forward and any positive news out of the opiate drugs would be welcome bonuses.
Author’s Note: Thank you for reading my article. If you find it beneficial, please consider following me and reviewing my other articles. Comments welcome.
Disclosure: I am/we are long KMPH.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have had ~6-7 marketing lunches provided to my office by NEOS in the past year. I have also had ~12 marketing lunches provided by Shire in the past year. KemPharm does not currently market its product, but I anticipate that with approval it would be marketed directly to me in the future.
Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.