Miami, FL–(EmergingGrowth.com Newswire – March 3, 2019) – EmergingGrowth.com, a leading independent small cap media portal with an extensive history of providing unparalleled content for the Emerging Growth markets and companies, reports on KemPharm, inc., Inc. (NASDAQ: KMPH)

  • $9 – $13 billion annual ADHD market
  • Market leader potential despite miniscule $60 million market capitalization
  • Licensing and takeover potential
  • High valuations of other ADHD drugs recently hitting the market

KemPharm, Inc. (KMPH) has been in a deep slumber since its October 2018 shelf registration announcement, which raised $23.1 million. Since then, no news has been able to inspire investors, who have been lulled to sleep, even as the company is on the cusp of a major partnership announcement. On February 28, 2019, the CEO said:

“With regard to the KP415/KP484 partnering process, we believe that we are in a strong position with late-stage discussionswith a number of parties in a competitive process.  We have been working to advance the potential partners that were most active in December, and have also added additional parties since that time. While there are no assurances, we feel confident that this is a robust, competitive processwith the potential to provide KP415/KP484 the best opportunity to maximize valuefor KemPharm. We believe the added time and effort will be worth it.”

The stock is behaving like another round of dilutive financing is coming, when in fact milestone payments are just around the corner, as well as a partnership deal, with the most likely suitor being Takeda (TKDA).

Investors are distracted by the idea of dilution, instead of company comments of a commercialization agreement on the immediate horizon. It’s as though investors have completely lost their focus on the keywords of “late-stage discussions” and “competitive process” —words that should have woken them up out of their deep slumber.

KemPharm’s lead candidate is a drug for the treatment of ADHD, KP415; it has already passed Phase 3 trials, and is best-in-class when compared to others on the market, beating out the leader Vyvanse on onset (30 minutes vs 1.5 hours), and FocalinXR on duration (13 hours vs “up to” 12).

Phase 3 trial data

KP415 is classified as a prodrug, which means the active ingredient needs the body to break down, or metabolize, the inactive part before it can be efficacious. As a prodrug of an existing drug, it’s almost completely derisked: the only other attempt at an ADHD prodrug was Vyvanse; Shire (now part of Takeda) now sells $2+ billion of product in the US annually. Interestingly, Vyvanse was developed by the CEO of KemPharm, Travis Mickle.

Investors are failing to factor in that this is the most promising new drug in a US market of $9-$13 billion annual sales. The stock currently trades at just a $60 million market cap, which was two times their cash value 5 months ago.

On the latest conference call, CEO Travis Mickle said,

“KP415/484 represents our highest-value assets. There is real and tangible interest in those products outside the walls of KemPharm. Our job is to capture that value with the best potential partner, but also not forget that work doesn’t end there. Many of these types of potential deals have other milestonesthat may be squarely in our camp to accomplish.

This could include the KP415 NDA submission, acceptance, and/or approval, and also could include labeling and scheduling. Some of these items could be critical for potential cash milestones, but other — and even more importantly — that partner would need these to launch the product.”

Along with “competitive process”and “late-stage discussions”, this is exactly the language you hear right before a deal is struck!

ADHD Market

The US ADHD market is about $9-$13billion annually; there are fivemain products in the market:

(Source: Top Drugs By Market Share, Express Scripts 2015)
  1. Adderall XR
  2. Concerta/Ritalin Long Acting
  3. Vyvanse (with Shire (now part of Takeda) taking in about $2.3B in revenues in 2018)
  4. Focalin
  5. Strattera

The majority of the market is either methylphenidate-based (like FocalinXR, Ritalin, Concerta, or KP415) or amphetamine-based (like Vyvanse, Adderall XR); many ADHD patients can take both with equal success, but one type works better than the other for others. Methylphenidates dominate the kids/adolescent market while amphetaminesdominate the adult market. KemPharm has floated the idea of a combo deal for KP415 plus KP484 (a reformulated KP415 methylphenidate for adults).

Licensing And Takeover Options

The company has clearly indicated its pathway is licensing; their top potential partner is Takeda, and they are very interested in this category. In fact, they completed the buyout of Shire Pharmaceuticals this year; a big part of the reason was the Vyvanse cash cow.

The connection to KemPharm? As stated before, the CEO of KMPH is actually one of the co-creators of Vyvanse, which he developed at New River as Chief Medical Officer. New River (and Vyvanse) was bought by Shire in early 2007 for $2.6Bnetting early investors at least hundreds of percentin return.Equally important, some of the same businesspeople who negotiated on the sale of New Riverto Shire are in place at KemPharm now.

Other potential bidders with drugs and expertise in this market are Pfizer (PFE), Eli Lilly (LLY) and Supernus Pharmaceuticals (SUPN). These are the likely players sitting at the bidding table.

Comparables

The last ADHD drug to garner FDA approval was Jornay, manufactured by Ironshore Pharmaceuticals in August 2018. They raised $200 million from lead underwriter Morgan Stanley just to get to their PDUFA date, and then after approval raised an additional $143 millionto “fully support the launch of a blockbuster drug and fund the anticipated costs of all planned commercialization and marketing initiatives with the launch of the drug projected to occur in the first half of 2019.” The last ADHD deal was worth over $343 million and this was for an ADHD drug to be used only for nighttime use and still contained an abuse and dependence warning.  A licensing deal for a much more versatile drug like KP415 that could challenge Vyvanse’s $2.0+ billion per year dominance is worth considerably more than $343 million. 

Vyvanse and KP415

The last prodrug to enter this market was Vyvanse, boasting a lower abuse risk and gradual release profileas its primary features over the previous leader Adderall XR (which was also being produced by Shire). Vyvanse captured about 14% of the market within 3 years, Shire bounced from Adderall to Adderall XR to Vyvanse, as patents became close to expiring, cannibalizing its own sales in the process while maintaining a competitive edge.KP415 is composed of 1/3rd instant-release and 2/3rd prodrug. Abuse liability trials have shown that, unlike Vyvanse, which only offers some abuse reduction, the prodrug’s addiction properties are nearly the same as placebo:

Drug Liking scores of KP415 vs. Ritalin vs. placebo

Experts are amazedat what KP415 can do:

This chart shows a child’s results in the Phase 3 KP415 trial. Before the dosing of the drug, the child was able to answer 54 out of 55 math questions correctly in a set period of time. After dosing, this went to 144/145 at 30 minutes and 178/180 at 2 hours: a more-than two-fold increase!

ADHD research expert Ann Childress, MDstated about one subject that:

“And so, he’s now on 40 milligrams of KP415. He did the initial double-blind study, the registration studying, and now, he’s in the safety study who is just finishing his six month visit. Last year all I was getting before he started on medicine were complaints about how he was doing in school.”

“And his dad said, ‘he’s getting As in Math, Science, and Computer Literacy.’He was just blown away. Never done that well in school ever. He’s like 10 now. He got a C in Chorus. I mean, you know, we can’t fix everything. And English. He really hates English because he doesn’t like to write. But, he’s not getting any complaints from the teachers and we all know, as parents, when we don’t get calls from the teachers that’s a good thing. And last year, this is what he was getting. Cs, Ds, and Fs.”

Investment Summary

It’s clear that many current retail investors in KMPH believe there’s more downside to go before the stock can go up. They’re choosing to ignore obvious and blatant signs the company is on the cusp of a licensing deal. The latest corporate update highlighted that fact that they are very serious and in late stage discussions. Late-stage discussions can mean one to 3 months as lawyers comb through the licensing agreements. With a $10 million quarterly burn rate (half of this being new trial costs that can be paused), that represents a worst-case scenario of another ~17% dilution.

With the Vyvanse patent expiring in a few years, and with KMPH CEO Mickle retained as a consultant for Shire for almost a decade, it’s therefore highly likely that Shire/Takeda will now beef up its portfolio with KP415. If KP415 captures even 10% of the market share within 3 years, this represents over a billion dollars in revenue, with KemPharm likely receiving royalties in the 20-30% range, or $200-$300m in clean income annually.

The worst case scenario with KMPH is ~17% downside risk in the next 3 months; there is a very high likelihood that they get a licensing deal (with milestone payments) and a certainty that there will be a royalty component of possibly 20-30%. Overall, such a deal would be worth significantly more than Jornay’s $340 million.

Investors should keep in mind that just the cash component of ~$200m in total milestone payments could be worth over $7/share. And the royalty component could be eventually worth billions: with 20% at just $500m in sales, and a 10 P/E, this represents a $1.0 billion market cap. Taken in the context of a $0.35 downside risk versus a $5+ upside risk, investors need to wake up out of their slumber and place their bets. Just the potential milestone payments themselves represents over a 3-fold increase in the market value of KMPH after these “late stage discussions” conclude.

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