KemPharm, Inc. — Form 10-Q summary
Reporting period: Quarter ended September 30, 2016; filed November 10, 2016. The filing identifies the registrant as KemPharm, Inc., whereas the request metadata names Zevra Therapeutics, Inc.; verify the entity and corporate-history connection before relying on this summary.
Business context and reporting period
KemPharm was a clinical-stage specialty pharmaceutical company developing prodrugs using its Ligand Activated Therapy platform. It reported no revenue and relied on financing to fund research and development. Lead programs included KP415 for ADHD and KP201/IR for acute pain; Apadaz (KP201 plus acetaminophen) was under FDA review.
Financial results and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $0 in 2016 and 2015 | $0 in 2016 and 2015 |
| Research and development expense | $4.3 million in 2016; $4.3 million in 2015 | $12.5 million in 2016; $9.2 million in 2015 |
| General and administrative expense | $3.1 million in 2016; $2.2 million in 2015 | $11.1 million in 2016; $6.3 million in 2015 |
| Operating loss | $10.4 million in 2016; $6.5 million in 2015 | $26.6 million in 2016; $15.5 million in 2015 |
| Net loss | $13.4 million in 2016; $9.7 million in 2015 | $6.6 million in 2016; $45.5 million in 2015 |
| Net loss per share, basic and diluted | $0.92 in 2016; $0.68 in 2015 | $0.45 in 2016; $4.71 in 2015 |
| Net cash used in operating activities | Not separately reported for the quarter | $20.1 million in 2016; $13.9 million in 2015 |
Margins are not meaningful because the company had no revenue. The nine-month 2016 net loss included a $29.7 million non-cash gain from fair-value adjustments, compared with a $26.5 million non-cash loss in 2015; this largely explains why net loss improved even as operating loss and operating cash use increased.
At September 30, 2016, cash and cash equivalents were $20.8 million, restricted cash $1.1 million, marketable securities $42.7 million, and long-term investments $27.4 million. Total assets were $94.5 million; total liabilities were $104.3 million; accumulated deficit was $111.4 million. The filing said current resources were expected to fund operations and capital spending for at least 27 months, subject to assumptions that might prove inaccurate.
Long-term convertible notes, net, were reported at $90.8 million; no term notes remained after repayment in February 2016. The company had issued $86.25 million principal amount of 5.50% convertible notes due 2021, convertible initially at approximately $17.11 per share. A separate Deerfield convertible note remained outstanding and bore 9.75% interest. The filing does not provide a clear breakdown of the $90.8 million carrying value by note. The $1.1 million line of credit was undrawn and fully collateralized by restricted cash.
Nine-month investing cash outflow was $52.7 million, mainly reflecting purchases of marketable securities and long-term investments; financing provided $61.3 million, primarily from the 2021 Notes offering, partly offset by repayment of Deerfield term debt and related amounts. Cash and cash equivalents declined $11.5 million during the period.
Material changes versus prior comparable periods
- Third-quarter operating loss increased $3.9 million year over year, principally due to $3.0 million of severance expense and higher general and administrative costs; R&D expense was nearly flat.
- Nine-month operating loss increased $11.1 million year over year, as R&D and G&A expenses rose by $3.3 million and $4.8 million, respectively, and severance added $3.0 million.
- In February 2016, the company issued the 2021 Notes and used approximately $18.6 million of proceeds to repay its Deerfield term notes, including interest, make-whole interest and a prepayment premium. The transaction resulted in a $4.7 million debt-extinguishment loss.
- Investing outflows increased substantially as the company moved funds into marketable securities and long-term investments. Operating cash use also rose, from $13.9 million to $20.1 million for the nine-month period.
Outlook, commentary, risks and unusual items
- On September 15, 2016, KemPharm announced it would defer commercial operations and redirect resources toward product development. It reduced its workforce by three employees and recorded $3.0 million of severance expense, including $1.9 million of accelerated stock compensation and $1.1 million of personnel and related charges.
- The FDA issued a Complete Response Letter for the Apadaz NDA in June 2016, citing concern that proposed labeling did not accurately convey abuse-deterrence study results. After an August end-of-review meeting, the company submitted a Formal Dispute Resolution Request in November 2016 and said the process could take up to 12 months. Approval, including abuse-deterrent labeling, was uncertain.
- Management expected significant ongoing expenses and operating losses and anticipated needing additional capital. In October 2016, after quarter-end, the company entered an at-the-market sales agreement permitting up to $50 million of stock sales; the related registration prospectus covered up to $20 million. Such sales could dilute shareholders.
- Pipeline milestones presented included KP415 human proof-of-concept data targeted for Q4 2016 and KP201/IR human proof-of-concept data for 2017. The company cautioned that development, regulatory review and commercialization timing were uncertain.
- Principal risks include regulatory and clinical failure, inability to obtain abuse-deterrent label claims, need for further financing, potential dilution, debt service and conversion exposure, dependence on third-party manufacturers and CROs, and competition. The filing reported no material litigation expected to adversely affect the company and no accruals for commitments and contingencies at September 30, 2016.
- Fair-value changes in derivative and warrant liabilities materially affected reported earnings: the nine-month gain was $29.7 million, while the third quarter recorded a $1.3 million fair-value expense. The relevant valuations relied on Level 3 unobservable inputs.
Important facts for investors to verify
- Confirm the registrant’s identity and its relationship to Zevra Therapeutics, given the filing’s KemPharm name.
- Check the subsequent FDA outcome and timing of the Apadaz dispute process, including whether any approval or abuse-deterrent labeling was ultimately obtained.
- Assess cash burn against the stated 27-month runway, the assumptions underlying that estimate, and any ATM sales or other financing since the filing.
- Review the outstanding principal, conversion terms, interest obligations and potential dilution from the Deerfield note, 2021 Notes, warrants and equity awards.
- Track whether the stated pipeline milestones were achieved and whether the commercial-operations deferral changed planned development spending or timelines.