Business context and reporting period
This is KemPharm, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2017. The request metadata names Zevra Therapeutics, Inc., but the filing identifies the registrant as KemPharm. KemPharm was a clinical-stage specialty pharmaceutical company developing prodrugs using its Ligand Activated Therapy platform. It had no product revenue and reported recurring operating losses.
Financial results and liquidity
Amounts below are in millions of dollars, except per-share data.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development expense | $6.3 | $4.3 | $15.1 | $12.5 |
| General and administrative expense | $3.3 | $3.1 | $10.2 | $11.1 |
| Operating loss | $(9.6) | $(10.4) | $(25.2) | $(26.6) |
| Net loss | $(10.0) | $(13.4) | $(32.8) | $(6.6) |
| Net loss per share | $(0.68) | $(0.92) | $(2.24) | $(0.45) |
| Cash used in operating activities | Not provided quarterly | $(26.2) | $(20.4) |
Gross margin was not applicable because the company had no revenue. Q3 net loss improved by $3.4 million year over year, mainly due to a $2.6 million favorable swing in non-cash fair-value adjustments and lower operating expenses; R&D spending increased. Nine-month net loss worsened by $26.2 million, largely because fair-value adjustments shifted from $29.7 million of non-cash income in 2016 to $2.4 million of non-cash expense in 2017. The 2016 period also included a $4.7 million debt-extinguishment loss.
At September 30, 2017, the company had $7.8 million cash and cash equivalents, $1.1 million restricted cash, $37.4 million marketable securities, $2.5 million trade-date receivables and $6.7 million long-term investments. Total assets were $59.3 million and stockholders’ deficit was $48.1 million. Cash, cash equivalents and restricted cash declined $8.9 million since year-end 2016. Management estimated existing cash, restricted cash and investments would fund operating and capital needs through the second quarter of 2019, subject to assumptions and risks.
Convertible notes had $96.3 million principal outstanding: $10.0 million under the secured Deerfield note bearing 9.75% interest and $86.3 million of 5.50% senior convertible notes due 2021. The balance sheet reported convertible notes, net, of $92.3 million. Deerfield principal is due in installments in 2018 and 2019, with the remaining balance due February 2020; the 2021 notes mature February 2021. No balance was drawn under the $1.1 million line of credit, which matured January 31, 2018. Liquidity and debt service remain significant considerations.
Changes, outlook and material risks
- Operating expenses for the first nine months fell $1.4 million year over year, as lower G&A and the absence of 2016 severance more than offset higher R&D costs. Q3 2016 included $3.0 million severance expense related to workforce reduction and deferral of commercial operations.
- In September 2017, the FDA deemed the amended Apadaz NDA complete after the formal dispute process and set February 23, 2018 as the expected action date. Approval, including abuse-deterrent labeling, was not assured; the prior NDA received a complete response letter over labeling of abuse-deterrence study results.
- Pipeline milestones included KP415 pivotal efficacy data and potential NDA submission in 2018; KP484 pivotal efficacy data and potential NDA submission in 2019; and expected 2018 human proof-of-concept data for KP201/IR and KP511 candidates. These are company projections, not guaranteed outcomes.
- Management expected continued losses and rising development expenses, and anticipated needing additional financing. Equity or debt financing could dilute shareholders or impose restrictions; collaborations could require surrendering valuable rights.
- Key risks include clinical and regulatory failure or delay, inability to obtain abuse-deterrent label claims, controlled-substance regulation, reliance on third-party and sole-source manufacturers, competition, and uncertain reimbursement and commercialization prospects. The filing states the company had no off-balance-sheet arrangements.
- A shareholder class action concerning alleged omissions and misstatements in IPO offering materials remained at a preliminary stage; the company could not predict its timing or outcome and had made no contingency accrual at September 30, 2017. The filing also reports that Nasdaq listing compliance, after a September 2017 notice, was regained later that month.
- Management concluded disclosure controls and procedures were effective as of September 30, 2017; no material change in internal control over financial reporting was identified during the quarter.
Important facts for investors to verify
- Confirm the registrant identity: this 2017 filing is for KemPharm, Inc., despite the Zevra Therapeutics metadata.
- Track the FDA’s February 23, 2018 Apadaz action and the scope of any approval or abuse-deterrent labeling.
- Reassess cash runway against actual operating burn, clinical costs and financing availability; management’s runway estimate extended through Q2 2019.
- Review debt payment terms, interest burden, conversion and dilution exposure, and Deerfield’s transaction consent and repayment rights.
- Monitor clinical milestones, manufacturing supply, the IPO-related litigation and continued Nasdaq listing compliance.