Zevra Therapeutics, Inc. Q3 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the KemPharm Third Quarter 2021 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. And I'd like to hand the conference over to your first speaker today Jason Rando with Tiberend Strategic Advisors. Sir, please go ahead.

Good afternoon, and thank you for joining our call today to discuss KemPharm's third quarter 2021 financial and corporate results. Before we begin, I would like to remind our listeners that remarks made during this call may contain forward-looking statements that involve risks and uncertainties and are subject to changes at any time, including, but not limited to, statements about KemPharm's expectations regarding future operating results. Forward-looking statements are made pursuant to the safe harbor provisions of the federal securities laws and represent management's current expectations. Actual results may differ materially. KemPharm disclaims any obligation to update or revise its forward-looking statements, except as required by law. More complete information regarding forward-looking statements, risks and uncertainties can be found in KemPharm's filings with the SEC, which are available on KemPharm's website under the Investor Relations section. Speaking on today's call will be Travis Mickle, KemPharm's President and CEO, and LaDuane Clifton, CFO. Following the remarks, there will be a question-and-answer session which will include responses to the questions that were submitted during the past week. With that, it is my pleasure to introduce Travis.

Thanks, Jason, and thanks to everyone for joining us on our call today. The third quarter was certainly a big and transformational quarter for the company. Our biggest news, of course, was the launch of AZSTARYS. As most of you are very focused on the launch and the near term here, while we can't give a lot of details based on our agreement with Corium, we are certainly excited to share what has been passed along: within the first 100 days into the launch, they now have access to over 50 million lives that are covered by both commercial and Medicaid insurance. In my experience, that has been a tremendous win in the early days of the launch. That’s a remarkable achievement in such a short amount of time, and it certainly speaks to the Corium team's deep experience in the managed market space. A highlight recently and a look forward: we have the SDX trial that got underway in Q3 and continues to proceed, and we still expect to have data available before year-end for that particular trial. From that data, we will provide more detail on the clinical development path for SDX or SDX-related products and indications. Again, another great quarter financially. LaDuane will report the details there, but revenue based on our consulting fees continues as well as our continued small spend until we have the resources and the budget available for our development programs. And last but not least, as many of you have already seen in the press release, we continue to advance strategically forward as a company. With our Board, I welcome today LaDuane and Rich Pascoe, who has joined us today as our Executive Chairman. He's here to help guide our organization in the future. He's joined us here on this call, so Rich, I will turn it over to you if you want to say a few words.

Thank you, Travis. I appreciate the opportunity to address the shareholders today. I just want to express my gratitude to the Board and to the organization for being able to step into this new role as Executive Chairman. As I think everyone can attest, 2021 has truly been a transformational year for KemPharm. The team has done a remarkable job of setting in place the foundation for a strong company as we move forward. We have much to celebrate with the launch of AZSTARYS in particular, but the Board and I believe there's more that we can do to build value for shareholders. My role here is to come and help assist the management team in that effort. Our goal is truly to create opportunity for our shareholders to grow, to build value in the company, and to do that by building a profitable, fully integrated biopharmaceutical company with multiple assets that we can take into the market. Travis, the Board, and I are all committed to creating that value for our shareholders. We believe that by continuing to build upon the successful track record that the company has in developing assets, getting those products approved by the regulatory authorities and into the marketplace is critical to our long-term success. As we look forward, we'll continue to find ways to retain the value of those assets and be able to deliver that value back to shareholders. I'm pleased to be part of the organization now in this new role as Executive Chairman. I expect that this year will continue to be a banner year for KemPharm. Moreover, I believe that as we look forward into 2022 and beyond, we'll continue to grow the organization in a way that delivers value for all of our stakeholders, including patients, the physicians that treat those patients, our employees, and importantly, our shareholders who have been with us and supporting us. We hope they continue to support us in the future. With that, Travis, I will turn it back to you.

Thanks, Rich. I agree wholeheartedly. One other point that we updated in the third quarter: Tamara Seymour joined our Board of Directors. That's been in process for months now, and she is a great strategic addition with experience in transactions, an accounting and CFO background, and will serve as Chair of the Audit Committee, which I know LaDuane is pleased about. Not that the previous chair had any issues; this is simply a strong addition to the Board. Turning now to expand upon what Rich introduced: the KemPharm value proposition is about where we sit today, and I think this will change and adapt. We have two approved and partnered products on which to build a company focusing on CNS neurological diseases, and we are leveraging our LAT platform technology to create additional opportunities as well as looking outside our own walls for the first time in our existence. For those who aren't familiar with the company and the technology, I'll spend a couple minutes at a high level. The LAT prodrug technology is a fairly simple concept: we take an FDA-approved product that has sub-optimal properties—poor PK, poor absorption, poor metabolism—and attach to it a ligand to get a new molecule. That new molecule can have composition-of-matter patents and sometimes new chemical entity status. Once administered as directed, the same active drug comes back off, so you still have the same effective product, which often enables a 505(b)(2) regulatory path. This has been the basis for which AZSTARYS and APADAZ were developed and approved, and any SDX-containing product would follow a similar path. Briefly on our history and where we've been: this is the foundation on which we'll financially do what we want in the future. AZSTARYS and KP484 have already been partnered—Gurnet Point Capital is the financial partner and Corium is the commercialization partner. Gurnet Point has a number of different milestones; we've highlighted these in the past. We have a number of SDX candidates. Gurnet Point does have a right of first negotiation, which is triggered after we have first proof-of-concept trial in man. After a 150-day window, it flips to a right of first refusal on any valid third-party offer and terminates upon NDA acceptance. So if we decide to pursue our own programs, we would do so without hindrance from GPC after those conditions. Turning briefly to the product: AZSTARYS is indicated for the treatment of ADHD in patients six years and older—there is no upper age restriction. It can be taken with or without food, and the capsule can be opened and sprinkled on applesauce or water. We are hearing benefits around onset and duration, and one aspect resonating more than we initially assumed is that in our clinical trial we saw no changes in height and weight over the course of a year. Many parents and physicians are very concerned about growth effects, so that observation is meaningful and is captured in the label and is something Corium is messaging. Turning now to the commercial launch: as I mentioned earlier, Corium has made progress on managed care; commercial and Medicaid lives now exceed 50 million. The momentum builds and the product is receiving positive receptivity from patients, physicians, providers, and payers. Corium estimates over 50 million lives and believes this will grow over the coming months. Their launch plan focuses on coverage first, which makes sense—you need coverage to get paid. Launching in the COVID environment is challenging because of changes in how physicians accept sales calls and introductions, but Corium has figured out ways around these challenges. Wins with payers are a key component of AZSTARYS' future. We'll keep passing along the updates Corium allows us to provide and we're tracking what they're doing as best we can. Looking at the SDX opportunity: SDX is the prodrug component in AZSTARYS, roughly 70% of the product, and it's the only Schedule IV methylphenidate-based product—others are Schedule II. This is a major advantage for prescribers, patients, and pharmacists: Schedule IV is more convenient for refills and perceived to be less abusable. It has a unique PK profile that allows gradual and continuous release throughout the day, and there is no generic equivalent; substitution is not allowed by law in most states. We recently initiated a trial with SDX under our KP879 IND. KP879 is our program for stimulant use disorder, at least where we want to investigate that indication. The study is looking at pharmacokinetics, safety, and some exploratory effects of SDX at higher doses. Data release is still on track for the end of the year. The goal with this study is to inform the clinical development path for SDX and help identify indications to pursue first, such as SUD or idiopathic hypersomnia (IH), and others where methylphenidate has historically been used. With that data in hand, we'll make business and clinical decisions based on clinical risk (likelihood of success), development risk (challenges in the development path), regulatory risk (first-in-class products can face a more difficult path), commercial opportunity (market potential and value), cost of development, and time to approval. SUD is a more challenging indication that may take longer to approval, so all of these factors will inform prioritization. Strategically, we also want to avoid stepping on our own toes with AZSTARYS, avoid overlap with other products, and consider rights of first negotiation and refusal. At this time, I'll turn the call over to LaDuane Clifton, who will provide a financial update. LaDuane?

Thank you, Travis, and good afternoon, everyone. For the third quarter, we reported revenue of $2.0 million, which was derived primarily from service fee revenue. This is the same service fee revenue we've been reporting to you, and it's being earned under consulting arrangements with Corium that continue through March of 2022. KemPharm’s net loss for the quarter was $1.8 million, or $0.05 per basic and diluted share, compared to a net loss of $3.0 million, or $0.68 per basic and diluted share in the same period in 2020. Net loss for Q3 was driven primarily by our operating loss of $2.2 million, which was partially offset by a non-cash value adjustment income of $300,000 related to derivative and warrant liability and some net interest income of about $100,000. Net operating loss of $2.2 million for Q3 of 2021 was a change of about $1.0 million compared to the prior year, which was primarily due to increases in operating expenses period-over-period. That increase was driven by R&D expense increases of about $0.5 million due to the ongoing SDX study, which Travis described, and an increase in other G&A expenses of about $0.5 million. Turning to the balance sheet: as of September 30, cash and cash equivalents were $131.5 million, which was a decrease of about $800,000 compared to June 30, 2021. Our burn rate has been a little better than what I've told you previously, and we continue to be prudent and manage our spending wisely. As of September 30, total shares of common stock outstanding were 35,317,313 shares, and fully diluted common shares were about 46.5 million shares, which includes warrants outstanding of 4.2 million. Our financial position remains strong as a result of the restructuring and recapitalization we completed earlier this year. It's healthy with a cash balance that provides us with the flexibility to consider the best opportunities both internal and external to leverage our position and drive growth in shareholder value. This solid financial position derived from our restructuring led to the recently announced uplisting to the Nasdaq Global Select Market. The Global Select Market, which is comprised of only about 1,450 stocks, is recognized as having the highest initial listing standards of any exchange and is considered a mark of distinction among public companies. In order to qualify, companies must meet strict financial and liquidity requirements, as well as corporate governance standards on both an initial and a continuing basis. Strategically moving up to the Nasdaq Global Select Market provides the opportunity to introduce KemPharm stock to a new echelon of potential investors, particularly those who only consider investments in companies on that exchange. This is an exciting development and one that we expect will provide benefits both now and in the future. With that, I'll return the call back to you, Travis.

Thanks, LaDuane. Just looking ahead and wrapping up, we're very encouraged with the Corium launch. We believe they are deploying their sales team and their efforts in the right places, and their focus on managed care and access is the highest priority. Early days, you want to make sure that scripts that are written are filled and there's no backlash to the physician which causes unnecessary difficulties. We do expect to have the data from the SDX trial before year-end and to be able to provide a pathway forward based on that data. Our cash on hand and potential for future revenue provide us with a unique and strong position to act strategically—to think beyond the walls of KemPharm and to consider internal and external opportunities. Beyond AZSTARYS, we see unique opportunities with SDX as the lead product candidate. We should be able to outline plans as early as January, perhaps early January following the data, and then ongoing evaluation of non-SDX candidates and external opportunities will continue. Cash and future revenue and the data we have will support those efforts. We're going to now turn to questions we received from analysts and shareholders. This may be the last quarter we do it exactly in this pre-submitted format; hopefully we'll do some live analyst questions going forward, but we'll still take and try to answer investor questions directly.

Yes. So thanks, Travis, and thank you everyone who submitted questions prior to the call. We'll start stepping through them. The first question is: given the favorable DEA Schedule IV for SDX, when will we know the details of your new expanded development plans for KP879 or a different product candidate using SDX as its sole API that you hinted at months earlier?

I think we've covered this a number of times, but just for clarity: anticipate having the data for the trial by the end of the year, which will allow us to hone in on the plan and prioritize which products to advance. SDX gives us multiple opportunities, and we want to identify which one or more of those can build a franchise around this unique SDX product.

Okay, good. Thank you. The next question: what has the early launch taught you about the receptiveness of the market towards AZSTARYS?

Indications from Corium, including the update provided in our press release and here on the call, suggest the rollout is going very well and according to their expectations. Corium’s plan is smart and being carefully orchestrated to maximize resources toward near-term opportunities that will build a foundation for sustained success. Again, we're very encouraged by the recent news and we'll see where prescriptions track in the coming months.

Okay. The next question: at what point in development must Corium act upon its first Right of Negotiation or lose that right if it doesn't act by then? I'll take this one. Essentially, initially for SDX-based products there's a Right of First Negotiation. When we have a new product candidate and we run a study and have proof-of-concept data available, we must provide it to Corium and they get a 150-day evaluation period to consider the data and decide if they'd like to license the product or make an offer to do so. KemPharm does not have an obligation to accept an offer from them at that point in time. If terms aren't agreed, the process can continue or not, depending on the strategic considerations. That right remains until the point when for that product candidate an NDA has been accepted, at which point the Right of First Negotiation ends. Regarding a Right of First Refusal, think of it as coming second in succession: it's triggered only if there's a bona fide third-party offer to license a product candidate covered by the agreement. In that case we must provide the terms of such an offer to Gurnet Point Capital, and they have a 30-business-day opportunity to evaluate and decide if they want to match the terms and step into the shoes of that third party and license the product candidate. That right again does not exist following NDA acceptance. Once they've decided not to exercise a ROFR, we can move forward with that third party with no additional rights for Gurnet Point. This process can happen more than once since there could be more than one SDX-based candidate. In particular with the Right of First Negotiation, KemPharm maintains a lot of flexibility to accept only offers we think are in the best interest of shareholders and our strategic objectives.

One point of clarity: the ROFR is not bound in time to the ROFN; it could be triggered at any time a valid third-party offer comes in.

Yes, good point. That takes us to the next question: when do you think you might have enough clarity on product uptake to guide on when you may receive the first sales milestones?

We continue to guide to initial royalty milestone sales occurring in 2022, but beyond that we are unable to provide more clarity. Corium is driving product penetration and controls details about rollout communications.

I would add that as you watch payer access grow, that's a good indication things are proceeding. But predicting when that translates into specific sales milestones is difficult. We'll keep you posted.

Correct.

Okay. The next question asks about the ongoing review of the SDX data: is any efficacy being measured in the proof-of-concept SDX trial currently going on, how much have you shared with Corium and do you continue to share with them? Also, have you had any additional discussions with them on the data set?

As I discussed earlier, the ongoing trial is designed to investigate several properties of SDX, including pharmacokinetics at higher doses, safety, and exploratory efficacy-type effects. This data will inform what to prioritize and what other indications may be possible. Our initial early PK data matched expectations—there were no surprises—but now we must pair that with pharmacodynamic and safety data to decide which clinical path and indication to advance first. We keep Corium well informed; they know what's going on. Once we have proof-of-concept data for any clinical candidate, we'll provide it to them, which would then initiate the ROFN/ROFR process.

Okay, thank you. The next question: based on current information, when do you think you will be able to file an NDA for idiopathic hypersomnia (IH) and stimulant use disorder (SUD) indications? Is there any special designation possible for either of those programs from the FDA?

Timing will be based on the full analysis and available data; without that it's difficult to determine exact NDA filing timing, which is usually a few years out. As for designations, both spaces could be eligible for Fast Track designation. Breakthrough Therapy designation is a possibility depending on clinical data. For IH, an orphan drug designation is possible since it's a rare disease and other products have received that designation for IH.

Okay, great. The next question: what impact could AZSTARYS have on potential future SDX products, both from a development and commercialization standpoint?

AZSTARYS should positively impact the development of future SDX products because it will generate clinical and CMC data that can inform future programs. From a commercial standpoint, we must be strategic: we don't want to step on our own toes or overlap indications that compete with AZSTARYS, especially rare-disease indications that could command higher price points and where AZSTARYS could encroach. We want to ensure our lead program is distinct and that the markets do not conflict.

Okay. The next question: the last call indicated difficulty in receiving accurate numbers from insurance companies. When can a real-time, holistic report on insurance companies approving scripts or sales for AZSTARYS be anticipated? Are the current script numbers reported by Symphony or available on Bloomberg accurate?

There are two parts to that question. Corium provided the payer access answer—over 50 million lives covered across commercial and Medicaid. The second part concerns script-tracking mechanisms, which rely on samples and estimations and can be subject to large errors when volumes are low. Those tracking sources become more reliable as prescriptions increase. We're not fully at that point yet, but we're getting there—particularly given the access number Corium provided.

These difficulties with the tracking data are related to the process of gathering information that Symphony and others use and their assumptions, and not specifically related to AZSTARYS itself. We're all looking forward to when we can have more robust data. Actually, this takes us to the last question: now that you've restructured the balance sheet and have a solid cash position, is KemPharm considering any next possible steps such as a share repurchase program? I'll take that one.

So it sounds like money—you can take it.

Yes. I think this is an interesting question and we've received several similar inquiries. The best way to answer is to focus on our strategic rationale for restructuring the finances and strengthening the balance sheet. Ultimately, this was done to fuel KemPharm's long-term growth by providing capital to invest not only in our current business and ongoing development activities but also to allow us to consider external opportunities. All considerations are designed to answer: how can we best invest to create shareholder value? We're always focused on that. Does a share repurchase program meet those goals? At this point we haven't announced one, and I'm not certain it does, but we will always consider the right way to return capital to shareholders. We have a lot of good opportunities in front of us to consider.

I'd like to add a few thoughts. If you look at the company right now and the value proposition we have: we have an excellent ADHD drug that's generating revenue for the company. That's rare in this business. The company has a strong track record on NDA approvals—it's unusual for a small company to get one drug approved, and we have two. We have a capital-efficient management team and organization, and a platform technology that can generate new drug candidates and serve as a life-cycle management opportunity for drugs we develop or bring in. We can do better as an organization. We know how to get drugs approved. We have a strong balance sheet and a capable team. The Board is focused on building out a pipeline that extends beyond what's currently on the table, whether through internal resources or external opportunities. If we can do that in a disciplined way and expend resources thoughtfully, we can build a pipeline, retain value in assets, attract strategic interest, and grow the organization and stock price. That's why I'm here and why the Board supports this effort. We're in a position where the company is strong, and we can do more. We'll be thoughtful and strategic in our approach, with a focus on creating shareholder value. I want to express my gratitude to the team and our shareholders who have supported us since day one. It's our intent to ensure everything we do going forward is focused on creating value for you.

Thanks, Rich and Travis. That's the wrap and the end of the questions.

Yes. I don't want to say anything else because that was perfect. I am going to just end the call there. Thanks, Rich, and thanks, LaDuane. Thanks everyone for joining today.

This concludes today's conference call. Thank you for participating. You may now disconnect.