By Jake King
Shares of Ampio Pharmaceuticals (AMPE) were on a tear in the past four weeks, climbing from $3.39 at the end of December to a recent high of $5.00 at the beginning of last week. But on Tuesday, Jan. 22, shares began retracing, and we expect the correction to continue as Ampio's valuation has reached unsustainable levels considering the company's capital need and "pipe dream" development programs.
Ampio develops a number of clinical compounds, all of which are previously approved drugs being "repurposed" for new indications. While the strategy itself shouldn't be discounted entirely in biotechnology, Ampio's lead candidates are more hype than substance, cast aside by other biotech firms for lacking commercial viability and already available as cheap generics. Institutional ownership in AMPE is negligible, suggesting that smart money on Wall Street has no interest in putting skin in the game -- only three institutions own more than 1% of AMPE's shares outstanding.
But perhaps most importantly, the company's current cash balance is insufficient to fund operations beyond 2013, and Ampio will likely move to raise additional cash through a dilutive equity offering within the next few months. Furthermore, a large number of shares owned by members of Ampio's management team were unlocked at the beginning of January, in tandem with the stock's rally. If management sees what we see, we wouldn't be surprised if insiders begin selling, the negative connotations of which and shares flooding the market will put pressure on the stock. Rather than rehash the Ampio "product pipeline" story in its entirety, which other authors have done quite thoroughly, we'll instead focus on the company's near-term economics.
Despite a capital raise just six months ago, Ampio will need to execute another financing just to continue operations through 2013. In July of last year, Ampio completed an equity financing that grossed $16.9M, bringing the company's cash position as of Sept. 30, 2012, to $20.3M. Ampio has consistently burned around $2.4M quarterly, suggesting that as of the end of 2012, Ampio had roughly $17.9M in cash on its balance sheet. However, an 8K filed by the company on Jan. 25, 2013, revealed that two pivotal trials set to begin early this year will cost $12.8M over the next 11 months. The trials -- for candidates Optina and Ampion -- will both run 12 weeks (slightly longer with enrollment and analysis), suggesting that the lion's share of additional expenses will occur in the first half of 2013.
A $2.4M quarterly cash burn plus $12.8M in additional trial costs means that without another capital infusion, Ampio will conservatively be coming into the second half of 2013 with approximately $6M on the balance sheet. And worse, the company would be expected to run out of capital around the end of Q3 2013. That's cutting it awfully close. Therefore, we expect Ampio to will be looking to raise capital through an equity financing within the next few months (note that the company has approximately $53.7M left on its shelf registration). Not only does that mean dilution, but Ampio's last two financings were priced at 20% and 24% discounts to market. Those discounts continued to pressure the shares for some time afterward given the lack of enthusiasm for the company's technology.
Management, however, is out making the case that Zertane, the company's drug candidate for the treatment of Premature Ejaculation (PE), is on the verge of being acquired, and will likely tout the potential for a quality upfront payment if a deal is reached. CEO Michael Macaluso repeatedly alluded to a Zertane divestiture during the recent Noble Financial Capital Markets Conference, saying that "we believe Zertane is going to be leaving our portfolio.…" and that "we're going to be out of the sexual dysfunction business here very quickly." But the odds of large pharma taking interest in Zertane are slim to none.
As others have highlighted, Zertane is little more than repurposed, low-dose Tramadol, an analgesic that's widely available as a generic -- on the cheap. But Ampio points out Zertane's "distinctive non-standard dosage and formulation" as key reasons to quell generic concerns. Dosage of 62mg and 89mg certainly are non-standard, but it's hard to imagine physicians prescribing Zertane when they can look to the 50mg Tramadol tablet for $0.30 a pill, even if Zertane is available as an orally disintegrating tablet.
To top it all off, development of Zertane, then known as BVF-324, was terminated by BioVail (now part of Valeant [VRX]) in 2010 due to a lack of commercial viability and slower than expected trial enrollment (a direct indicator of market viability). Ampio picked up the drug for $2M in 2011, hardly the price that a potential blockbuster should fetch. Large pharma are very unlikely to have interest in this rebranded Tramadol, and if Zertane leaves Ampio's pipeline anytime soon we believe it will be under third-rate conditions, and not a lucrative large pharma deal. Because this kind of drug, if successful, would most certainly take a large marketing effort, one that we believe only big pharma could achieve. Zertane's opportunity in P/E should be seen as a dud until proven otherwise.
Ampio's pipeline needs validation before we're believers. We've already discussed Zertane's slim shot at commercial viability, but the rest of Ampio's pipeline will also require further confirmation before these assets attract interest from serious investors. Diketopiperazine, called Ampion, is a possible anti-inflammatory molecule present in Human Serum Albumin (HSA) that Ampio is evaluating as a treatment for osteoarthritis of the knee. The drug candidate has been through a single 102-patient trial that ran in Australia -- odd for an American biotech company -- but the FDA has yet to sign off on an Investigational New Drug (IND) application, which will allow the company to move forward with a planned pivotal trial.
Interestingly, the FDA originally wanted to see pre-clinical data for the compound, but Ampio argued that as a biologic, animal testing (cross-species) would be ill-advised. The FDA apparently backed down, and Ampio anticipates that the agency will have no issues with an IND, guiding for a pivotal trial to begin in the early part of this year. According to Ampio, the 12-week studies will test 800 previously untreated patients and 800 patients who've failed standard steroids, and will be completed in Q3 2013. If results prove positive, that trial could support a New Drug Application with the FDA.
Optina, Ampio's most advanced drug candidate, is a treatment for diabetic macular edema (DME) that's also been through a single early-stage clinical trial, this time in Canada. Again, it's disconcerting that Optina is simply a low-dose formulation of danazol, a steroid that's been around for 40 years and is now available generically. On Jan. 22, Ampio announced that the FDA accepted the company's IND for Optina, and that it would commence enrollment of a 12-week, 450-patient clinical trial in the first quarter of 2013. The FDA allowed Optina to utilize the 505(b)(2) approval process in August of 2012, permitting the drug to reach approval on only a single trial due to its existing safety record.
Nevertheless, even if Optina reaches the market, we see generic availability as a detriment to potential sales. A full analysis of these two compounds is beyond the scope of this article, but both Optina and Ampion carry significant clinical and commercial risk. Importantly, we believe the company needs to address its financial runway before clinical trial results for these compounds are available.
Management share lock up has expired, creating risk around significant insider selling. Following increased visibility and criticism in the middle of last year, Ampio CEO Michael Macaluso and CSO Dr. David Bar-Or extended lock-up restrictions on the sale or disposition of their AMPE common stock through Jan. 1, 2013. Collectively, the executives own 4.7M shares, almost 13% of Ampio's 37M shares outstanding. Future insider transactions pose a risk to AMPE, and assuming that management sees the same risks we do -- potential for a capital raise and uncertain clinical trial outcomes -- insiders may begin selling shares on the open market. The negative connotations that would accompany insider transactions will validate investor concerns, pressuring Ampio's share price. Most of these shares have been locked up since 2011, and AMPE closed in on its 52-week high just this past week -- what better time for executives to book a quick profit?
Bottom line: Capital needs will weigh on AMPE in the near term, driving the stock lower. As outlined above, if Ampio moves forward with both of its planned pivotal trials, the company will be in desperate need of cash in the second half of 2013, and we doubt management will want to cut it that close. Most likely, necessary capital will come in the form of an equity raise in the first half of the year, despite Ampio's best efforts to sell or out-license Zertane. In addition, we see Ampio's "cost-saving" and "repurposing" strategy as little more than an attempt to cut corners.
The company's clinical trials to date have been conducted anywhere but domestically, a questionable methodology and a clear red flag for biotech investors. While Ampion and Optina have a shot at making it through the approval process (the company reported favorable Optina results after taking patient BMI into consideration, which has continued to fuel skepticism), we're not yet convinced of commercial viability. But for the time being, Ampio's ability to meet its financial obligations in 2013 remains our key concern.
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