Overview
KemPharm (KMPH) is a clinical trial-stage biotech company focused on developing pain medications that are abuse-deterring. The company is preparing for its IPO, which could raise in excess of $50 million to further trials and research. KemPharm's general premise is to utilize a proprietary drug development technology that is abuse-resistant. The company will not only be able to create versions of widely used pain drugs, but it may also be able to patent its technology and generate revenue from licensing and future partnerships. The company's IPO comes at a time when attention towards prescription drug abuse is highly scrutinized not only in the media, but also by healthcare regulatory agencies and insurers. The current market value of just over $200 million leaves plenty of upside potential for early-stage investors.
The Pipeline
(Source: KemPharm S-1)
KemPharm is developing several drugs using its proprietary technology. The company currently has 3 candidates focused on widely used and abused prescription pain medications. It is also exploring deploying its technology for commonly abused drugs outside the pain-sphere, including drugs for CNS disorders and ADHD. The pipeline represents a significant proportion of prescription drugs.
Currently in early trials, KP101 has effectively shown bioequivalence to its widely used counterparts. This effectiveness is good news for approval and marketability. Unless the drug ends up causing unforeseen side effects, the likelihood of approval is higher, because it is piggybacking on other drugs.
(Source: KemPharm S-1)
The Value Proposition
KemPharm's value proposition is that the base opioids used in the drug are much more difficult for users to abuse. The thought is that the difficulties will deter users from starting to abuse, and will reduce the availability of abuse. The key to success, if approved, is selling these drug benefits to insurers to provide coverage and doctors to prescribe. One potential key to KemPharm's sales pitch would be the "abuse-resistant" labeling. However, the value propositions also face a few key threats. First, competitive pricing may threaten the viability of the drug. If the company cannot price the drug competitively with its counterparts, insurers and patients may elect to avoid the more expensive option. Additionally, new laws and anti-abuse enforcement activities may threaten the need for abuse-resistant drugs.
(Source: KemPharm S-1)
Finances
KemPharm spent about $16 million last year on administrative and research & development expenses. The company is projected to have almost $60 in cash and equivalents after the IPO. The IPO capital should help keep the company solvent and operating for a few years. The biggest concern is a sizable debt obligation due in a few years. The $17 million obligation could threaten the company if it has not begun generating revenue by then.
(Source: KemPharm S-1)
Risks
KemPharm faces three key risks:
1) Regulatory
Regulatory risk not only includes approval of the drug, but also the fact that current law enforcement may prove effective in deterring abuse.
2) Competition
The company is going after drugs that are both name-brand and generic. Intense competition could threaten the business both through pricing and through changing market use patterns. Competition could force the market towards drugs that KemPharm does not create a version for.
3) Marketability
By the time KemPharm has a drug ready for market, will it be relevant and/or profitable? KemPharm fails to address this key point in its IPO filings. The company is creating a noteworthy product, but its ability to actually convert these to meaningful sales is very unknown. Investors should be very aware that just because there is social influence behind the drug doesn't mean it will generate sales.
Summary
There is a significant social factor that will not only help push these KemPharm's drugs through approval, but will also be a critical selling point behind the drugs. Many unknowns still exist about the future potential of these drugs, and investors should assess if the proposed IPO valuation represents enough upside for the risk their portfolio will have to take. If investors assume the current market will maintain status quo over the next few years, and if KemPharm's pharmaceuticals get approved hiccup-free, then the investment will have significant upside.
