Ampio Pharmaceuticals (NASDAQ:AMPE) is a relatively new company. Its predecessor was founded in 2009, and through a series of transactions, found its way to the public markets in 2010. Ampio claims that it is in the “drug repositioning” business, which amounts to developing drugs in indications that haven’t been thought of before. This is a well-established pharmaceutical business model, and countless successful drugs have been developed this way.
Ampio has a pro forma market capitalization of roughly $133 million, estimated cash of $16 million and no debt, yielding an enterprise value of about $118 million. Ampio has three main drug assets, and I will give you my perspective on these product candidates. I have come to the conclusion that Ampio shares are not a good long investment opportunity, but instead a compelling short sale. My hedge funds have shorted shares of Ampio, and we believe that shares of AMPE will eventually trade at a market price of less than $0.50 per share.
Zertane is one of Ampio’s products. Zertane is a brand name for tramadol, one of the most popular drugs pain drugs of all time. Tramadol and extended-release tramadol are generically available. In my eyes, drug repositioning for generic products is a very difficult business. Somaxon recently attempted to “reposition” doxepin (selling it at lower doses than currently available) for insomnia and seems to have failed. The issue with repositioning products where the base molecule is generically available is the likelihood of therapeutic substitution or compounding at the physician and pharmacy level. There are exceptions to this, notably, Acorda’s Ampyra. The greater issue with Zertane, however, is the indication of premature ejaculation (NYSE:PE), a serious and quality-of-life impairing condition, but an unproven pharmaceutical market with a difficult regulatory pathway. Indeed, it is not clear to me that Ampio is interested in developing Zertane itself, as the company notes its strategy of pursuing “multiple licensing partners worldwide”. As someone who is in the market of pharmaceutical licenses (both buying and selling!), my prediction and opinion that no legitimate pharmaceutical company will consummate a meaningful license for Zertane (which I define as more than $5 million received upfront)are based on both experience and my financial interest. In my opinion, it simply is not economically viable to run a new clinical development program for Zertane, which we believe would cost at least $30 million (in addition to any potential upfront payment) and risk a weak product launch, regulatory failure or generic risk. We will see if Ampio secures a “meaningful” license. Without a license, I do not believe that development will proceed.
The Company’s next product is called Optina. I should stop here and mention that I am wary of companies that name their development-stage programs with brand names before FDA approval. This is an atypical approach which, in my opinion, displays a promotional character that does not speak positively to the Company’s nature. “Optina” is a low-dose danazol product. Danazol is a well-known steroid which is similar to a common hormone. Ampio is studying the effect of this drug to treat diabetic macular edema (DME). Again, as with Somaxon, it is very difficult and usually not worth the return to conduct an extensive clinical development plan for an already-approved and generically-available drug, in my experience. Most drug-repositioning creates value, in my eyes, when the drug is not-yet FDA approved. Drugs like Viagra, Tracleer and others were great repositioning stories which worked because they were not yet FDA approved. Once a drug is generic, physicians are smart enough to just use a lower dose of the generically available drug (if available). Payor pressures in the United States have increased this phenomenon to the point where even biologics that are clearly different, for example Lucentis and Avastin, are being substituted because they are “similar enough” to save money. There is no doubt in my mind that the same would occur if Optina were to ever move forward. The DME market is notoriously difficult, and I have not seen any evidence that Optina would be effective for DME. AMPE has presented data showing that low doses of Danazol (< 1 micromolar) do decrease endothelial permeability, but it is unclear if this will translate into clinical benefit.
Ampio’s last drug candidate is called “Ampion”, which is an interesting chemical, a diketopiperazine (a cyclic two amino acid conjugate). Ampion is in an Australian clinical study as a potential treatment for osteoarthritis of the knee. I don’t understand how this product would have anti-inflammatory properties and I’m not sure that AMPE can explain it: the company’s most recent investor presentation (dated July 2011) shows preclinical Ampion data as a potential treatment for multiple scelerosis or traumatic brain injury.
AMPE did disclosed data from the Ampion clinical study on October 26, 2011. In particular, the company stated: “At each study time point (6 hours, 24 hours, 72 hours) measurements of the difference in pain relief from baseline was greater in the group that included Ampion™, steroids and lidocaine than the group that included only steroids and lidocaine reaching a 37% better improvement at 72 hours for the Ampion™ group”. Aside from the awkward sentence structure, without knowing baseline status of the patients (beyond that it was “comparable”) it is very difficult to ascribe any meaning to this study.
I am wary of a two-amino-acid peptide having any enzymatic or autoimmune effect. Amino acids are so ubiquitous that a two-amino acid, in my opinion, “drug” is highly unlikely to have such a broad effect in inflammation, mutliple scelerosis, and traumatic brain injury. To suggest that Ampion a biologic is also, in my opinion, unrealistic. Someone should tell Ampio that biologics should be biologically derived, e.g. made by bacteria or other living cells. I suspect, but cannot know for certain, that Ampion is created using simple chemical methods.
I am, in general, wary of Ampion’s business practices and properties. The Company, so far, has not responded to our (numerous) requests to communicate with us. Our fund frequently communicates with the senior management teams of many large pharmaceutical companies and small biotech firms---who are typically quite eager to discuss their companies---so we were surprised that Ampio has so far refused communication with us. Next, there appears to be very few institutional shareholders with substantial holdings. In fact, it appears there are no institutional shareholders who own more than 1% of Ampio’s shares outstanding. This is distressing to me. In this era of 8,000 hedge funds, it is rare that a good buy goes unnoticed without someone pouncing on it. The CEO of the Company does not appear to have any experience in the pharmaceutical industry, other than Ampio and its related predecessor companies. Only one of the named executives has spent time at an actual drug company—this is not the experience I like to see when I invest in emerging pharmaceutical stocks. There are countless executives available to spearhead new ventures like these and shareholders usually install experts along the way. While it is certainly possible these people have what it takes to succeed, I still feel that it is unlikely Ampio shares are a reasonable investment opportunity. Various other occurrences, including the Company’s response to an “anonymous short seller” publication, make me skeptical that Ampio is an undervalued stock. If I were the largest shareholder of Ampio, I would advise the Company and its management team to take the opportunity to buy Ampio stock at a discounted price as a sign of strength that their business is undervalued. An ambiguous threat against a blogger exercising his First Amendement rights is not befitting a $100 million company. If anything, Ampio’s recent press release about the short-seller publication prompted me to increase my position and to write my own article.
I hope this review of Ampio has been helpful. I believe that one can generate a substantial return by selling-short Ampio stock, but I also hope that anyone who is long Ampio stock takes a second look at what they own and thinks about trimming their position of this seemingly overvalued equity.
Disclosure: We are short AMPE and may reverse, hedge, liquidate or otherwise modify our position at any time without notifying SeekingAlpha.
Disclosure: I am short AMPE.