KemPharm's Best Strategy - Manage Risk By Reordering KP415, KP511, And KP201/IR

| About: KemPharm (KMPH)

Summary

Investors desperately need more clarity regarding the discussions around Apadaz, as the market is currently pricing in no chance of Apadaz approval.

KemPharm should re-evaluate its pipeline priorities in the context of the labeling issues centered around Apadaz.

KP511 or KP415 might present a less risky and potentially larger opportunity than the current next drug up for an NDA filing, KP201/IR.

As of today, the market believes that the current evidence points to an unbridled FDA fiasco at KemPharm (NASDAQ:KMPH): that the FDA simply has no wish to engage KemPharm in any sort of constructive dialogue and that Apadaz as well as the whole idea of prodrug abuse-deterrence is doomed to fail, at the hands of the FDA.

I would like to recognize that the CEO, Travis Mickle, is a very talented man who invented and developed Vyvanse while at New River, and managed to start and maintain a biotech company over the span of 10 years (from 2006), enduring numerous trials and tribulations. I have posted several early conference call transcripts from 2015 and early 2016 -- they project a very confident and intelligent management, both in the prepared statement section and in the question & answer section.

However, ever since the day of the advisory committee meeting, the level of detail has significantly suffered. Perhaps one reason is that the extraction studies, one point of contention, have trade secrets that must be protected (that is: what each solvent and temperature is). However, companies are not required to keep everything secret and investors are extremely wary of companies that do.

I find that many companies that have difficult discussions with the FDA, like KemPharm or recently Chiasma, just begin to provide fewer and fewer details, which leads to a spiral of distrust between the company and many of its investors, often leading to, down the road, much poorer financing options.

A company would often suggest that they would like to maintain a good working relationship between itself and the FDA when citing the lack of detail on ongoing discussions. However, revealing specific substantive disagreements and issues -- and I think Mr. Mickle would agree -- does not harm a relationship that is based on professionalism, such as what we must expect from an organization that safeguards the country's drug safety system, the Federal Drug Administration (FDA).

In the Q1 2016 conference call, one sell-side analyst asked "Can you be a little bit more specific on the areas that you thought there was the biggest difference?" Part of the response was, "Sure, no problem. So I can't go into detail, of course, about what - maybe there may have been some differences of opinion."

Well, yes. There were a number of potential differences in opinion, and without the FDA explicitly and really specifically defining what it thought were differences or issues during the advisory committee meeting, then investors just wouldn't know. This is something that the company would know by talking to the FDA reviewers/managers, and clarifying each point.

Maybe, as investors, we don't really care too much about the details of this conversation with the FDA, as long as there are eventually results, and signs of progress. But, now investors are facing a potentially significant delay or nullification of Apadaz as a product, and just a great deal of uncertainty overall. Investors, who do own the company, need to know what transpired, keeping in mind the FDA's professionalism, in order to be confident in the regulatory process. I would like to know, for example, which potential extraction study issues may have been resolved, which remain, and whether the A03 study (where one cohort did have PK data tossed due to a lab error) was ultimately accounted for in the FDA's analysis.

It would also be helpful for Kempharm to clarify the timing and nature of the draft label amendments (the timeline of the FDA sending their draft labels, and of Kempharm sending new ones back), as well as to what extent the amendment that Kempharm sent last week was considered, if it were.

From what I understand, many of the early investors are Iowans, and a few large banks. Maybe there was an understanding there, though maybe some of these banks already sold by now. However, some more recent investors, as well as likely many of the older investors, inevitably are concerned by the lack of detail.

How this affects the company long-term is this: if there seems to be no way to get the abuse-deterrent labeling approved (without carrying the decision above the Division level), the company needs to adjust its pipeline strategy to refocus away from seemingly risky and difficult-to-obtain (regulation-wise) abuse-deterrence (KP201/IR) and into some of the other very promising products such as KP415 and KP511/ER.

Both of these products carry some very interesting properties beyond abuse-deterrence.

KP415

KP415 is discussed on Kempharm's website and was briefly covered in an earlier article. This methylphenidate prodrug's main feature would be 24-hour effectiveness for ADHD patients without potential heart-related side-effects of products like Strattera.

KP511/ER

KP511/ER is an ER prodrug of hydromorphone with two potentially very valuable properties. First, the ER version could reduce or prevent the typical constipation that some patients (perhaps 20%-25% according to one study) experience. Second, similar to KP201/APAP, it may greatly reduce overdose potential compared to hydromorphone alone, as tested in rats:

"We also observed that the study animals began dying from the increasing excessively large oral doses of hydromorphone hydrochloride, but never died from an equimolar oral dose of KP511. Based on the molecular structure of KP511, KemPharm believes it may be possible that the metabolic processes of releasing hydromorphone from the prodrug become saturated at excessively large oral doses. If confirmed by further studies, this could potentially mean that KP511 and KP511/ER may reduce the risk of oral overdosing by a unique mechanism that is inherent in the prodrug molecule itself."

In its April 2016 presentation, slide 35 shows this effect in rats. (slide 34 shows the abuse potential difference) At about a 14 mg/kg HM (hydromorphone hydrochloride) dose, the area under the curve or AUC (h*ng/mL HM) is about 100 for KemPharm's prodrug, versus about 750 for the regular hydromorphone. If validated in humans, this would provide an unequivocal overdose safety benefit (the main cause of opioid abuse deaths) compared against current hydromorphone and perhaps will serve as a replacement to some other pain medications. I'd note here that KP201/APAP had a very mild overdose benefit in humans which was not seen in rats.

At present, hydromorphone ER is relatively underdeveloped due to the high abuse potential, representing a $138 million market. The company has indicated that KP511/ER would more than likely use a physical abuse-deterrent formulation from another company to impart ER characteristics and extra tamper-resistant properties due to the large payload of extended-release drugs.

I would, however, suggest that hydromorphone as an IR drug may be a more approvable alternative unless the tamper-resistance is very solid and proven, and that there would be a more defined market for it -- 1.1 million patients in 2015.

KP511/IR vs. hydromorphone/IR bioequivalence data is on track to be provided this month in human proof-of-concept trials; KP511 will then be reformulated to an ER version using technology from a physical abuse-deterrent partner.

KP201/IR

KP201/IR, the next product slated for an NDA in Kempharm's pipeline, is simply KP201 (benzhydrocodone) without the APAP (acetaminophen). Stepping back a bit: the nasal route of abuse (snorting) means that a person puts crushed drug in their nose. Because the nose has porous membranes and many blood vessels, this represents a more direct/faster route to the blood than just swallowing a drug.

We do know that with KP201/APAP, the acetaminophen (APAP) causes some of the negative nasal effect to be diluted because (1) the pharmacology of acetaminophen cancels out some of the benzhydrocodone (APAP) effects, and (2) a large part of the drug ends up being ingested through the throat instead of going through the membrane in the nose, thus causing a less significant nasal adverse event profile. Without the acetaminophen, more adverse events would exist from the benzhydrocodone.

Drug Liking, an FDA standard when evaluating abuse-deterrence, is a subjective measure by the patient, and roughly a composite measure of both the patient's drug High and the adverse event profile. From the A03 study, both Drug Liking and concentration when snorted has been shown to be significantly lower compared to just hydrocodone (and potentially, hydrocodone/APAP). How much, though?

Do these adverse events from KP201 lead to a negative or zero Drug Liking as three, four, or five pills are insufflated? The A02 study was tested with two pills due to the difficulty of snorting much more (physical difficulty plus the immediate adverse events of the acetaminophen). Similarly, the A03 study looked at two pills, and generated a much-reduced but still positive Drug Liking in the first two hours. So, we do not yet know if more insufflated KP201 will lead to a plateau of a high, increased adverse event profile, and thus a negative or at least a lower Drug Liking. Since hydrocodone/APAP generics limit insufflation due to the presence of acetaminophen, then if Drug Liking is higher for just benzhydrocodone (KP201) at three, four, or more pills, the regulatory hurdle will be essentially impossible to pass.

A way to potentially mitigate this risk is to add some sort of irritating agent to the product, as Purdue attempted with Avridi (though, Avridi was not bioequivalent in the fed state).

Further, if (we don't know yet) the FDA considered that extraction-resistance was not good enough to add abuse-deterrent labeling, the extraction-resistance part may also be a problem, so the company will need to implement an extra extraction resistance technology into KP201.

Another risk lies in the rigid way some FDA reviewers examine data. For example, for KP201/APAP, the A03 study did have half of the patients (one cohort) evaluated without pharmacokinetic (PK) data due to botched lab measurements. Even though the valid PK data seems to have had an extremely low variability, the FDA tossed the cohort with the botched PK data in examining the p-value (or significance) of the exploratory Drug Liking over time measurements for the A03 patients. This achieved a p-value of slightly over .06. Variability in Drug Liking, as a very subjective measure, is much bigger than pharmacokinetic measures. If both cohorts had been used in the FDA's analysis, though, the Drug Liking-over-time p-value would have been under .05, passing the statistical significance hurdle of 95% likelihood of an effect.

From a rigorous mathematical standpoint, this kind of data tossing that the FDA may have done in its final analysis is inexplicable, but here it seems, perhaps, some bureaucratic mindsets kicked in. It's very difficult to fight such bureaucracy, and it simply represents a risk. So, the more moving parts, the bigger the risk.

In sum, although there are a number of beneficial qualities of just KP201 such as (1) no liver damage risk compared to combination products, (2) potential extraction resistance similar to KP201/APAP, (3) slight or potentially moderate overdose protection effects due to more significant saturation as seen with KP201/APAP, and (4) a much slower blood absorption rate compared to hydrocodone resulting in vastly decreased drug concentration and Drug Liking due to insufflation, there are a number of potential risks as well, as outlined above.

Summary

Currently, KP201/IR is slated as the next NDA, under the company's pipeline scheduling plan. However, if Apadaz's approval and abuse-deterrent labeling is significantly delayed, if labeling is much softer, or if Apadaz is abandoned, KP201/IR could present a less significant and/or more risky opportunity, in my opinion. I believe, and have suggested to the company, that in this case, KP201/IR would be a potentially very risky proposition in terms of regulatory approval and labeling, and that KP415 or KP511/ER (or /IR), which both could offer a very compelling reward for investors, with much less risk in terms of the abuse-deterrence question due to other differentiating features, should be moved up the NDA ladder to 2017.

Disclosure: I am/we are long KMPH.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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