He who knows, does not speak. He who speaks, does not know.
- Lao Tzu
White Diamond Research has been bearish on Ampio Pharmaceuticals (NYSE:AMPE) for awhile. You can see our report published on 1/9/18 titled "10 reasons Why We Remain Confidently Short Ampio Pharmaceuticals", and we still are confidently short AMPE. Our research leads us to believe that despite management's strong rhetoric to the contrary, no pharmaceutical company has any interest in acquiring or partnering with Ampio for its osteoarthritis of the knee drug, Ampion. In Ampio's latest conference call on 3/7/18, Ampio's CEO Michael Macaluso said the company will file a Biologics License Application (BLA) for Ampion. We believe the FDA will reject Ampio's BLA because in Ampio's pivotal phase 3 trial under SPA, Ampion failed to show benefit over placebo.
Ampio Pharmaceuticals recently had two conference calls, one on 12/14/17, and another on 3/7/18. Ampio's CEO, Michael Macaluso, spoke at length in both calls. Upon paying close attention, one can see that in the first call his tone was bold, euphoric, and focused. While the next call, on 3/7/18, he was evasive, insecure, and spoke of many different things. It's helpful to analyze the words used by the CEO in both calls as data points to assess the situation the company is in today.
Ampio has recently removed the recording of the 12/14/17 conference call a day or two ago after it put up its 3/7/18 call on its presentations and media webpage. We're not sure why it was removed, maybe it is trying to hide it, or maybe it has a policy of only having the most recent conference call on the site. Luckily, we had already transcribed both conference calls. You can view our transcripts of the conference calls on our website here.
The 12/14/17 conference call was all about partnership, partnership, partnership. There wasn't much talk of anything else. The company was excited about meeting the primary endpoints of its follow-up phase 3 trial after the previous phase 3 trial failed. We don't believe the company had any reason to feel it accomplished anything great, because:
Details on these issues and more can be found in this article.
Macaluso didn't go much into detail about what Ampion is going to do, but more about what kind of deal with big pharma it will make, since there are so many interested suitors, according to Macaluso. Keep in mind when you read these quotes, they were said almost three months (90 days) ago. And Ampio has since removed the recording of the call from its website. The following are some key Macaluso quotes from that conference call:
If you ask any pre-revenue bio CEO he'll say he has no interest in raising money, then as soon as he can he'll do it anyway. I'm going to tell you we'll do everything we can so we do not have to raise any dilutive capital.
I think we've had 18 pharma meetings so far, including a few this week. 55 companies worldwide have expressed interest, many of these were awaiting the outcome of this trial. I would expect that they'll all take a meeting now.
All of our options are open: acquisition, partnering, licensing, and even doing it ourselves but with a twist.
There have been so many interactions and so many questions with pharma, and I would like to share these interactions with you. Right now it's important that we answer your questions and we open the line to answer your questions.
I think that depending on the size of the pharma and their intentions, they would perhaps want to file the BLA themselves, name it, and time it based on their needs for bringing the drug to market. That has generally been the flow of our conversations with the larger pharmaceutical companies. The smaller pharmaceutical companies that aren't small but smaller than the top 7 or 8, their interest is more about licensing or partnering or other sort of considerations.
So I think that the major companies would like to file the BLA themselves depending on the time it hits the market.
We're at the point now it's easy to talk about valuations and appraisals, but now we're in the point of negotiations.
Some of the opportunities we've been presented thus far that don't include acquisitions, but partnering, make a lot of sense from a business standpoint.
What we're going to do now Rich, is play it out. Take our time. I expect now we'll have upwards of 30 meetings with pharma scheduled in the next month.
Tomorrow we have a meeting, we had a meeting this week already. So now with this data I think things have changed.
I think in the next 30-60 days we'll have a very good idea of the direction we're going to take
I think we're going to have an option to get an attractive transaction completed, and I don't think it's going to take us very long to do that.
We have enough money to get us through these negotiations. I don't think we'll show any weaknesses through these negotiations. I think we'll be in a good cash position to negotiate strong without taking any more dilution.
I want to keep our investors informed of our progress. I think right now we're in the enviable position of having something that a lot of people are interested in. When you're in a business like this, there's so many boxes that need to be checked to make it valuable. I think we've checked pretty much every box.
We're going to work on the BLA. But I don't know that timing because that will be determined by who will be our partner in the future. So ask me that question in 60 days and I'll be able to give you a better answer.
As can be seen in the above quotes, Macaluso continually states how great of a position the company is in, how many pharma companies they have spoken to, and how they won't need to raise capital. We highlighted the above statement in bold:
"I think we're going to have an option to get an attractive transaction completed, and I don't think it's going to take us very long to do that."
That is a key statement, and, as shown above, he made many other bold statements like it, letting investors know that the company is very confident it will get a partnership deal without dilution.
We're not making the claim that Ampio is making false statements, we don't know for sure, but if it fails to make a partnership, Macaluso will have to explain how could it not make a deal after claiming to speak with 30+ pharma companies and 55 pharmas worldwide have "expressed interest", and the company is going through "negotiations". What are the definitions of "expressing interest" and "negotiations" to Macaluso?
Now, let's take a look at key quotes from Ampio's 3/7/18 conference call and see how they match with those from the 12/14/17 call. All quotes are by Macaluso. For this call, we're providing our quote analysis directly after each one where appropriate.
Strengthening the balance sheet is easy, raising the money is easy, managing the balance sheet is much more difficult. Trying to figure out how to manage dilution, keep dilution to a minimum, especially when we're in negotiations.
With this statement, right off the bat in the conference call, Macaluso expressed the difficulty of managing a balance sheet and spoke about upcoming dilution. This is a sharp contrast from the 12/14/17 conference call where everything was wonderful and a deal was about to happen. The company's recent 10-K states that the company's current cash balance will last through the end of Q218 - over three months from now. The company should not need to do an equity raise if it's currently negotiating a partnership deal like Macaluso said.
Pharma/biotech partnership deals usually involve upfront payments from the pharma company to the biotech company. For example, after Aeterna Zentaris (AEZS) got its drug MACRILEN approved on 12/20/17, less than one month later Strongbridge Biopharma (SBBP) acquired the US and Canadian rights. Under the license agreement, Strongbridge made an upfront payment to AEZS of $24M and tiered royalties from mid-to-high teens on net sales of MACRILEN. As Ampio expects to burn $830K per month in 2018, an upfront payment of $20M or more from a pharma partnership would go a long way.
Obviously dilution is important to me, I want to keep it to a very minimum. So I believe right now, we have enough capital to get us through at least the rounds of discussion we're going through and I'll talk about that in minute.
Macaluso is starting to talk more about dilution, when in the previous call he was talking about how many pre-revenue biotech CEOs will say they won't dilute, yet dilute anyways. What does he mean by "rounds of discussion"? How many "rounds" does it take and how long is a "round"? It has already been over three months since he claimed to be meeting with dozens of pharma companies. Macaluso never spoke more about the "discussion rounds" later in this conference call like he said he would in this statement.
The first thing I want to talk about is our extension study. Obviously an extension by its very name, is an extension of the 003-C study, where we announced the data in December. So those that got their first in June 2017, the trial will be done for that patient by June 2018. We will try to complete that trial about the same time we're ready to file our BLA. So it's really important that we stay on our path there and we get these things done, and get our BLA prepared along the same lines.
We're working to file our BLA, it's a priority. The amount of work required is extensive, it's massive, and so we've hired a large outside firm to help us manage the process.
In the 12/14 conference call, Macaluso spoke about how maybe a big pharma partner will want to file the BLA, and not Ampio. Now, he's saying Ampio will be the one to file the BLA, and preparing the BLA itself. That's a sign it is moving away from partner talk and moving towards attempting to get the drug approved itself.
So that's an update on our extension study, it will be done around the 3rd quarter of this year, and those things will be recorded. I want to stress though, it's not an efficacy study, it's just for safety.
By stressing that point, Macaluso seems to be already prepping investors to hear the results of this study, which won't be until 3Q18, as stated in the call. Does this mean Ampio won't have a partner by then? It's also strange that Ampio is still trying to prove Ampion's safety. Safety isn't the issue here, the drug has already been shown to be safe. There haven't been any reported serious adverse events in the Ampion trials, as stated here and here. The issue is the drug has shown weak efficacy in the trials compared to saline. The inevitable result from this extension study that Ampion is safe will not bring it closer to approval because it's the drug's efficacy that needs to be proven.
Because we did not want to be valued based on our current market cap, and we felt that our value proposition is much higher than where we're currently valued, we engaged a very reputable independent market research firm to value Ampion.
This statement is further evidence that Ampio is moving away from partnership deals. We have not seen companies which are about to make a partnership deal need to hire a research firm to come up with the company's value. Any pharma company that Ampio deals with would be able to do its own analysis and come up with its own opinion on the value of Ampion. They are able to see the data from the trials and have internal access to Ampio's data room that the public doesn't see.
We don't believe a big pharma company is going to give much merit to a market research firm that Ampio paid to assess the drug's value. Maybe it would have a little value to help Ampio see all the different advantages of the drug and to collect more data about the industry and the market. But we believe primarily the value Ampio would have of hiring this research firm is to show the report to potential investors as a way to show the company's worth. Sell-side research firms have not recently shown any interest in covering Ampio.
So those negotiations are ongoing. Some are acquisitions, some are licensing, some are partnerships, some are US specific only, some cover all the major markets. How long will that process take to complete? I don't know I really don't know how long it will take.
Ampio shareholders should ask Macaluso what does he mean by "negotiations" exactly? The term "negotiation" generally means one party makes an offer, and the other party makes a counter-offer. Has a company made an offer to Ampio? If so, what was it? The statement is Ampio has done "some" negotiations for licensing, partnerships, and acquisitions. Does this mean more than one for each?
We put his next key statement in bold. In the December 14 conference call, we bolded Macaluso's statement of: "I think we're going to have an option to get an attractive transaction completed, and I don't think it's going to take us very long to do that."
Now, almost 90 days later, he says "I really don't know how long it will take." This speaks for itself.
It feels weird to me to do a call and not open it up to Q&A, which is the situation we're in today. But the confidentially agreements that we've signed are not an afterthought, they are not a formality.
On the December 14th call, Ampio did a Q&A. This time, it did not. This further illustrates the different tone of this call. Macaluso doesn't want to face investors this time. Macaluso could simply refuse to answer questions that violate the confidentiality agreements and answer the questions that don't violate them. And what confidentially agreements is he referring to? The company doesn't have a partner yet.
Ampio is not a virgin to settling shareholder lawsuits. It settled one last year for $3.4M, paid for by Ampio's insurance. The lawsuit alleged that Ampio misrepresented and/or omitted information regarding a STEP study for Ampion. The company didn't admit guilt in this case and there's not sufficient evidence that lying took place. But the fact that they had to settle in court is a data point that investors might want to at least question management's credibility.
Ampio shareholders are in a dire position. The more time that goes by for Ampio without finding a partner, the more the bear case will look correct that says Ampio will not succeed in finding one. Macaluso put so much emphasis and made bold rhetoric on finding a partner, and it has lifted the stock considerably. If no partner materializes, as we believe will happen, we believe the stock will have a hard landing.
In Ampio's 2017 10-K filed on March 6, 2018, it states:
As of December 31, 2017, we had $8.2 million of cash which we expect can only fund our operation through the second quarter of 2018. To operate as planned in fiscal 2018 and into 2019 we will need to raise at least $11.0 million through equity offerings, debt or other financing tools.
As stated above, Ampio is expected to run out of cash by the end of 2Q18 without raising capital. In the 3/7/18 CC, Ampio's CFO, Tom Chilcott said:
We have a $25 million credit line that is available to the company currently.
Don't be confused by this statement. When you hear the word "credit line" most people naturally think of debt. But this is not the case. Mr. Chilcott conveniently omitted the word "equity" as the company has a $25M "credit equity line" which is similar to an ATM. This is explained in the company's recent 10-K. We believe the omission of the word "equity" is misleading.
By the end of Q218, without a partner, how much will the stock be trading for, and how much will Ampio be able to sell its shares for? As recent as October 2017, Ampio did a secondary offering at $0.875 per share. In June 2017, Ampio did a secondary offering at $0.60 per share plus warrants.
We wouldn't be surprised to see AMPE return to sub $1 levels soon, possibly right before it needs to raise capital again, if it hasn't made a partnership deal by that time.
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Disclosure: I am/we are short AMPE. 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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