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Ampio’s Hurdles To The Finish Line Despite The Valuation Gap

|About: Ampio Pharmaceuticals, Inc. (AMPE)
Summary

Billion dollar plus valuation gap.

Social media attacks run out of justification.

World class manufacturing facility acknowledged by the FDA.

Favorable responses keep coming from the FDA while the pivotal ruling has yet to be determined.

Ampio Pharmaceuticals (AMPE) keeps chugging away at the Biologics License Application (BLA) process and could be one FDA letter away from a major breakthrough that could pave the way toward a licensing or partnership deal. Numerous social media attacks have eroded the market cap to approximately $50 million from $300 million on August 7, 2018. Unfortunately the company fueled the flames when they entered into a draconian financing for $7.5million in stock and warrants at $.40 in August right after announcing that there was a possibility that another trial might need to be done. The market has overreacted to this news sending it plummeting down almost 85% in 2 days. Another trial is no more than a 6 month delay, but the market has crushed the stock to below its phase 2 market capitalization when in fact they could get a letter back from the FDA at any time accepting AP-003-C as a pivotal trial. This letter or clinical trial with a Special Protocol Assessment (SPA) is all that stands between them in order for them to ink a partnership or outright sale of the company. The market has over corrected to the point that it has derisked any chance of success in a clinical trial. What the market is missing is that they might not even need to do another clinical trial. Assuming they did need to complete an SPA it would be one of short duration, and statistically achievable.

Valuation Gap

Global Market Insights

The first non-opioid drug to treat the most severe grade (KL-4) of Osteoarthritis of the Knee (OAK) is worth billions without even having to put pen to paper. The cost of the drug is negligible and it would likely be replacing the current standard of care of Total Knee Replacement (TKR). According to the American Academy of Orthopedic Surgeons (AAOS), the total knee replacement market is 719,000 patients annually. According to Global Market Insights the domestic market is worth $3.2 billion annually with a global market worth closer to $8.0 billion. Simple assumptions like a $1250 Ampion shot compared to $417 Synvisc shot (cheapest comparable) taken just 3 times works out to $2.696 billion in annual revenue if Ampion become the new standard of care (SOC). This is highly conservative given that AMPE is seeking a label that allows up to 5 shots as needed. The SOC could very well be three (3) shots of Ampion before and three (3) shots of Ampion after a knee replacement. The anti-inflammatory actions of Ampion will most likely make it a requirement for all pre and post TKR’s. No matter which business case is pursued each is worth billions and the company slide representing $1.8 billion in sales seems understated.

Corporate Presentation

Debunking STAT’s Social Media Attack

The main thrust of the social media attack this year was that AMPIO was no better than saline. With the letter from the FDA stating that the “FDA considers AP-003-A to be an adequate and well-controlled clinical trial that provides evidence of the effectiveness of Ampion. AP-003-A can contribute to the substantial evidence of effectiveness necessary for the approval of a BLA.” This statement represents clear and convincing proof that Ampion does in fact work and is much better than saline. So what are the issues left in social media? A perennial favorite of the shorts is the coming dilution. Well with the stock down over 85% they did an offering that diluted the company 43%. No one can argue the merits of doing an offering into a panic, but this is currently factored into the stock price. The shorts would be out on a limb to if they pointed out the need for another financing. The current financing gets them through an SPA and once they reach the endpoint they will have what they need to get a licensing deal or sell the company. The final point from the shorts was that they needed a control arm. If they get approval to move forward with the BLA then that means that the FDA accepted AP003C as a pivotal trial and the short argument that they needed a control arm disappears. However, if they have to do a trial under SPA then the shorts could claim a victory but it would be a hollow one because the completed SPA trial would likely lead to an approval within a short 6 to 9 month window that it would take to finish the SPA trial.

Corporate Presentation - Controlled Responder vs Historic Saline

Class 1 Pharmaceutical Operation

A tour of the facility demonstrates a significant expenditure in R&D and special equipment. The company operates a class 1 clean room for the processing of Human Serum Albumin (HSA) into Ampion. It’s hard to grasp that a drug as versatile as Ampion is manufactured in such a simplistic way. They take HSA and sanitize the outside of the bottle before entering the clean room.

They pour it into a bladder, filter it and finally fill the vials. The process is fully automated with most of the human resources verifying the purity of the raw material, HSA, and then testing the quality of the batches and maintaining internal controls on receiving product. There are no bugs or dirt and they have a sophisticated air management system that maintains the positive pressure and constantly filters the air. Production capacity is 7-8 million vials per year (Slide 18). Assuming $1250 retail cost and operating at maximum capacity the company could produce $8.0 billion of product in the Englewood, Colorado facility.

Sterilized HSA enters through the portal into the Class 1 Clean Room

Vials are filled in this chamber and samples for testing are taken

Finish Line in Sight

Author Graphic

What they have? IN HAND

AMPE has 70% of their BLA preparation finished when the FDA acknowledged that there were no pending issues regarding manufacturing. This was a major hurdle that they crossed. Keep in mind that this plant in Colorado is over designed and fully automated with state of the art equipment. This quote was from the press release on October 4, 2018, when the Office of Tissues and Advanced Therapies (OTAT) provided a favorable response, with no areas of dispute, in support of Chemical and Manufacturing Controls (CMC) for the Ampion BLA. AMPE said an agreement was obtained “on the CMC data requirements for BLA and on the data presented for analytical characterization, commercial release specifications, and potency of Ampion drug product.” For investors this means that when the time comes for them to file the BLA there will be no issues. The pictures in this article reveal a state of the art manufacturing facility and it shouldn’t come as any surprise that they likely exceeded FDA standards which is why there were no areas of dispute for the CMC.

What they need? FAVORABLE RULING or SPA TRIAL

Corporate Update Press Release

1. FDA ruling that AP-003C was a pivotal trial – According to the latest corporate update, AMPE is in “continuing discussions with the FDA to determine if the pivotal AP-003-C study is the final trial required to support the Ampion BLA.” These are informal discussions that have been ongoing for at least a month. If the FDA says “YES” to AP-003-C then AMPE has met all the regulatory requirements to file a BLA. AMPE has very power arguments to present to the FDA. The first issue is going to be what information will be gained from a non-inferiority trial or sham injection trial that isn’t already known. Slide 15 of the corporate presentation above shows the historical for saline but this is for presentation purposes only. The FDA has 2000 patients worth of data stretching over 8 clinical trials. If these patients were not randomized 1:1 and stratified uniformly the FDA could make an argument that it could not use this control data. In 6 prior trials the data was done exactly like the FDA wanted so it is statistically acceptable. What was perplexing about the FDA letter is that they admitted to AMPE that if they had “done a controlled trial with that was randomized and stratified uniformly then it would have been in a position to accept the trial.” The essential point that investors need to understand is that AMPE accomplished exactly what the FDA said they were deficient in.

The FDA comment indicates the FDA didn’t thoroughly review the trial data. One theory given by AMPE management on the conference call for the communications breakdown involves the internal restructuring of the Center for Biologics Evaluation Research (CBER) division which moved them from the Office of Blood Research and Review (OBRR) to OTAT. Given the multitude of corrections already admitted to and fixed by the FDA at the July 19th FDA meeting, it seems to suggest the FDA’s willingness to correct the record. For example, the FDA letter on August 5th said “we are not aware of any data the demonstrates the efficacy of the product and the treatment of Knee Osteoarthritis.” On August 16th OTAT reaffirmed that the “FDA considers AP-003-A to be an adequate and well-controlled clinical trial that provides evidence of the effectiveness of Ampion. AP-003-A can contribute to the substantial evidence of effectiveness necessary for the approval of a BLA.” In a 10 day period, investor’s should be able to see the complete 180 degree positive shift in the FDA impression of the effectiveness of Amion once they were confronted with 3 letters from OBRR that reaffirmed the efficacy.

There is one more key comment that needs to be brought to light about the FDA handling of the clinical trial AP-003C. When the company submitted the AP-003-C trial incorporating FDA guidance to randomize saline at 6:1 the FDA they didn’t come back and revise their guidance. Their inaction actually ratified the trial because if the FDA didn’t find the protocol acceptable they had a duty to send AMPE a letter with respect to what they needed to change or put them on a clinical hold. Neither of these actions happened. What did happen is that AMPE ran the clinical trial and beat the endpoint by almost double. This would typically lead to an approval had it not been for the FDA reorganization.

Reviewing the trial design slide above shows what the FDA missed. Each trial is randomized 1:1 with 4ml of Ampion vs 4ml of saline. It’s reasonable to think that AMPE will be presenting a powerful statistical argument to the FDA. Hopefully investors can see just how obvious this argument is. Although appealing decisions from the FDA isn’t typically a layup, there seems to be a pattern that indicates the FDA is responsive to AMPE.

OR

2. Meet Endpoint of New SPA – They will have to design a small trial with possibly 100 – 150 patients to conduct a non-inferiority trial to saline. The other trial design would be against a sham injection. If this SPA were to move forward the statistical probability of failing to meet the endpoint of non-inferiority is nearly impossible with 8 statically relevant trials that have met the same endpoint. A non-inferiority trial is used to determine that the drug is not worse than the active comparator (saline) by the non-inferiority margin. For example, if investors assume the social media attacks which claim Ampion is “no better than common saline” are true then the drug would receive approval. It’s essential for investors to realize just how low this bar would be for the new SPA. The historic saline slide pictured earlier in the article shows how Ampion was at a 71% response rate over double the 30% endpoint. In this non-inferiority trial the response rate can be lower than the control by a considerable margin and still receive approval.

Financial Analysis

According to the latest 10-Q ended June 30, 2018 they have just under $5.0 million. On August 8, 2018 they entered into a financing with Canaccord Genuity for $8.0 million in gross proceeds. After commission that would net them about $7.3 which would give them a total of $12.3 million. Based on a continued burn rate of $800K per month this would give them 15 months of runway to next September 2019. This however assumes they don’t have to run a clinical trial. The Company has stated that they might have to do a clinical trial which might cost anywhere between $3-5 million for 150 - 200 patients. In this worst case scenario they would have until March 2019 to reach their endpoint assuming they needed to run a larger than expected clinical trial. Assuming they company meets their endpoint the company has 6.2 mil legacy warrants with an average exercise price of $.76 and a newly minted 20 million warrants with a $.40 exercise price. Any price appreciation could result in the warrant exercise and have additional funds flow into the company.

Robust Short Interest/Class Action Lawsuits

The company is #9 on the list of most shorted stocks as reported by the Wall Street Journal. There are 16,269,620 shares short. The company is also in the line of fire of a number of class action lawsuits that claim the company made materially false and misleading statements, and failed to disclose material adverse facts about AMPE’s business operations and prospects. The lawsuit alleges 3 key claims

(1) the FDA would find Ampio's AP-003-C Phase 3 clinical trial inadequate and not well-controlled.

This claim appears to be without merit because the determination by the FDA has not been made yet. Assuming the company has to run an additional SPA the plaintiffs can call the trial inadequate but the question is whether or not this resulted in misleading statements.

(2) Ampio had not successfully completed two pivotal clinical trials for Ampio.

This allegation is also premature because the ruling from the FDA on AP-003-C has not been rendered yet.

(3) Defendants' public statements were materially false and misleading at all relevant

This sort of blanket coverage that everything they said was misleading is very broad and will be difficult to prove.

Investment Summary

In their latest update AMPE indicated it has appealed the last trial data to the OTAT division of the FDA. The company was clearly a victim of the reshuffling at the FDA. Moving from OBRR to OTAT and having 5 different review teams was taxing on the approval process. The AP-003-C trial is still under appeal with a decision imminent. When the FDA switched divisions the company was halfway through their trials and they weren't given any guidance to modify the trial design. Unfortunately, the OTAT division is still operating under the old rules of the FDA, and the design division of the trial was operating under the new 21st century pharmaceutical act. OTAT’s letter to AMPE was essentially a refusal to sign off on the trial. The company never thought that the fda would not approve the best trial data the company ever had. Ampio had waited over 102 days waiting for a final go ahead for the last trial, all was good until the new division again dropped the trial on completion. Many letters had gone back and forth between the company and the go ahead for the trial. AMPE has moved through 5 divisions of the FDA, 96 administrators, and 6 directors due to the restructuring of the FDA. Many companies along with AMPE are in limbo do to this FDA restructuring.

The statistical data is what matters, coupled with the safety of the drug. For simplicity's sake investors should understand that Ampion is just a filtered version of an already approved FDA compound called Human Serum Albinum (HSA). In cases where the drug is a fractionate of an already approved drug it’s very hard to believe that the fractionate drug with an impeccable safety profile would be unable to secure approval. Connecting the dots, it looks like the FDA was embarrassed by their confusing statements, but has been slowing making amends that will create a simple pathway for filing the BLA. The statistical data is so compelling the FDA will have to create a pathway for the benefit of the drug Ampion. The informal appeal process is coming to a conclusion very soon. The odds seem to be shifting toward a potential ratification of the AP-003-C trial. The company is trading at maybe 5% of its true valuation. The stock is completely derisked as there is very little chance that this drug will not receive approval. The SPA has an approval bar so low there is very little chance that they will not meet their endpoint. It is for this reason that this is very little downside risk an explosive upside on approval which could be much sooner than what people are expecting. Whichever way the FDA rules the company has enough funding to reach FDA approval.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.