Zevra Therapeutics Inc (ZVRA) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to KemPharm's First Quarter 2021 Results Conference Call. (Operator Instructions) Please be advised that today's conference may be recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker host, Jason Rando at Tiberend Strategic Advisors. Please go ahead.

Good afternoon, and thank you for joining our call today to discuss KemPharm's first quarter 2021 financial and corporate results.

Before we begin, I would like to remind our listeners that remarks made during this call may contain forward-looking statements that involve risks and uncertainties that are subject to changes at any time, including, but not limited to, statements about KemPharm's expectations regarding future operating results. Forward-looking statements are made pursuant to the safe harbor provisions of the federal securities laws and represent management's current expectations. Actual results may differ materially. KemPharm disclaims any obligation to update or revise its forward-looking statements, except as required by law. More complete information regarding forward-looking statements, risks and uncertainties can be found in KemPharm's filings with the SEC, which are available on KemPharm's website under the Investor Relations section.

Speaking on today's call will be Travis Mickle, KemPharm's President and CEO; and LaDuane Clifton, CFO. Following the remarks, there will be a question-and-answer session, which will include responses to questions that were submitted during the past week.

With that, it is my pleasure to introduce Travis.

Thanks, Jason, and thanks, everyone, for joining us today. As most of you know, and I'm sure all of you that joined the call are aware, the FDA approved AZSTARYS back in March 2, certainly one of our large highlights here from the first quarter of this year. We do expect our partner, Corium, to launch that product in the second half, presumably around the start of the school year, if all things go well. We also announced during this quarter a number of different highlights, including an amendment that happened after the first quarter to the license agreement, now eligible to receive up to $590 million in sales milestones and royalties on top of that, that go out to the length of the patents.

We also recently just announced that serdexmethylphenidate, which is the prodrug in AZSTARYS, received a Schedule IV classification. This is the only methylphenidate product that is a Schedule IV. Actually, the only methylphenidate product that's any different schedule than a Schedule II. And I will actually walk through a little bit of those key differences and how they're prescribed and handled, the differences there between those 2 classifications.

Just to say it's fairly meaningful for a patient, physician and a pharmacist, and we believe it provides a key differentiator for AZSTARYS as well as potentially KP484, and our own product, KP879.

LaDuane is here to discuss all the great things he's accomplished since the beginning of the year. So I won't take away much of his thunder there. Of course, the big ones being complete transformation of our financial situation, relisting on the NASDAQ, repaying all the debt and putting us in a great position to amend the agreement and be able to invest in our own future again, as well as have ample capital to do what we need to do strategically and with the organization moving forward.

And then beyond AZSTARYS, we're actually getting very excited now about the initiation of a clinical trial in mid this year on KP879. That is our lead product for the treatment of stimulant use disorder or stimulant addiction. Extremely exciting product, a unique opportunity there. We still are working under the expanded services agreement with Corium. And we continue to watch with our partner, KVK Tech, and the launch of APADAZ. And as soon as we're able, we'll give more details on how that is progressing.

Turning now in more details of the AZSTARYS approval. Certainly, this was a transformative event for the organization. Our second product approval, really a huge opportunity when you think about the product itself and its differentiation in the marketplace. When you look at our previous commercial forecasts, they're really just based on things like efficacy and safety, really being very similar in safety to other products. And what we were able to achieve with our studies as well as in negotiations with the agency. We were able to include benefits around the administration of the product, height and weight changes that showed no difference from placebo or from the typical height and weight growth you would expect, pharmacokinetic differences as well as the efficacy data that we've discussed all along. It was those key differentiations that led us to revise our own commercial models, of course working with Corium to do so. And realized we had a great opportunity to amend the agreement and possibly make additional investment in the near term for the launch of the product, and ultimately receive more upside, as we believe it will be quite successful in the near term.

So to that, moving now on to the amendment itself. We were able to actually work with the GPC team to renegotiate and increase the regulatory and sales milestones from what they were at $468 million, up to $590 million. You can see that's a substantial increase. It also added a top-tier sales royalty that is higher than the previous mid-20s level, and increase that royalty rate throughout the life of the patent. We received our $10 million regulatory milestone for the approval of AZSTARYS. And now, of course, now with the scheduling, we're eligible for that other $10 million that I'm sure we'll receive just on time from our partner there.

There was 4 additional sales-based milestones that were added. 3 of those are relatively near-term and weren't present before, they're at the lower tiers. So between 0 and kind of a mid level. We think those are very achievable in the next few years, and something that we believe allows as well our partner to reinvest in manufacturing and clinical studies that will help the product overall.

So overall, we're very excited about that amendment. We believe there's a great opportunity for that product and a great opportunity to work with Corium and GPC to maximize its value.

Turning to the AZSTARYS commercialization. I've mentioned much of this already. I did touch on very briefly, the additional manufacturing. Of course, as you would project, if you think there's going to be more sales, you're going to need more capacity. So that's something that we are working with Corium diligently to prepare for the launch as well as prepare for the future there. In addition to that, it was disclosed publicly in the summary basis of approval. There's requirements for pediatric clinical studies, mainly focused on preschoolers. So of course we're working with Corium and their team to design and conduct those trials. The time lines are very short, surprisingly so, from the FDA. So we're working to get those studies conducted. I do believe that the addition of a 4- to 5-year-old indication would be of more value. So you can see in part why we were working with GPC to amend the agreement with the additional cost of those studies and the additional value they can derive once those studies are on the label.

Certain -- have heard, just anecdotally from our partner, discussions with physicians and payers have gone very well. There's an initial receptivity by payers that this product is differentiated. And certainly, it would be something that patients would want to see. And the scheduling, of course, really does add to that. Payers certainly see that as an important differentiation, but certainly physicians and patients would as well. Remember, it's 70% of the active ingredient in AZSTARYS is SDX. So the product itself is still Schedule II, but ultimately, it will be very prominently displayed on the label in the highlights of prescribing and in the Abuse section, Section 9, that this is a Schedule IV controlled substance as far as the prodrug component. And we believe that's very straightforward and very much something that a salesperson can highlight for a physician.

So let's just touch on the Schedule IV classification in a little more detail. The feedback from the DEA was very much like what they passed along from the FDA, is that SDX really didn't show any sort of abuse liability above that of phentermine. And we know the results of our studies did indicate that. That in fact, you don't see a difference from phentermine when taken orally. In fact, it's actually, at some doses, even less. And through other routes of abuse, it was either closer to placebo or certainly far less that -- than that of methylphenidate.

And with that, the FDA recommended to the DEA that this be Schedule IV. And luckily for us, the FDA -- the DEA, excuse me, followed suit and agreed. And of course, we got the notification that it would be a Schedule IV API.

We believe that if we develop and take KP879 forward, that it's more than likely would also receive a Schedule IV classification. And this could be a huge benefit to a product that you're going to be giving to someone who's addicted to stimulants, someone that's trying to go through treatment. Now something that's very difficult to abuse and certainly less abusable than methylphenidate.

So let me just quickly highlight for you some of the differences -- key differences between a Schedule II product and a Schedule IV product. Certainly, all of the current methylphenidate products, other than SDX, are Schedule IIs, and this restriction is in place because of its potential for abuse. Now with all Schedule II products, refills are not allowed. And of course, with a Schedule IV, those are allowed. The longest script that you can receive for a Schedule II is 30 days. At the same time, you get the same 30-day script as well as up to 5 refills, giving you a 6-month total time frame that you can receive refills and prescriptions for a C4 product. So imagine this now an application for a KP879.

The prescription is also easier to deliver. That means it can go to the pharmacy, phoned, faxed, written or electronic., while in the case of a C2, it has to be written or electronic only. There's no other mechanism. You can't call the physician and get them to change anything with the C2. And of course, similar abuse potential as phentermine. Phentermine is also a Schedule IV product. So I mentioned that product before, and you can see now we've been classified similar to that type of product.

Some things that we see in addition to just KP879, we have contemplated and are considering other SDX-containing products that may also receive a C4 indication with those particular products. So that could be of tremendous value or advantage for us moving forward. In addition, our amphetamine-based prodrugs, so that's been referred to as KP922, they have similar properties as SDX. So we're certainly excited about the potential there that those could also receive a lower schedule if those candidates are advanced and approved.

So with that, I think I've given a thorough overview of where we sit through the scheduling decision, and I'll turn it over to LaDuane to discuss our financials.

Thank you, Travis. Certainly, Q1 was the culmination of a lot of work that's gone into our financial restructuring. And I'm very thankful to say that we've come out on the other side very strong as a result. A series of transactions, obviously, we've discussed this with you before, so I won't go into great detail. But of course, we regained our listing on the NASDAQ capital market. We were able to eliminate all of the company's debt. We added new capital to propel growth and really create flexibility that we did not have before.

It's important to note here, I added a bullet here regarding the incremental capital that continues to flow in as the warrants that were generated from the January transactions are exercised. And we don't really predict when that comes in, but those warrants have a 5-year life, and have a strike price in the range from $6.36 all the way up to $8.125 per share. And so those come in from time to time as the holders decide to exercise, but it is an incremental source of capital which is already included in the fully diluted share counts.

With all of this, of course, it provides greater operating and strategic flexibility as we bring 879 into development, and then of course also evaluate other ways in which we can deploy the capital to create long-term value for shareholders.

Looking specifically at the results for Q1. We reported revenue of $12.1 million, comprised primarily of the milestone payment of $10 million related to the AZSTARYS approval in March. And then we had services revenue during the quarter of $2.1 million under the consulting arrangements we have with Corium.

We ended up reporting a net loss of $10.3 million for the quarter or $0.54 per basic and diluted share, which is more of a loss than in Q1 of 2020. But it's important to note here that a substantial noncash loss was recognized based on the extinguishment of the debt. So the cost of extinguishing the debt, there were certain assets on the balance sheet related to the accounting. And that extinguishment was actually a noncash loss of $16.9 million. So if you look at the next line, operating income then was actually $7 million during the quarter, or would have been $0.36 per basic and diluted share. That just gives you a sense of we really did have a good quarter, but it's hidden a bit by this noncash item.

R&D expenses were modestly up during the quarter as we began some activity related to 879, and then G&A expenses were decreased compared to Q1 of the prior year, continuing with our attempts to be very diligent on managing our expenses.

The balance sheet as of March 31, we had total cash of $76 million. Obviously, a large increase of $71.7 million compared to the prior quarter based on the restructuring that was completed. This does not include the $10 million for the approval because that money was paid after the end of the quarter. And then also the additional $10 million that we've now earned as a result of the DEA scheduling is also not included. We have not yet received it, but we [would] receive that 30 days after the decision. So you can assume we'll get it around June 7.

The total debt, which was still on the books as of December 31, as I've mentioned, has been fully extinguished. And so we're really glad to be in a position now where we have no debt.

And then just a quick update. As of March 31, total common shares outstanding was 28. -- almost 28.5 million shares, fully diluted is around 38.4 million shares, and there is no preferred stock outstanding as of March 31.

And so with that, I'll turn it back to you, Travis.

Yes. Thanks, Laduane. So just to kind of wrap up here and look ahead. AZSTARYS, we continue to actively support Corium's commercial efforts. You can imagine those are quite substantial since receiving approval back in March. The work that we provide is included in the manufacturing support, scientific affairs, clinical studies, everything that I've already sort of touched on during the call. So much of what our focus is right now is really being that scientific and manufacturing support arm of Corium as we prepare for that launch. And of course, that's critical for the value of the product, and you only get one chance to launch correctly. Once that product is launched, we do expect royalties and sales to continue from 2022 and beyond.

For KP879, as I mentioned before, we're looking forward to the start of our clinical trial there in mid-2021. We will provide more details and timing of potential study wrap-ups and additional studies as we're able to get that study started. It's a little lengthier than our traditional sort of first studies. So while we are excited about it starting, we want to make sure that we provide you with the best guidance and be able to maintain when the other studies could start afterwards.

As LaDuane just mentioned, we're in a great cash position. It's only getting better as we hit milestones here, and the AZSTARYS-related milestones just make it better. And then just as you may recall, of course, the services agreement we have with Corium adds additional revenue. It also has a fair amount of distraction associated with it. So while we work with our partner on the launch of AZSTARYS and some of their internal development work, we're also in parallel prioritizing our own programs and trying to figure out exactly where our pipeline fits, as well as other value-creating opportunities. And all of this is while we support and work with our partner, KVK Tech, on their launch of APADAZ.

So certainly a very exciting time. Transformative events behind us, nothing but great opportunities in front of us. We're going to stick with our previous sort of approach, forum, to this call. We have received a number of inbound questions. We prioritize them and try to collate them as best as possible, and we're going to answer those now as they have been provided.

So LaDuane, if you want to read off the question and then you and I can decide who and how to answer it.

Yes, of course. And thank you to everyone who's send in questions. We hope you find this format helpful.

Okay. So the first question, how could KP879 ever fail to receive a Schedule IV DEA scheduling, if approved?

Yes. We just -- we looked at this one. I don't imagine there's any mechanism in which it wouldn't keep the designation it already has. It is a pure SDX-containing product, which has already been determined to be Schedule IV. That all being said, I think we all recognize there's significant risk in any regulatory body, FDA and DEA included. So I think very high probability. But I can't imagine, you can't imagine. But at the same time, I think it's very, very unlikely that it would be anything different.

Okay, great. The next question we received is related to the commercialization of AZSTARYS. Can you give us an example of the sales pitch that might be used to detail AZSTARYS while counter-detailing close competitors?

Well, of course, Corium is the marketing partner, and we aren't really -- not allowed really to say much about what they're doing. They do pass things along that they give us permission to pass along to our shareholders and investors. At the same time, we've touched on all the highlights, and those are the highlights that are differentiated above the other products that are out there. I think the C4 is a big differentiation. It's obvious. We have the height and weight, we have the administration and we have the efficacy. So you have all those different advantages. That being said, we didn't do head-to-head comparative trials. So the counter-detailing portion of that -- physicians will just have to know, and have known it through their clinical experience, how this product is now different than those other products.

The next few questions, actually we received several related to clinical and regulatory time lines for both KP879 and for KP8 -- excuse me, KP484. We've actually already touched on the 879, but maybe we could speak a little bit to 484?

Yes, KP484 was licensed under the agreement by GPC. It is entirely up to them whether or not and what the time lines would look like for the development of that product. We have provided our kind of input and what studies would be needed and so forth that you would expect. At the same time, they're vigorously working on the launch of AZSTARYS. They're also working now on adding a potential preschool indication onto the AZSTARYS label. We think there's a lot more value right now to pushing them to help with that process. And as soon as we hear from them and as soon as they make the decision, we will pass along any updates on KP484.

The next question is related to really the treatment of stimulant use disorder. And this person provided a comparison of treatment options. There's a number of treatment options for opioid abusers, while at least they were not able to find any similar or any treatment options for stimulant abuse, and so just curious about how we view that. Are there, in fact, any other competitors or products that can be used, whether indicated or otherwise? And then related to that, could we speak to the potential to use KP879 outside of just treating stimulant use disorder?

Well, the question about, is there anything available? I think that's a good question, thinking about why we chose stimulant use disorder. There is right now nothing available. Everything is more just to help with some of the symptoms and not really treat the disease itself, not be able to help as the opioid addicts with those options that they have, with buprenorphine, methadone and so forth. Those aren't available for stimulant use. It's a completely different mechanism. So if you're currently giving antidepressants and other products, it would be really beneficial to a patient, certainly for a physician to have a lower scheduled, safer product that could now be available for them to use to treat stimulant use disorder, which would include methamphetamine, cocaine and other stimulants.

And then as far as the potential outside, I mean, there's been a lot of work that's been done with methylphenidate in general, but this does provide us with a unique opportunity to explore. Looking at now at C4, looking at the properties of just SDX and saying, "Well, what about other indications?" And we have a number of patent applications already been published, patents that have been issued, looking at things like binge eating disorder, shift work disorders. So where you have overnight shifts and you change your hours repeatedly, anything with excessive daytime sleepiness that's associated with narcolepsy and other things. All of those are -- were always theoretical, but certainly now are something that we evaluate in more detail.

Okay. The next question is one I'll probably take because it's related to -- I guess, here's the question. Has the company updated its budget or its operating forecast for development of its products and programs? And at what rate does the company expect to utilize the proceeds from the recent capital transactions?

So I'll take this one. And you'll notice in today's presentation and also in the press release that we didn't really provide a cash runway because in a lot of ways, our current burn rate -- how long does it -- how many quarters does $76 million last if your burn rate is between $1 million and $1.5 million per quarter? So it seems like a sort of a strange question. And really, the thing about it is, we currently have a relatively low R&D spend rate. And so something that's very important to us is that we take some time right now to not only look at the programs we have internally, but also other opportunities externally. And as we evaluate these opportunities, we hope to put together an updated plan for how we might consider deploying the capital so that we can create long-term value for shareholders. So that's a process that we're always looking at. But certainly, we're looking at carefully right now together with our Board. And so -- but with that said, we certainly have enough cash to carry through the development and continue what we're doing with KP879. And as we have updates or other additions to the pipeline or whatever decisions come out over the next several months, we'll continue to update you. I will say at the moment, though, our burn rate continues to be around $1 million to $1.5 million until we make some judgments around incremental investment in R&D.

Okay. And the next question, I guess this investor was looking for ways to look at the potential cash flows that might come from the AZSTARYS license agreement that we have.

And I guess, echoed by a few other investors, there's some confusion, I suppose, around when we talk about $590 million of sales milestones, what does that mean? So I'll just try to review that again and try to answer the question. Whenever we speak to $590 million, these are potential milestone payments related that are triggered by attaining certain regulatory or sales-level milestones. So there would be specific sales tiers, for example, that if you attain that annual sales level, then you receive this milestone payment. So $590 million is the sum of all of those regulatory and sales milestone payments, okay? Now the underlying sales tiers, though, go potentially higher than $590 million. That is not the peak sales, that is just the sum of those milestone payments' potential.

With that said, then, underlying that then was also a question that said, do royalties stop when you get to $590 million in sales? And so hopefully that's clear now, that the answer is no. This is a royalty based on net sales. And so we receive a royalty at a certain percentage on the first $1 of sales, all the way to the last $1 of sales when the patents expire. And actually, if you read the details of the agreement, we receive a reduced royalty for up to 2 years after the expiration of the last patent. We've disclosed before, the patents run out to 2037 currently. There's -- is it possible we could maybe have other patents added that add time, I suppose it's possible. But we would be receiving royalties on net sales throughout the entire life of the product up until that time. So hopefully that kind of explains then, you can see there's 2 cash flows: the cash flows from achieving these milestone payments and then there's cash flow that comes from the royalties. So I hope that helps answer that question. But if there's a continuing question, we would encourage you to send that in.

And looking at the list, Travis, actually, this is the last question that we can answer today.

All right. Well, again, I appreciate everybody's time. Hopefully you can hear from us, we're diligently working to assess everything that's going on here at KemPharm. We want to make sure that we take all the right next steps, do everything that we can possibly do to add the most value, as well as make sure that we're continuing to address the shareholders' needs. So while we just received word around the DEA scheduling, you can imagine that, that's created a whole new set of options and a whole new set of opportunities. So while we evaluate everything, we really appreciate your patience. And we will, as always, continue to provide meaningful and timely updates whenever possible, especially as it relates to the value creation we hope to achieve here at the company.

So with that, again, I would like to thank you for your time, and appreciate you joining me. Thanks, everyone.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.