KemPharm, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the ChemPharm fourth quarter and year-end 2020 results conference call. At this time, all participants are in a listen-only mode. Please be advised that today's conference call is being recorded, and if you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Mr. Jason Randall from Timberland Strategic Advisors. Thank you. Please go ahead, sir.

Good afternoon, and thank you for joining our call today to discuss ChemPharm's fourth quarter and full year 2020 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 and are subject to changes at any time, including but not limited to statements about ChemPharm'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. ChemPharm 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 ChemPharm's filings with the SEC. which are available on ChemFarm's website under the Investor Relations section. Speaking on today's call will be Travis Mickel, ChemFarm's President and CEO, and LaDwayne Clifton, CFO. Following the remarks, there will be a question and answer session during which ChemFarm's management will respond to questions that have been submitted during the past week since that company's call regarding the approval of the STARS. With that, it is my pleasure to introduce Travis.

Thanks, Jason, and thanks, everyone, for joining this afternoon, this evening. I wanted to just quickly provide some updates, really just recaps from what we've discussed over the past few months. I think most of our questions that we've received and most of the focus will be around the financial position of the organization since now we're able to actually report that out. So I think the focus of today's call will center around very much so the financial position of the organization. So to start out, of course, hopefully every single person is aware that's on this call or will be listening to it that the FDA approved our product of Starus last week. That is, of course, partnered with an affiliate of Gernot Point Capital, and the commercial partner in that case is also Quorium. Under the license agreement, we're eligible to receive regulatory sales-based milestones totaling up to $468 million and also includes tiered royalties up to the mid-20s. These milestones are broken up into various amounts, but they include an approval and, of course, sales-based milestones. Coriam has issued a press release regarding the approval of Astaris. I encourage you, if you want to hear a little more from them on the product, please seek out their press release to read more about Astaris. Updates on the partnership. Again, we've entered into a consulting agreement with Corium on other projects other than KB415 slash Astaris. This provides us additional revenue. And we have, of course, our ongoing collaboration with KVK Tech and for the launch of APIDAS and the pilot program there that just launched in Alabama. A greatly improved financial position. I will let LeDwayne really talk through all of this. I think everybody on the call or listening can see the tremendous turnaround from a year ago, two years ago, even before that, and I'll let him go through that in detail. And then kind of looking forward, we have this great achievement. I do want to spend a little bit of time, mostly towards the end, kind of outlining for everybody where we believe the product is differentiated, help point to the value proposition a little bit more, and provide some context that I think will be very, very helpful for you as you assess the future of the product, the future value proposition of the product, as well as the value to this organization. So with that, I will jump right in to talk a little bit about the approval of Astaris. Of course, this was approved on the 2nd. This was actually a very late night event. There was no pizza party, just so everybody knows. In fact, many of us had already gone home for the day waiting for that event to happen, the official letter from the FDA. Coriam does expect to make Astaris available in the U.S. as early as the second half. I think in general, for anybody that would launch an ADHD product, a great time to do so is at the very beginning of the school year. So if I was in Perry Sternberg's shoes over there at Coriam, that would be where I would focus my most attention. A Starus NDA approval not only validates the prodrug approach, the LAT approach that we've developed here at ChemPharm, but also the value potential of each one of our prodrugs that we do spend a lot of time and effort on to get these products approved. This goes far beyond a Starus. This goes into KP484. It's the same active, the only active ingredient in KP879. So with this, it's really a pivotal point in our organization's history. Turning to the partnership a little bit more. For those that aren't really familiar with this license, again, it started off back in September of 2019. It's with a portfolio company directly of GPC who has then assigned the commercialization rights to Quorium. Quorium is headed by Perry Sternberg. I mentioned him already. This is the guy who really made Vyvanse what it was commercially, and much of the team that worked with him there is now at Quorium, and we are very excited to have such a great commercial partner, literally very complementary to this great development team that we have here at Kim Farms. The milestones and royalties I've already mentioned. So, just briefly, I did want to touch on the marketplace. And this is really a prelude to some of the discussion I'll have related to some questions. You know, this is a very big and growing market. I think we really underestimate when we think about ADHD, it's so well understood. You know, a $17.5 billion market in this particular case divided up, yeah, sure, in a number of different products, but two major categories, stimulant, non-stimulant, with only really two stimulant-based types of products. We believe that our product has met many of these, if not all, the key advantages that we intended to go out and demonstrate as far as how we can improve methylphenidate-based products. So with that, I'm actually going to turn it back over to LeDwane, and he'll go through the financial update.

Thank you, Travis, and good afternoon. As we've spoken about already a couple of times, certainly we are pleased and excited to report that the multi-phase financial restructuring process has been completed. This was the culmination of a series of transactions that began last at least Q4 of last year, but really went back even further than that. And the result has been pretty astonishing. We were able to pull together a string of transactions, which culminated in gross proceeds of approximately $94 million to ChemPharm. This allowed us to regain our listing on the NASDAQ capital market back in January. We eliminated all of the company's debt as of February 8th. I'll probably be talking about that for the rest of the year just because it really is a major accomplishment for the company given the years that we've been under that debt, really since pre-IPO. And we've added substantial new capital to propel the company's growth efforts. We're positioned with a great balance sheet now, significantly extended runway, and frankly, it's a brand new company with a whole different set of strategic options available to us for the future. Specific to the Q4 2020 financial results, we reported revenue of $2.4 million for Q4. That's primarily composed of services revenue under our aquarium consulting arrangement and other consulting arrangements. Compare that to Q3, and you can see that was about half a million more than the prior quarter. We reported net loss of $4.9 million, or about $1.07 per basic and diluted share. compared to a net loss of $6 million or $2.90 per basing share for the same quarter in 2019. Our operating loss for Q4 2020 was about $3.2 million, and that is an improvement of $1.2 million by comparison to the same quarter in Q4 of 2019. This was primarily driven by an increase in the revenue as well as a decrease in our operating expenses during Q4 2020. And you can see here R&D expenses at $3.1 million, G&A expenses at $2.5 million. Essentially here you can see that we are maintaining our same expense posture as we have been since our adjustments to the cost structure in 2019. Turning now to the full year 2020 financial results. We had full year revenue of $13.3 million for 2020. This was primarily services revenue, as well as we received a regulatory milestone revenue of $5 million, which was at the NDA acceptance last May of the KP415, now a Staris NDA. Compare that to 2019 revenue of about $12.8 million. Net loss for the full year was $12.8 million, or $3.21 per basic and diluted share. Compare that to a net loss in the prior year of $24.5 million, or $13.23 per basic and diluted share for 2019. The expense picture follows along with what I've already described to you related to Q4. And so for full year 2020, our operating loss was $5.6 million. And that's an improvement of about $14.7 million compared to operating loss in 2019 of $20.3 million. This was primarily driven by the increases in revenue and decreases in operating expenses. Now we turn to the balance sheet. And of course, as we've gone through the first few months of this year, you know, balance of cash at $4.3 million as of 12-31 is certainly a fact, but that's not the story, as you well know. Our burn rate, we had a decrease of about 1.1 million during Q4, and that's been consistent with what I've been telling you over the last several quarters, and that remains the case, a burn rate of around one million per quarter. Based on existing resources and really going past now all the transactions that have taken place, in the beginning of 2021. Our cash runway is much longer. Here it says at least through 2023, but to be honest, it's even longer than that based on our current operating forecast. We had a net total debt of $67.7 million as of December 31st, but as you know, it's been fully extinguished. We did that sort of three ways here. We paid $30 million. out of the January 21 offering. We converted $31.5 million into preferred stock also in January. And then we paid the remaining amount of $8 million of principal interest and prepayment fee in February 2021. Again, that's a great accomplishment for the company and really put this at a different place. And as of March 10th, you know, normally we wanted to make sure we got you a number that kind of says exactly where we are today. Total cash today, or as of yesterday, was $77.6 million. This does not include any milestone payments related to the approval of Astaris. This is really just the cash that came in through the series of transactions, as well as cash that's come in from warrant exercises that have also been taking place over the last several weeks. Total shares outstanding as of yesterday. is 28,376,321. The fully diluted share is outstanding, 38.6 million. And that includes 9.6 million of shares issuable upon exercise of the remaining warrants. The press release has more detail around exactly how many have been exercised, and we can try to address that as we go through the questions later. Another feature of the balance sheet and cap structure today is that of that preferred that was issued in conversion of the debt. None of that preferred stock is outstanding as of March 10th. So with that, Travis, I'll turn it back to you.

All right. Thanks, LeDwayne. And we are taking a little bit of a unique format this time with the call that we just had and so many questions coming in from our hundreds, if not thousands, of shareholders. We wanted to address as many of those as possible while also addressing questions from analysts. So we've collected those questions ahead of time, able to kind of consolidate and precisely have those in a form that we can explain. I did want to mention that if we didn't answer a question that you had, it's either because it was answered in something else in the presentation or we plan to address that in some other forum. Or it's just something we can't talk about because it's a confidential business discussion. It's something that maybe we don't have all the information on. Whatever it is, it's a very valid reason. We want to tell you everything we can. We have to tell you everything that is legally responsible to do. So please, you know, these questions are just a piece of what we've heard, but I think are representative of everything that – we feel is important for everybody to know, as well as many things that you should know. So the first one, it really goes off of what you've already spoken about, LaDwayne. Can you clarify the number of fully diluted shares outstanding after the restructuring?

Yeah, so I just spoke to that a moment ago. That number, again, is 38.6 million fully diluted shares, and that's inclusive of the mores of 9.6 million. It includes the preferred stock that was issued. and really every element of the recent transactions is included in that number.

Okay, well, the next one really is very similar. It's, can you clarify the number of warrants exercised, not exercised? This one's a little bit different, as well as the current market cap and cash position.

Right, so in the press release, we tried to provide this detail, too. So with regard to the number of warrants exercised, To date, or as of yesterday, 12,281,000 warrants have been exercised and converted into 11.8 million shares of common stock. The reason for that difference is primarily that, in some cases, warrants were exercised on a cashless basis, so it resulted in less shares being issued, but a large majority was actually incremental cash that came into the company, which is included in the cash balance I mentioned of $76 million. And then, of course, warrants already exercised, or excuse me, that remain to be exercised is the $9.6 million that we've talked about. Our current cash position, $77.6 million. Again, we've already talked about that. And then current market cap, I guess if you base it on today's close, which is $9.98. I'm literally doing the math right now. And you would assume, I guess, the 28.4 million approximately shares outstanding gives you a market cap on that basis of 283 million approximately. On a fully diluted basis, 38.6 times 998 suggests a market cap fully diluted of 385.2. So I think that answers that question pretty well. And I do know that because of the flurry of these transactions, that while these seem like very basic questions, all of the filings we've been required to do, obviously, we're not intending to obfuscate, but it's pretty technical, a lot of these transactions. And so I'm glad that we could provide some clarity today. And by the way, if there are any follow-up questions, continue to send those in. either at info at chempharm.com or through the contacts at TBRND, and we will continue to try to bring clarity where we can. Thanks, Dwayne.

The next one is more of a general question. I think I've covered a part of it. A lot of folks are trying to understand the commercialization plans that Quorum have and, of course, any updates that they have provided. The first one kind of related to that is the launch still expected. I believe I've covered that. Of course, my belief as well as I think their press release and the press release that they reviewed that we issued, all states as such. There's nothing to the contrary. I think as far as any detail, the best sources you're going to find for that is located in the presentation that Coriam and ChemPharm gave together. That's found in the past events section of our website. It's a full transcript there. You can go read it, see the slides. It's actually very well done. And so, you know, I think that's going to be your best resource. Nothing has changed from that other than the fact that we believe we have an excellent label, perhaps the best in class label when you talk about ADHD products. And, you know, that just means it's all the more valuable and important to do our very best. We've got some questions, very astute. Shareholders, what is the status slash process of scheduling with the DEA? Some of you may recall hearing me speak about this in the past. The DEA is required to issue a preliminary schedule decision for the prodrug, SDX, pyridexamethylphenidate, 90 days after approval. Now, that is based on a recommendation that's sent from the FDA to the DEA. At this time, that remains a confidential recommendation. And at such time as that final determination is made, we will be happy to pass that along to our shareholders and potential investors.

And Travis, to be clear, that's 90 days from when?

From approval date, March 2nd. Yes. I'm really glad we have this format, actually. It works a lot better. The next question was submitted from one of our analysts, and this one I think is on a lot of people's minds, so we're happy to spend some time here. Your market cap is currently very near what it was before the successful PDUFA date. How do you account for what I view as a clear disconnect between the current valuation and the potential value to ChemPharm from the recent Astaris approval? Well, I certainly won't pretend to. you know, understand all the ins and outs of the public markets. And, of course, everybody has an opinion, you know, whether it's good, bad, or indifferent. What I would really encourage everybody to do, and I can sit here and tell you the great things that I believe are imparted in the label for Astaris. I can tell you what I know about the ADHD marketplace, what the needs are. I can tell you personally what my needs are. and those of my children. But what I can't do is fully convince you of exactly what the value is, because I've said all these things multiple, multiple times. So what I encourage here is go and look at the label for Concerta and Focalin XR. These are two of the most prescribed products in this methylphenidate-based space. Take those labels and put them side by side with the SARS. And look for things about height and weight. look for things about onset and duration. Look at the different graphs that are included in there. Look about sprinkling and prodrug profiles and pharmacokinetics and just look at the differences. And you'll be able to tell, I believe, that there are major differences from these two very valuable products. Both Concerta and Foclin XR are right now roughly about 1% each market share. They're highly genericized. The only benefit to these 1% market shares that these guys both have is the fact they have a brand name. They literally have no differentiation from a generic, which would be cheaper, and yet they still hold on to 1% market share. So I'm really trying to say here, I think alluding to anyway, you'll have to come to your own market assessment. Do we think this is 1% the same as a branded generic share? Or do we think there's 2%, 3%, 4%, 5% of the marketplace? And then what does that mean? Well, we know it's a $17.5 billion market. So I think really the disconnect is between the value proposition and what the market shows. So everybody was focused on what the label would say and forgot at the end what is the value of that label. And I think that's at least in our belief where that disconnect lies. I do, we have a presentation that we're going to share at the Roth Conference. It is available if you go to our press release and sign up for the, register for the conference. You can listen to it now. I walk through the label in detail. I'm not going to do it on this call. It would take forever. So, certainly, I think that will help you in your exercise there. Another question that kind of relates to this, we kind of piled this in here, is other milestones for Astaris. Well, in the license agreement, there's also an approval milestone associated with KB484. There's also a number of different sales milestones. We're giving you what GPC allows us to tell you. So we're under confidentiality. We have a redacted agreement in the public space. I encourage you to go to that. I also encourage you to look at other licensing deals. this isn't strange or extraordinary. This is very much a typical type of licensing deal. So you could probably guess and get fairly close on what those breakdowns are. And if you want to do that, please feel free. Go ahead, Ludwine.

One thing I would add, in one of the questions that we had sort of summarized here, someone was curious if there are specific to first first dose or first prescription or sort of, I would just say we have very simple milestone structure. It's simply based on achieving certain sales tiers. So again, we can't disclose the exact amount of those tiers, but there's nothing fancy. When you achieve X dollars in sales for a year, you achieve certain milestone. So that's very simple. If we're able to bring KP484 to approval, it gets added into and has the effect of taking a Staris sales plus KB484 sales, and then you can reach each tier. Arguably, you would probably reach it sooner because now you've got two products contributing sales. So it's a very simple milestone model.

Very, very good point. Was there anything else you believe I missed on that question?

No, I think you covered it well. I think the way I think about it, I know when we saw the data from 2018 sales, I believe it is, of Focalin XR and Concerta, Focalin XR, again, on a label-to-label comparison, there's amazing differences in terms of benefits to patients, potentially for a STARS. And Focalin XR had around $350 million in sales approximately in 2018, and Similarly, Concerta, again, this is as generic, had sales in the approximate range of around $500 million. So, just wanted to put numbers on that. You combine those two products, you're approaching $850 to $900 million in sales. Okay, and again, making that label comparison, what do you think Astaris would be able to do if Concerta and Falkland in a generic position was able to get those kinds of sales? So, that's the That's a CFO's way of saying peak market share seems to not be well understood. At least that's my guess.

Right. And one point I do want to make certainly here, we're the developer. We're trying to convey as best as we can the differentiation of the product. That's why we're both encouraging to go and look at the label. We're not going to be making promotional claims We are not a regulatory agency. We're not claiming to be the FDA. So, you know, Corium has a lot of work to do because the label, you know, literally just came out. And while I'm sure they predicted certain things, at the same time, I'll tell you, there's surprises in this label that are great surprises. So, you know, it takes some time. It takes some work. But ultimately, you know, I think we're in agreement. This is a great product. it will do very, very well. And ultimately, I think it's just highly underappreciated. So the last question is a little more strategic, and also from one of our analysts. ChemPharm has completely transformed its balance sheet since year end 20, with debt dropping from roughly $65 million, he didn't have the exact number apparently, to zero. And cash is far higher than it was back then. How should investors be thinking about Kim Farms' capital deployment? And are you looking at any new assets to potentially acquire? I think there's actually several parts to this answer. You know, of course, the financial transformation, I mean, LeDwayne talking about our current market cap. At one point last year, sitting as an OTC company, we had a market cap below $15 million to go to that to a $280 million market cap. And this is meaningful in many different ways, including access to additional mutual funds, additional new investors, shareholders, just visibility, credibility. The list goes on and on and on about what that can mean to an organization to have a meaningful market cap. But at the same time, we've removed the debt overhang, the $67 million that we owed, was less than the $48 million approval milestone that is available to us. And so you start to do the math. You worry about market conditions. That was just a huge transformation. So I can't undersell that. And certainly, it really proves the commitment we have to continue to add value for shareholders. When we think about the capital deployment, as we look forward, this is where we get very excited. Hey, look, We've got this transformational product, so we are going to optimize it. If we were a commercial party, we would be out there really doing everything we can. And all your questions would be directed, well, what about market access? What about pricing? What about your sales force? How big is that going to be? I can't tell you any of that because that's Quorium. They're a private company. They don't have to tell me, and they really don't have to tell the public. But at the same time, I'm very convinced that they know exactly what they're doing. and will do the very best because they have all the incentive in the world to do so, and certainly the right team in place to capitalize on that. At the same time, our focus is back into development some, but we'll be supporting that entire effort, including manufacturing support, medical affairs and scientific literature, and just anything regulatory. There's a lot of regulatory work that still goes on. It wasn't a one and done event. we will be doing everything we can to optimize the value of that product as well. And that will not change in the near term or the long term. Secondly, we have this great validation for our technology again. You know, AAPIDAS approval is great, but the opioid space is crushingly difficult is the best adjective I could use. And at the same time, we're going to deploy, you know, our capital and our resources and our development expertise in areas of high value, high need, high value. And, you know, kind of to answer the last part of this, are you looking at any new assets? Absolutely. We should be. We should be looking at things that add the most value. And if it's a little later stage and we can add our approach, add our development team, whatever we can do to create, you know, new value for the shareholders, that's exactly what we intend to do. So hopefully that wraps up that question. Ladoine, did you, anything I missed on that one?

No, I would say, you know, not only is it what Travis and I view, but of course, together with our board, this strategic direction, the strategic focus on what's next is going to be, I think, a very important conversation. It's something that we talk about on an ongoing basis, but I can't say enough how the new balance sheet really now makes us have real conversations about what's possible, what's next. So this will be an ongoing discussion, and I think over The next several months, throughout the rest of the year, just on an ongoing basis, we'll do our best to provide updates as we make progress in this area. So, I appreciate the question, frankly. It's really the right direction to be thinking about.

All right. With that, we don't have any more questions that we can, for this time, allotted. Again, I will reiterate the Roth Conference. Again, there's a link to register and to listen to the full current management presentation. Hopefully, we can answer a few more questions. I think all your financial updates can be found here. Certainly, this is the best resource for that. At the same time, I really wanted to thank everyone for your time. The intense interest and excitement around the approval, all those great things are still present in the company. Thank my shareholders and appreciate everyone's effort.

Okay, thank you. And, operator, with that, we will conclude today's call.

That does conclude today's conference call. Thank you for participating. You may now disconnect.