Strategic Acquisition of Arimoclomol
May 16th, 2022, 8:30 am EST to May 16th, 2022, 8:57 am EST

Participants
Richard W. Pascoe, Executive Chairman
Travis Mickle, CEO
LaDuane Clifton, CFO
Jason Rando, Tiberend Strategic Advisors
Jonathan Ashcroft (Roth Capital)

Prepared Remarks

Operator:
Good day. Thank you for standing by. Welcome to KemPharm's strategic acquisition conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during a session, you will need to press star-1 on your telephone. If you require further assistance, please press star-0. I would now like to hand the conference over to your speaker today, Jason Rando, with Tiberend Strategic Advisors. Please go ahead.

Jason Rando, Tiberend Strategic Advisors:
Good morning and thank you for joining our call today to discuss KemPharm's definitive agreement with Orphazyme to acquire Arimoclomol.

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 Kempharm's expectations regarding future operating results. Forward-looking statements are made pursuant to the safe-harbor provisions of the Federal Securities Laws. They 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 from KemPharm will be Richard Pasco, KemPharm's Executive Chairman, Travis Mickle, President and CEO, and LaDuane Clifton, CFO. Following the remarks, there will be a question-and-answer session. With that, it is my pleasure to introduce Rich.

Richard W. Pascoe, Executive Chairman:
Thank you Jason, and welcome to everyone who joined our call this morning. I'm very excited to be speaking with you today about what we believe is a substantial value-building opportunity for KemPharm and its shareholders. As Travis has highlighted on prior calls, including last week's discussion of our first-quarter 2022 results, KemPharm's drug strategy is focused on building a pipeline of novel treatments for rare CNS and neurodegenerative diseases that address indications that are under-served by currently available medications.

Our aim is to build this pipeline by advancing internally-developed products, such as KP1077 for idiopathic hypersomnia, and through the acquisition or in-licensing of products originated by other companies or institutions.

Ultimately, our goal is to advance these products to an NDA and potential FDA approval, after which KemPharm would seek to build a small but highly specialized marketing and commercialization team. We believe our regulatory experience with Azstarys and Apadaz position us well for success on this front.

Richard W. Pascoe, Executive Chairman:
With this vision in mind, KemPharm is excited to announce our definitive agreement with Orphazyme to acquire essentially all their assets, to include their lead product candidate, Arimoclomol, an orally-delivered, first-in-class, heat-shock protein amplifier being developed as a treatment for Neimann-Pick Disease Type C, or NPC for short.

NPC is a rare, progressive, neurodegenerative disease, for which no approved treatment exists in the US. The disease is so severe and underserved that Arimoclomol is currently being made available to NPC patients in the United States, France, and Germany under Orphazyme's Early Access Program, or EAP.

Richard W. Pascoe, Executive Chairman:
The addition of Arimoclomol significantly expands our development pipeline targeting rare CNS diseases, bring to KemPharm an NDA-stage, revenue-generating product, on which intend to build commercial capabilities that allow us to create and retain value for the benefit of shareholders, versus solely relying upon partnerships.

The financial structure of the acquisition is also very attractive in that current revenues being generated by Arimoclomol from the existing Early Access Program in France affords us the opportunity to acquire the asset in a capital-efficient manner that has the potential to create positive cash flow while incurring no shareholder dilution.

Richard W. Pascoe, Executive Chairman:
I think this bears repeating: today, KemPharm has acquired a novel, late-stage product — Arimoclomol — that addresses a rare condition impacting the central nervous system for which no treatment exists in the US. We were able to do this via a non-dilutive, all-cash transaction that the potential to generate immediate revenue, which could ultimately render the deal cost-neutral to KemPharm.

Simply said, this is a tremendous opportunity for KemPharm, and one that is the result of months of diligent work by the entire KemPharm team, mostly notably, Travis Mickle and Laduane Clifton, who are here with me today. Expanding our pipeline via the in-licensing or acquisition of an asset was stated as an objective for 2022, and through their leadership, we have now delivered. With that, I'd like to turn the call over to LaDuane, who will provide more details on the transaction. LaDuane?

LaDuane Clifton, CFO:
Thanks Rich, and thank you for joining this morning. I'll just provide some additional details related to the definitive agreement. As Rich has already summarized, we will be purchasing substantially all the assets and operations of Oprphazyme, including the product Arimoclomol, with a cash payment of $12.8 million. We are going to finance that cash payment through a revolving line of credit, which is secured by KemPharm's balance sheet, so that if you ask me what the balance is today, I'd tell you it was $119 (million) at the end of March. And if you ask me what it is tomorrow, I'd tell you it was $119 (million) as of after this transaction.

I think we have tried to do this in a way that is very much capital-efficient, and maintained KemPharm's flexibility, as we certainly have other development priorities in addition to this new product opportunity.

LaDuane Clifton, CFO:
There is an assumed reserve liability that we're also going to be picking up here of $5.2 million. This is tied expressly to the revenue that is being generated under the French Early Access program, and it's something that will be due in the future. It's important to note that this is, in fact, an estimate, and so this is a conservative estimate based on what the estimates are today of what the commercial price will be in the future, but as we get closer to that, there is a chance that that could be a lower liability.

The EAP in France is very important to this project. As Rich noted, it allows us to begin recouping costs immediately, and frankly, we expect this to generate up to $12m in 2022, and that's based on the current enrollment in the program in France. That could change. It could go up, it could go down, but we believe that this is an important feature of this deal, as it allows us to cover this cost going into into and through the resubmission and approval, we hope.

In addition to that, there are "Early Access" programs in other countries, such the US and Germany, although those do not bear revenue the same way as the French program.

LaDuane Clifton, CFO:
We will also be retaining a majority of the current employees of Orphazyme — a lot of the scientists and product development specialists, who have been a key part of bringing Arimoclomol to the point of where it is now. And we have, actually, already created a new subsidiary in Denmark, where the assets will be held initially.

Ultimately, this deal is expected to close on or before June 1st, and it's subject to final approval by the creditors and the courts. We'll tell you that the court has been a key part of all the negotiations, and we don't expect anything to delay the close. So with that, Travis, I'll turn it to you.

Travis Mickle, CEO:
Thanks LaDuane, and thanks, Rich. So I'm going to dig into a little bit more of the details of Arimoclomol, and and "NPC", and how we believe there's a great opportunity in front of us.

Travis Mickle, CEO:
When we think about this disease, this is a debilitating, devastating disease, really characterized by a lysosomal storage disorder. This disorder affects primarily organs of the brain, spleen, and liver. Ultimately, the neurocognitive function is adversely affected greatly, and of course, most importantly, this is a fatal disease. Most cases that start young are actually very progressive, and aggressive, and tend to lead to a very short lifespan. If it is later in life, so as people grow older, it tends to be a bit less aggressive in those cases.

But as you can see from the slide, the mean age of death in NPC patients is roughly about 13 years. It's There's an estimated 1,800 patients in the US and Europe, and 3,000 globally, and of course, there is no approved treatment that exists in the United States for NPC. In Europe, there is one available treatment — that's migulstat, and you may hear that again in this presentation.

Travis Mickle, CEO:
So when we looked closely at Arimoclomol — when we looked at this opportunity, what we saw was clinical data that was convincing and compelling, a regulatory environment that certainly can be overcome, and something we are very interested to see if we could bring it across the goal line.

This is a first-in-class oral treatment intended for NPC. It's a capsule formulation, so you can open it up, and actually allow the contents to be mixed with food, liquids, delivered through a gastric feeding tube, which is an important option.

All of the evidence to-date has shown that this product is actually improving lysosomal function, as well as cellular function. This has been studied in Phase 1, Phase 2 — four Phase 2s, and three Phase 2/3 trials in various rare diseases. So, what we've seen is very good safety data — up to 500 individuals in various diseases. Up to 5 years of treatment with no significant safety findings.

Travis Mickle, CEO:
There was a positive efficacy signal from the NPC trial — that's NPC002, as well as positive results from a Phase 2 trial in Gaucher's Disease, which is a related lysosomal disorder.

The product is exciting because it's already received an Orphan Drug designation for NPC in the US and Europe. Fast Track designation, Breakthrough Therapy — again important component when we think about the economic possibilities for a product like this. It's a rare pediatric disease designation.

So if approved, this product would be eligible to receive a Priority Review Voucher attached to that designation. Also, it's eligible for NCE (New Chemical Entity) status, as well as Orphan Drug Exclusivity. And, the patents are long-lived. They could extend out to 2040.

Travis Mickle, CEO:
So when we look at the path ahead of us for an NDA resubmission, this particular process, we think, is fairly straightforward. The CRL was received from the FDA, by Orphazyme at the time, was last year, June 17.

The FDA identified three key issues, primarily surrounding the endpoint, and how that's used in a single efficacy trial. So they wanted to see additional evidence, as well as substantiation of the validity of that endpoint. Second was how missing data was handled for the statistical analysis. And then third was additional support for confirmatory evidence.

Many of you may be aware that in particular cases where you have just a single efficacy trial that there is need for additional confirmatory evidence of efficacy and/or mechanism of action. Most importantly, when we reviewed the CRL and reviewed with our key experts and consultants, the FDA did not request any additional efficacy data. Usually the first thing they do is to say right up front "you need to conduct another trial", and they did not do that.

Travis Mickle, CEO:
When we reviewed the Type A meeting that was held in October (2021), we saw this continued effort to work with the company and work the sponsor to be able to move this product ahead to potential approval. The FDA agreed with Orphazyme's approach on how to re-analyze the primary endpoint, removing the cognition domain. They agreed to a rescoring around the swallowing the domain, as well as further validation of that endpoint.

The FDA agreed to discuss in the future of how best to handle missing data. There was no consensus at this time, but we believe that there is a very reasonable path forward. And then, additional confirmatory evidence was already available, and so the company actually presented this, and we believe it is very compelling and an expansion upon what was submitted in the NDA.

So, I discussed some of this already as we have broken this down — the FDA has confirmed that we can remove the cognition from the five-domain primary endpoint to form a new "core domain" endpoint. You'll see how that affects the statistical analysis and treatment effects in a second. They agreed to a qualitative study and reviewed it when it comes to the swallowing domain, the scoring used in the trial, as well as the clinical relevance.

What we still need to find out, and what what we need to work with, is how the FDA would like to see missing data handled. And, ultimately, we believe there's a great opportunity here.

Travis Mickle, CEO:
What I think is very important for everyone to be aware of and understand is that this study did not fail. This was not a failed trial. By the pre-specified analysis that was included in the SAP in the protocol was the original endpoint that met statistical significance, and the study was successful. The agency's methodology — that they would like to see in this particular instance — was not pre-specified. Other statistical methods may be more appropriate, including the use of the original pre-specified analysis. And this is something that we have seen many times, where missing data has become an issue for a lot of sponsors, and how that is handled statistically, given the statistical impact there for a particular product.


Travis Mickle, CEO:
Now, when we look at what was actually in the original NDA, that is the — slide 11 — pre-specified five-domain "NPCCSS", the treatment effect was a change from baseline of -1.4. This indicates an improvement versus the baseline effect — so where somebody started. Again, this is a scale. It runs from 0 to 25 when we talk about the 5-domain. When we talk about the 4-domain, that's a scale from 0 to 20 — 0 being the best, and 20 being the worst. Each domain is scored from 0 to 5, depending on the particular symptoms involved.

So when we look at the pre-specified, and removing the cognition, you can see an improvement in the treatment effect, and certainly an improvement in the statistical significance.

When the FDA used their post-hoc analysis, again, just an illustrated example, again you can see it did not reach statistical significance for the 5-domain, and was barely outside of what is usually assumed to be statistically significant at 0.06.

Travis Mickle, CEO:
When the meeting was conducted — the Type A meeting suggested that you could use the 4-domain, as well as a re-score of the swallowing domain as per what the FDA had requested, you see, again, a p-value that is highly statistically significant, that also can be used with the FDA post-hoc analysis, and reach statistical significance.

When the migulstat subgroup was explored, you can see a tremendous effect. So one thing I would like to point out is that in this particular study, the standard of care was applied, which is migulstat. It was applied to both placebo and the active group. So, fundamentally, these patients were, for the most part, on both. About 80% of all patients received migulstat during this particular clinical study.

Travis Mickle, CEO:
The other piece of the puzzle here — the other piece to us getting this product resubmitted and ultimately approved — was bolstering the confirmatory evidence in order to address the key issues. Since the Type A meeting — since the CRL — there's been a ton of additional data that's been generated. All of it pointing in the direction of confirming the clinical effect I've seen. This includes data around biomarkers, results from the open label extension arms — which have gone out to four years —, as well as the data from the expanded access programs. As Rich alluded to, I'll give some actual numbers — but many of these patients, and additional patients have been added to the program.

New results have also been included for in-vitro studies and in-vivo models in NPC. We believe the totality of the current evidence, as well as whatever we may do before resubmission, is enough to address the FDA's issues. And we'll be addressing that before that submission.

Travis Mickle, CEO:
So the path forward, we believe, is very straightforward. We have the right experience, the right team. You know, we've gone through this before with Apadaz, which actually went through an FDRR process before finally getting approved. We went through a statistical issue with Azstarys, and we worked with our partner to get their product Adlarity approved after they received two CRLs.

Certainly, there is an opportunity here above that. We believe that there is a chance that we may want to utilize the FDRR process. We do know that an adcom is highly recommended if we resubmit, which, we believe will be a good thing in this particular instance to educate the FDA further on the benefits of the product.

With all that being said, we are focused now on resubmitting the NDA, and we believe the first-quarter 2023 is a reasonable target objective for that resubmission.

Travis Mickle, CEO:
Turning a little bit to the commercial opportunity.

Travis Mickle, CEO:
What's compelling here, we believe, is that with this particular product, right up front, if you receive approval, you have this Rare Pediatric Disease Priority Review Voucher. The last one sold for $110m. It's within the typical range of roughly $100m per voucher.

We also think there should be an opportunity, if this program is going to end at some point where the options are more scarce, so that may be something that impacts and makes these vouchers more expensive in the future.

Arimoclomol is already generating revenue, as LaDuane and Rich have mentioned. That program is actually one that reimburses for the treatment, and it's one that's been in place now for over a year. Typically, as we're moving through a marketing application and a potential French and/or European approval, that program will remain in place. And the French agency has been very willing to work previously with Orphazyme, and we hope that they will do so again now with KemPharm.

Travis Mickle, CEO:
The global EAP programs actually represent what will be the first patients on treatment post-approval. Right now, there are 151 global participants. We've heard from a number of consultants that that's amazing. Many times, these are led by positive results that KOLs are seeing in current patients in their centers or in their care. As of March 31 (2022), there were 67 patients in the US, 41 in Germany, 34 in France, and 9 patients in other countries, including Denmark, Switzerland, and the UK.

Travis Mickle, CEO:
When we look at this opportunity, as rich already mentioned, this is a great chance for us to take the product forward, get the product approved, and retain all the business that is in the value. Typically, an ultra-rare disease like NPC can be commercialized and marketed with a very small team — less than 20 individuals.

You know, again, thinking about the global market opportunity, sure, there, from a European perspective, we'll focus on the European regulatory (environment) after we get the US approach well off — in full steam towards that Q1 2023 potential resubmission.

We'll also be looking at other partnerships outside of Europe and the United States, because there are opportunities outside of those particular jurisdictions.

Travis Mickle, CEO:
So when we look at our pipeline today, we can see that we've actually demonstrably moved this company forward, now with an NDA resubmission product. Idiopathic hypersomnia — we all know — KP1077 is moving forward as well, as narcolepsy, and internal candidates.

And we believe that this is just the start. These are the candidates that we are going to focus on for now, but there are other opportunities out there, and there are other opportunities within.

And this is just a great chance for us to move the value proposition, and really advance the company and the programs that we have in very short order. So we're tremendously excited — I know the team that's been involved with this internally is the right team. They are energized beyond anything I've seen in the 15 years of being a part of KemPharm. And they are ready to make this product succeed, take it forward, get it approved, and get it commercialized as well.

Very exciting day. That's all I have for now. Happy to take any questions.

Q&A

Operator:
As a reminder, to ask a question, you will need to press star-1 on your telephone. And to withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster.

Our first question will come from the line of Jonathan Ashcroft from Rock Capital. Your line is open.

Jonathan Ashcroft (Roth Capital):
Thank you, and good morning guys. I was curious — was migulstat use stratified between the arms in that trial?

Travis Mickle, CEO:
I don't believe it was. It was used as a standard bearer as needed.

Jonathan Ashcroft (Roth Capital):
Okay. But, 39 out of how many used it?

Travis Mickle, CEO:
39 out of 50.

Jonathan Ashcroft (Roth Capital):
Okay. Um, so basically, how are you going to modify the swallowing component?

Travis Mickle, CEO:
The current proposal is to combine some of the different swallowing domain calculations. So, there's one that's focused on coughing with a liquid, and another one that's coughing with a solid. So, that's a textural issue. You can fundamentally have difficulty swallowing both of those, and it may not be recognizable. So the agency, rightfully, pointed out that, you know, "coughing while eating" was probably more appropriate.

So using, say, some other scales, speaking to KOLs, doing a qualitative assessment, I believe that's the approach to take forward, and it's really about making sure that those particular scores are well-validated and have clinical significance and can be measured.

Operator:
Okay. Um, so let's see here... what amount of revenue in total is being generated under the EAP in Germany and in the US? Because you spoke about $12m in France.

LaDuane Clifton, CFO:
Yeah. This is LaDuane. The early access programs in the other countries outside of France do not generate revenue. The manufacturer provides the product free-of-charge in those cases. So, the French program is unique in allowing reimbursement pre-approval.

Jonathan Ashcroft (Roth Capital):
Okay. And the last two questions, can you break out the total pre-commercial revenue every quarter, and the second part of that is: how much of the $5.2m rebate is owed to the French regulators? How much revenue is that rebate based on?

LaDuane Clifton, CFO:
Well, it's a great question, Jonathan. We do expect to provide visibility as we go forward each quarter so that can be the answer. With regard to the estimate of revenue liability, it has been based on a 50% rebate at the moment. And so you could expect that was approaching the $12m approximately in revenue. So those estimates are tied together.

But, I have to re-iterate that that estimate of a 50% rebate is conservative, and it's intended sort of — it won't be finalized until the commercial price is set after approval. And so, there's a lot of estimation and adjustments that might coming out of that.  So, that was very much a conservative estimate that Orphazyme had initially made with the French government, and at this point, we've maintained.

Operator:
Okay. Well, you are about to find a home, I think, for this drug, which has been around the block. I mean, I've covered the company that had this drug about 12, 14 years ago. So, it definitely seems like it's about to find a home. So, congrats on the progress. Thanks, guys.

Travis Mickle, CEO:
Thank you.

Operator:
Thank you. There are no further questions in the queue. I would like to turn the call over to Travis Mickle for any closing remarks.

Travis Mickle, CEO:
Again, I'd like to thank everybody for your time today, and I'd certainly like to thank the team, the board, the entire company, the Orphazyme organization — everyone who worked on this to give us this opportunity. It's very exciting. We plan to move this forward with all the passion that we've had with every program we've ever had here at KemPharm. So again, thank you. I appreciate your time.

Operator:
This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.

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