- Highly specific rumors connect dots of deal making strategy
- Potentials suitors sitting on significant cash positions.
- Valuation gap between market cap and traditional metrics
- Testimonials of drug highlight strong case for approval
- Short interest levels topping charts setting up for an imminent short squeeze
Ampio Pharmaceuticals (AMPE) is up on takeover rumor chatter initially spotted by Seeking Alpha editor Douglas House. In light of AMPE’s extremely low valuation, FDA meeting, and most heavily shorted stock status, the stock could be in a position to extend its gains significantly in the short term. Investors are now awaiting the shareholder report regarding the company’s FDA meeting scheduled in July regarding the filing status of the Biologics License Application (BLA). The reason the BLA is so important to investors is because of its one of the last hurdles required for FDA approval. AMPE’s lead compound, Ampion, has been identified as a reference product which will enjoy 12 year exclusivity. This is how biologic drugs made with human DNA get approved. AMPE has publicly stated they want to file by the end of Q3 but they recently hired a top notch consultant to help accelerate the process. The rumors are highly specific and seem to connect many dots.
Rumored Buyout Scenario Dissected
The tweets from FTT Capital (@CapitalFtt) are very detailed but the question on investors minds is all about credibility. FTT Capital’s Twitter profile states they joined in July 2018 which makes it clear that they are newbies and set up this profile to break the news. They have only five tweets and all of them are about AMPE.
Given that the BLA will be about 80,000 pages and the company’s prime focus, they have hosted only two conference calls since January 2018. This has left investors searching for information. FTT Capitals first tweet establishes an FDA meeting the 19th -20th of July. This fits in within the guidance the company gave investors on the May 29th when they announced the FDA has “agreed to a July 2018 meeting to continue their discussions of the BLA.”
The second tweet said “the FDA has wrapped and no further discussions are needed. The FDA has not requested another meeting, nor any further information from Ampio. We are informed it went well and they will be issuing some PR on this.” FTT doesn’t reveal its sources but this is a very detailed account of what could have happened. Although not specifically mentioned in this tweet, FTT Capital is talking about the BLA submission mentioned in the third tweet. According to the FDA Group LLC, any drug company filing a BLA with the FDA will want a meeting to “review it to determine whether it is complete.” An incomplete application could result in issuing a Refuse to File (RTF). According to the scenario presented, this was likely the filing meeting with the FDA in which they identify any issues that could result in a RTF like missing data or additional manufacturing information. Assuming this is the filing meeting, the next step would be a filing letter from the FDA allowing the advisory committee to conduct a complete review of the BLA. After the complete review the committee will identify any issues, agreements, or other commitments with respect to the drug label.
The third tweet indicated that “minutes from the FDA meeting need to be put on paper, then Ampio will do PR.” This is in line with the next step of the process which is a Filing letter from the FDA. With any FDA meeting there are minutes, and according to FDA guidelines they must “finalize minutes to the requestor within 30 calendar days after the meeting.” FTT Capital seems to be expecting a press release within the next 10 days indicated in the fourth tweet.
Now comes the interesting part of the tweet where they say “we are hearing a Chinese company has been waiting in the wings with a license deal. Hearing Ampio will also release that infor after FDA PR.” The next day they seem to clarify in the fourth tweet saying “next an announcement regarding license deal with China firm (this is big), then they will announce that a large pharma co will file BLA under their name.” Putting the diction of the tweet aside, there seems to be some real substance regarding the strategy. AMPE is suffering from a very low valuation compared to where they can get a deal done on a buyout. No drug company can offer a buyout at $30/share if the stock price is $2.50. That would be a 12X return and hard to substantiate. It makes sense to do a licensing deal first which will likely boost the stock price to a more appropriate level, so any acquiring company will be in a position to move forward with its offer. On the advice of their advisors, who had a hand in the Medivation deal, they may be taking a page out of that playbook.
The fifth tweet addresses the timing and the linkage between the licensing agreement and big pharma. When acquiring drugs big pharma has a tendency to go after worldwide rights to a drug. So companies that license their drugs overseas or chop up their territories do so at their own peril. If a large pharmaceutical has distribution in a licensed area the drug might not be as desirable to purchase as it creates competition. The tweet make reference to the licensed territory and said “a big pharma company is very serious about filing the BLA under their umbrella. Big pharma already knows about the licensing agreement.” Most big pharmas don’t care about China because it’s not in their global footprint. This adds credibility to the tweet as it addresses a weakness in the argument that a company would not move ahead with a license deal if there was a serious suitor ready to tender for the entire company.
It’s unclear who the Chinese suitor could be. Social media hasn’t unearthed any hints as to the name but what would make sense is a distribution partner. The other element might be an HSA manufacturer because despite AMPE’s capacity to produce product for international shipment demand could overwhelm them. This leaves a great opening for a drug company has distribution to orthopedic clinics and has the ability to procure large raw stock of HSA.
In terms of big pharma the top contenders from an ad hoc poll in April are Merck (MRK), Johnson and Johnson (JNJ), Pfizer (PFE) and Sanofi Aventis (SNY). This could result in a auction process bidding the stock price up.
MRK has exposure to the Osteoarthritis of the Knee (OAK) with its compound called Sprifermin. There have been no updates since the trial results in December 2017 which showed in a 549 patient 2 year trial that they were able to regrow almost .02 mm of cartilage versus -.02 mm in placebo. Cartilage growth alone will not be good enough for FDA approval. The secondary endpoint was a change in the Western Ontario and McMaster Universities Arthritis Index (WOMAC) score over two years. Total WOMAC scores decreased (indicating less symptoms) by approximately 50 percent compared to baseline in all treatment groups, including placebo. There was no statistically significant pain data. The lack of a phase 3 trial design 9 months after the results suggests they might be leaving their pipeline open for an acquisition. MRK has about $45 billion in cash and cash equivalents.
JNJ’s primary focus in it’s immunology segment where rheumatoid arthritis takes center stage. They have a variety of drugs like Simponi for rheumatoid arthritis and psoriatic arthritis and Stelara for plaque psoriasis and psoriatic arthritis. With no viable osteoarthritis candidate in its pipeline it makes sense for JNJ to pursue AMPE. What the company has been involved with in the osteoarthritis pain market with a drug called fulranumab, an anti-nerve growth factor drug. Unfortunately for J&J, they discontinued the program in 2016, due to “portfolio prioritization.” The licensing agreement with Amgen was subsequently terminated. J&J is also involved with ATTUNE knee replacements, helping knee replacement patients get better range of motion and other improved usages of their new knees. As of the last quarter JNJ has $15.2 billion in cash and marketable securities. With a hoard of cash and deep involvement in many types of knee treatment besides osteoarthritis treatment, Ampio could be a perfect acquisition candidate for J&J.
Pfizer also has been involved in the osteoarthritis pain market, like JNJ, with their monoclonal antibody tanezumab, which is another anti-nerve growth factor. The compound has been tested for various pain indications where the patient did not experience adequate pain relief with existing therapy. Like JNJ, PFE can possibly dampen patients’ pain with tanezumab. However, like JNJ’s drug, PFE’s drug tanezumab only has the potential to curb pain. With about $20 billion in cash, cash equivalents, and short term investments, Pfizer has more than the means necessary to make a lucrative acquisition of a true OAK drug, one that can improve function as well as pain, and in the most severe cases.
Sanofi approaches the knee pain market by using an injectable called Synvisc-One, which is simply a 6-month joint fluid injection. Is there a better alternative? With over €10 billion in cash as of the beginning of 2018, Sanofi has a large amount of cash – enough for a substantial acquisition. And they have shown their intentions to make acquisitions. With a failed attempt at buying Medivation and then Actelion, SNY made some large moves earlier this year, buying Ablynx and Bioverativ for a total of almost $17 billion in total. Last year, there were rumors that Sanofi was in discussions to buy Flexion Therapeutics, a competitor to AMPE, as SNY is involved in the knee osteoarthritis market with a different method of action. Sanofi surely has the cash and the infrastructure to make a seamless acquisition of a knee OAK player.
There are are only a couple of pure OAK plays for comparison purposes. The comparisons however, are like apples and oranges, because all the other drugs use KL2 and KL3 stage patients while AMPE uses the most disease prone KL4 patients. Flexion’s (FLXN) lead drug is called Zilretta and it received FDA approval on October 6, 2017. It is classified as a corticosteroid that has a sustained release element. In the latest quarter it booked sales of $2.2 million. It’s market capitalization is close to $1.0 billion. This is the only drug left in its pipeline after news that FX101 would be discontinued. They do have another preclinical drug called FX201 but that is years away from revenues. Most of the corporate value is sitting in the bank with $377 million in cash and marketable securities announced in the last quarter earnings call. The company has huge overhead associated with the rollout of their new drug. With $26.9 million in quarterly SG&A and $17.6 mill in selling expenses it’s amazing that they have investors that are so patient to wait for sales to ramp. With the potential approval of Apmion lurking FLXN shareholders might want to consider buying AMPE stock as a hedge against approval.
Another pure OA drug company is Anika Therapeutics (ANIK). This is a tough comparison coming in at $505 million because six months ago it was at close to $1.0 billion valuation. Anika’s top selling drugs are all based around Hyaluronic acid. Orthovisc, Monovisc and Cingal are their top 3 selling injectables. They are not a one trick pony like FLXN. They have well over $100 million in estimated revenues. They have $163 million in cash and cash equivalents and have announced a $30 million accelerated share repurchase. Business really flattened out as the started feel the effect of the sales cliff from insurance providers who started pulling reimbursements after recommendations from the American Academy of Orthopedic Surgeons (AAOS) pulled their support of hyaluronic acid in early 2017. Then they slumped even further after a product recall in May 2018. The final major ding in stock price came when their Cingal trial failed to meet its endpoint.
Both FLXN and ANIK have drugs that really dont work that well and have clearly lost the support of the AAOS which leaves a massive void to be filled by AMPE should Ampion get approval. It stands to reason that if AMPE was approved it would swallow up the combined market capitalization of both companies estimated at $1.50 billion as well as the private ones. There are private companies like Bioventus with $250 million in annual sales, OrthogenRx with $9.8 million in annual sales, and Fidia with €250 million in annual sales. The public companies are valued at 15x sales. If the private companies are valued at just 5x sales then Bioventus would be worth about $1.25 billion and Fidia would be worth about $1.5 billion. The AMPE valuation for all the companies it could displace should the drug get approval is $4.25 billion. To do a quick check of void filling valuation, AMPE has stated itself that the market potential for severe OAK is about $1.9 billion – and at a conservative biotech peak sales multiple of 2x that works out to $3.8 billion valuation from AMPE.
A recent twitter poll exposed the extreme disconnect between stock price and expected valuation of a buyout. By many metrics AMPE is undervalued having a pivotal phase 3 completed and apparently ready to file a BLA. Once the BLA is files there is statistically an 86% chance of approval. It is time for investors to figure out the market potential or peak sales of the drug, and give it a multiple.
In March 2018, Emerging Growth (EG) put out a detailed earnings model that showed a $9.5 billion probability adjusted NPV. On first pass the many of the assumptions were indeed conservative. According to AMPE the market size for KL-4 patients was 1.1 million and EG started out with 640,000. This is very conservative IF the FDA gives them the label they asked for which call for up to 5 shots before TKR. The next area of conservative thinking is in the profitability per patient. They use $200 profit per shot and the cost of manufacturing is $180 based on the last conference call. That puts the wholesale cost at $400 per shot to the doctor and that just seems way to low when the average cost of a synvisc-one shot is running at $1250. A wholesale cost with 40% gross margin is $750. This seems like the more likely scenario that would translate into a doubling of sales.
The primary issue with the model are the hip and shoulder joint revenues. It’s definitely something that might be done off-label but its not proper to factor that in quite yet before the drug starts selling. The revenue from these joints represents almost 5% of the projected sales. The time value of money is set at 5% which is extremely low. It should be more like 15 – 20%. At first glance the probability of approval looks like a typo at 9% then the corresponding note says “most conservative number used in an NDA filing vs actual of 86%.” After a rough review of the calculations this number was indeed only factoring in a 9% chance of approval. One could only guess that a number that was 10 times as large would not be believable and hoped to bury the devin in the detail.
This is the only published earnings model and it has a lot of flaws but the methodology is accurate and many of the assumptions are overly conservative. Investors should exercise caution because a $9.5 billion disconnect should throw up alarm flags.
There is a huge disconnect between these buyout valuations ranging from $2.0 billion to $9.5 billion while the current market capitalization sits at $258 million. The question on investors minds is how did this valuation gap develop and then ultimately how will it be resolved. The valuation gap started in December 2017 after the company released phase 3 data and made its intentions known that it was in active discussions to sell or license the company. On the day of the release (12/18/17) close to 917,569 shares were naked shorted putting a cap on the price dampening investor enthusiasm. A few week later another disinformation campaign had indicated there was a slim approval for Ampion. Much of the shorting will be covered later in the article but the takeaway should be that the valuation gap is primarily due to the shorts. Between the legal shorts and naked shorts roughly 38% of the float is short. So the shorts represent the smoking gun for the value gap but other factors contributed as well. Management didn’t do a good job managing the funding options for the company which resulting in significant dilution. Public relations efforts failed due to the overpowering message of the shorts leading to non-existent public relations efforts. A valuation study was completed, which is rumored to be in the billions, but management chose to not make it public yet. There is also a looming doubt that the company can even complete the BLA before they run out of money even though they publicly stated there was no immediate need to raise funds. Investors also expected the company to secure some sort of licensing deal but what most investors don’t realize is that no drug company will want to risk doing a deal until they know the terms of the label that grant them exclusivity in manufacturing. So investor naivety is also a major factor. As information is released and milestones met this valuation gap should narrow and the stock should rise.
Ken Meritt, 71, and Alan Stanley, 70, were 2 of approximately 21 million people in the U.S. currently diagnosed with OAK. Ken and Alan both qualified to be able to participate in a clinical trial for a low molecular-weight filtrate biologic of an FDA-approved human serum albumin (HSA) developed by Ampio Pharmaceuticals, Inc.
Both men sought to take control of their debilitating diagnosis. Ken enjoyed jogging, and when diagnosed, he feared he would have to give it up. While Alan, a retired deputy director of the Colorado Bureau of Investigation, was no stranger to knee replacements as he already this procedure done on his knee and was not looking forward to having it done on the other. Prior to the trial, constant nagging pain, depression and physical limitations took its toll on the gentlemen. The range of treatments included taking addictive opioids to numb the pain or getting a total knee replacement, which neither option sat well amongst the two.
Alan Stanley had the non-surgical treatment (single intra-articular injection of Ampion™) and didn’t have to endure another knee replacement, and Ken Meritt is back to jogging again!
“The injection worked like a charm, now I can walk, jog, climb stairs, get up from a chair and sleep without knee pain. Ampion most certainly worked for my knee. It’s pain free.”
Stanley experienced similar results. Not only did the pain and disability associated with his OAK disappear after his injection some 18 months ago, but he didn’t need that knee replacement after all. In fact, Stanley added, “it feels better than the replaced knee.”
Alan and Ken are not alone. Others were quick to share their experience with Ampion.
“I am only 60 and can still walk up and down the steps behind me with no pain in either knee; my younger brother has been putting off a recommended knee surgery for years. I’m delighted to learn Ampion did well in the Phase 3 trial so when I approach 70 and the surgeon is recommending knee replacements, Ampion seems like a great alternative to enduring a risky, painful, and invasive surgery. Good news for me and my brother!” – Kevin Smith
“AMPION was a game changer for me. While in the trial I didn’t need any other pain relief meds -ice- narcotics – nothing.” – David Rau
Robust Trial Results – Approval Likely
There is overwhelming evidence to support an approval of Ampion so this section is for the new reader just being introduced to the AMPE story. In osteoarthritis studies > 30% reduction in pain is classified as moderate pain relief and essentially the endpoint of the study. The design of this clinical trial was so restrictive that simply a passing it would have been a monumental win let alone beating the mark. To give a reader perspective its like being graded on a curve with a bunch of valedictorians. The company created the most difficult to pass clinical trial ever run in OAK. First they only chose the worst patients who were KL-4 and on the verge of a TKR. Then they created the highest bar they could think of to get a response. See below the OARSI responder criteria.
There were two sets of conditions criteria 1 and criteria 2. In the first scenario patients had to have a decrease in pain of 50% or more and then had to have an increase in function of 50% or more. Almost all pain studies before this measured pain because the drugs did nothing to improve the joints performance. The other criteria included global assessment which encompases the overall well-being of the patient. Their phase 3 study crushed the results with a 71% responder rate and no safety concerns because after all it is just a filtered form of HSA which already has FDA approval. Had they got just over 30% its results would have been better than every single OAK drug because not one clinical trial has ever enrolled a KL-4 patient.
The icing on the cake was the statistically significant STRUT study that was able to reduce the need for a TKR surgery by almost 50%. Let that sink in for a minute, that 50% of 700K+ patients ready for TKR can delay it theoretically indefinitely if they take Ampion. In a small subset of patients that got 3 shots of Ampion 6 out of 7 got to keep their knees. In summary the drug has a clean safety profile, could completely eliminate the use of narcotics, while saving at least half the KL-4 OAK sufferers from having to go through TKR. It almost unimaginable to think that this drug will be denied on its merits. As mentioned earlier once the BLA is filed statistically there is an 86% chance of approval.
Short Interest at Record Levels
The short interest as reported by the WSJ is 14,752,101 with increased 39.8% from the prior reporting period. This represents 19% of the float and represents 8 days to cover with an average daily volume of 1.744,324. This represents the third highest percentage of the float shorted. Only VirnetX Holding Corporation (VHC) with 25.1% and TranEnterix, Inc. (TRXC) with 20.5% of the float short have higher percentages. Investors need to keep in mind that AMPE was recently included in the Russell 2000 Index which happened on 6/22/18 with a 10.24 million volume spike which dramatically skewed the published days to cover ratio. The 3 month average volume is 852,417 which means the adjusted days to cover ratio is 17.3 versus 8. In terms of the absolute number of shares shorted, AMPE is #8 on the list of biggest short positions. Just 3 months ago in my last article it was #19 on the list of biggest short positions.
Authors Graphic – Source Fail to Deliver
Beyond the published short position this graphic represents a well documented naked short position. The total short positions is 28,934,499 which represents approximately 38% of the shares float. With this extreme level of short interest the shorts could get squeezed really hard on any official news. Based on the buyout rumors the stock price has started to grind higher on above average volume.
They have stated that they have cash until end of 2018. As of March 31, 2018 they had $7.52 million in cash and have stated their run rate with the BLA is $800K/month. Assuming their current rate of cash burn they have funds to last until December 2018 should no buyout or licensing deal materialize. This number also correlates with the $5.83 million in contingencies they have left through the balance of the year. If the licensing rumor is true it will bring additional money into the company. Additionally, significant price increase will likely bring in additional warrant exercises. There are 7,647,744 warrants remaining at an average exercise price of $0.93 as of the end of Q1. These warrant exercises could bring an additional $7.1 million into the company’s bank account giving them even more runway should they file the BLA and have a positive market reaction. The company also has an “at-the-market” credit line allowing them to raise additional funds should the opportunity present itself. CEO, Mike Macaluso said on the last conference call that he doesn’t anticipate using it.
There appears to be a perfect storm brewing in AMPE as the buyout rumors highlight just how undervalued this company really is. The storm clouds are on a collision course with the shorts who have really failed to recognize the next stage of corporate valuation. No longer is stock price determined by the ability of the CEO to communicate, the burn rate, institutional ownership, disparaging news articles, or even shareholder sentiment. When a company is put up for sale, the things that matter now are how well the drug works, FDA approval, an expanded label, manufacturing capacity, intellectual property, patents, platform technology, and the ability to license territories. Investors should be reminded that they should never buy a company on buyout speculation but this may be the one case where an exception is made to the rule because of all the blatant telegraphing. The focus of the company made a major pivot when the Parexel came on board in May. News like journal publications hit the wires, investor communication is at a complete standstill, the CMC filing took center stage, and now people are talking about the mechanism of action. It’s a brand new company and shareholders and shorts alike need to realize that they are no longer in control. Ampio’s board of directors, the CEO, Parexel, and the big pharma suitors are the players at the table controlling the fortunes of shareholders and the fate of the firms backing the short positions.
The rumors do look very real, but investors need to realize that the company won’t comment at this stage. They will release only what they have to and their silence speaks volumes about ongoing negotiations with big pharma. The suitors mentioned in the article are probably preparing for a bidding war as this drug has platform potential in many disease indications. The company is extremely undervalued on so many metrics, comparables, NPV modeling, and multiple to peak cash flow. The current market capitalization is bordering on irrational given the short time frame from a major announcement like the BLA filing. The short interest is staggering and the ones still shorting are in denial that Ampion will receive approval. A massive short squeeze is coming. The short term price target is $10 – 15.
Disclosure/Disclaimer: PSInvestor.com has NOT been compensated for the above article, but are LONG shares bought on the open market. The purpose of the article is to put the shorts on notice. To read the full disclaimer, please click here.