The ADHD market is over $10B yearly in the US.
Last week, Kempharm (NASDAQ: KMPH) announced a very positive restructuring of their licensing deal which increased the payout from an original amount of $468 million ($15m paid out) to $590 million. The market bought into the narrative that this was not a favorable deal.
What made matters worse is that shareholders seem to have thrown the baby out with the bathwater because they got less of an upfront milestone payment. Putting this in perspective, the anticipated milestone payment was $48 million, but instead the company will only get $20 million — but it gains much more in the back end with greater milestone and royalty payments.
KMPH has $77.6 million in cash and a burn rate of $1.0 million per quarter so the last thing it needed was more cash. This restructuring places more earnings in the hands of shareholders over the long run. The knee jerk reaction to this deal is utterly flawed and investors should take a closer look.
Why KP415 Will Be A Blockbuster
Vyvanse is an amphetamine prodrug with worse qualities and more side effects than Azstarys, yet it generates $2B+ in revenue for Takeda (NYSE: TAK), and has for years.
“The milestone payments are short term but the long term outlook of KP-415 to make a huge dent in the ADHD market. I’m a prescriber and myself and nearly all of my colleagues that I’ve ever spoke to agree that the biggest drawback from stimulants for children is the weight loss / potential growth suppression. KP-415 data shows minimal effect on both of those. The non-compliance rates of stimulants because of those side effects are the #1 reasons for kids having to discontinue stimulant therapy. Corium WILL use this as a marketing strategy for prescribers and I can guarantee you nearly every child and adolescent psychiatrist / pediatrician will want to prescribe this.”
It is anticipated with the current cash on hand and the new expected milestone payments that the company will have total assets of $100 million in cash. What the company did is trade something they didn’t need — which was more cash right now — for future profits should the company do well.
Their approved drug Azstarys (KP415) is expected to be a blockbuster, which is why the market reaction to this positive news is so out of touch with reality. A picture is truly a thousand words. When you see the projections adjusted for milestones it’s clear which path is better.
Over time there is a potential doubling of the company’s value due to this well crafted deal by simply exchanging the timing of the payments. Look at how quickly this loss of upfront revenue is made up in the short run and long run. No rational investor looking at this chart can say this re-negotiation was a bad deal.
This deal was essentially a stock buyback. Since when is a stock buyback negative? This renegotiated licensing deal essentially reinvests $28 million so that it can achieve a much higher payout in the long run. The company has a market cap of $245 million and $100 million of that is going to be cash. So for a net $145 million in enterprise value look at what the investor gets at this level: they get $590 in milestone payments, a up-to-25% in royalties from REVENUES, and a pipeline of 3 other drugs (and one of these, KP922, is an amphetamine set to be better Vyvanse which clocks in with over $2.0 billion in sales).
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Disclosure: Insider Financial and its owners do not have a position in the stocks posted and have posted this article for free without editorial input. This article was written by a guest contributor and solely reflects his opinions.