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Kempharm: The Snorting Gun

(This article references the following three FDA-provided documents:)

1) Abuse-Deterrent Opioids - Evaluation and Labeling -- April, 2015.
2) FDA advisory committee briefing on Apadaz.
3) Kempharm advisory committee briefing on Apadaz and corrections.

_-=| Introduction |=-_
As a follow-up to my brief article about Kempharm's (NASDAQ:KMPH) Apadaz (hydrocodone/acetaminophen [tylenol] combo) advisory committee meeting, this article will discuss the study and labeling issue more in-depth. There are Category 1, Category 2, and Category 3 abuse-deterrence claims possible, and it seems likely the company will receive both Category 1 and Category 2 claims on its labeling. The Category 3 claim, based on clinical abuse potential, was cited by the company as unlikely as early as its last conference call in March, so investors should not have been entirely surprised. Despite this, I will show in this article why both Category 1, 2, and 3 abuse-deterrence claims are directly supported by FDA guidance and further discuss why ad comm panelist views may not conflict with Category 1 and 2 labeling.

A further article I may write in the future will discuss the potential of the Kempharm ligand platform in-depth, and not just for abuse deterrence opiods but also for other potentially very lucrative indications.

For more background information, and other perspectives, here is my previous article, a few other articles on the ad comm events, other previous Kempharm articles, and Kempharm investor presentations and webcasts, I have provided links at the bottom of my article.

_-=| Background |=-_

The FDA established substantial 29-page guidance regarding labeling of opiods in April 2015.

There are four categories of potential labeling, attached to four different types of studies conducted by a sponsor (the company producing/selling a drug):

Category 1 studies: "Laboratory - based in vitro manipulation and extraction studies". In Kempharm's case, these are the extraction difficulty studies.

Category 2 studies: "Pharmacokinetic studies" -- "The study of the time course of drug absorption, distribution, metabolism, and excretion." In Kempharm's case, this covers trials that compare plasma levels through time of Apadaz, generic, and benzhydrocodone, (Apadaz without tylenol), and hydrocodone, using both oral and intranasal administration.

Category 3 studies: "Clinical abuse potential studies" -- studies that provide clinical evidence (statistical significance) that the proposed drug could potentially deter abuse.

Category 4 studies: post-market studies that further strengthen safety, efficacy, and/or abuse-deterrence labeling claims. Category 4 abuse deterrence is the strongest claim and is most difficult to prove, because it is difficult to prove that clinical trials consistently reflect real-world outcomes, especially given an imprecise long-running measure of abuse deterrence. For example, following a large number of subjects for a decade (to then see how much they have progressed, if they have) could be a post-marketing study feasible for a big pharma to substantially validate reduction in abuse potential, although exogenous factors such as improvements in prescription procedures and treatment options may invalidate any such study.

After labeling categories are determined by the FDA, the FDA will also issue a determination regarding DEA drug scheduling, which pertains to things such as whether a drug needs a prescription, etc. Schedule 2 is the likely outcome, with Schedule 3 a remote possibility.

_-=| What Was Expected? |=-_

As early as March 2016, the company specifically stated that they expected Category 1 and 2 labeling, which both voting and FDA guidance seems to support. (analyst question and response, @19:58 and @21:46)

_-= Advisory Committee Voting |=-_

The first voting question was whether KPT01 APAP should be approved for the prescribed indication. 18/20 voted in favor. Of those who did not, one stated that she was not persuaded by the data of bioequivalence, while another who voted in favor stated, "I don't think it had the strength of data that would normally be if someone was just presenting for a new drug.". (These two voters seemed to have not considered that the drug was developed along the 505b(2) pathway, which allows findings of safety and efficacy based on an already-existing drug.)

This was the second voting question: "If approved, should KPT01-APAP be labelled as an abuse-deterrent product?"

The advisory committee voting question was ambiguous with respect to categories claims. Every member was asked to provide their reasoning for voting on this question. Most did.

Based on my analysis of the voting transcript transcript, 17/20 committee members did not have any explicit concerns with respect to the extractability of benzhydrocodone (Category 1), while 4/20 people indicated in their wording that Category 2 was not a problem, and no members explicitly stated that they believed Category 2 labeling was an issue. 5/20 members indicated explicitly that Category 3 was an issue, although we may assume that the other 13 "no" votes also believed that Category 3 was an issue.

9/20 members expressed varying levels of concerns that (blanket?) abuse-deterrence labeling would encourage doctors to over-prescribe pills.

5/20 members explicitly mentioned the word "baby steps", or "incremental steps", even though 3/5 of these voted that Apadaz should not have an abuse-deterrence label.

Despite the vote, the advisory committee clearly seemed conflicted on this topic.

Right now (as of Friday), the stock is trading at a 55% discount from May 4's price (it was 75% on Thursday in after-hours) based on (perhaps) the lack of Category 3 labeling and/or fear. However, Category 3 labeling was not expected by the company (analyst question and response, @19:58 and @21:46). On the June 9 PDUFA date, based on the advisory committee vote and FDA guidance, the company's drug will be approved. It will almost certainly carry Category 1 and Category 2 abuse-deterrence labeling findings, something expected all-along. Although Category 3 is not overwhelmingly supported by precedent or the advisory committee, I believe that the company has a good chance of obtaining this label, based on FDA guidance.

_-=| Category 1 Studies |=-_

To try to understand how the FDA will resolve the matter, we can scrutinize the category labeling guidance. First, let's look at Category 1, in vitro manipulation and extraction studies. There should not be a significant voting hurtle, as only 3/20 people indicated that Category 1, extractability, was a problem.

There was only one committee member who almost unequivocally believed that Category 1 abuse deterrence was not met, Anita Gupta. She stated, "The solubility characteristics that were presented demonstrated the ability to manipulate the product using simple solvents." Charles Emala, with concurrence of Jeanmarie Perrone, stated, "I'm also not convinced that it's not an easy extraction method."

As stated in my previous article,

"Out of solvents and buffers tested (A-Z), the FDA found one buffer that it deemed to be commonly available, which could, through an optimized process, extract hydrocodone from hydrocodone/acetaminophen (60% according to company, 80% according to FDA -- FDA used a slightly different process), making drug abuse from the extracted drug possible.

However, this buffer requires continuous agitation at extreme temperatures for 360 minutes, and it is banned by the FDA as a food additive, so it may not be readily available in the US. Comparatively, the generic was extractable for almost any compound. The company disputed that this was a common buffer and stated that it requires advanced lab equipment to use. Note again that the company was represented by pre-eminent experts in their field, a fact acknowledged by the FDA."

To summarize the FDA guidance on the matter, "The goal of laboratory-based Category 1 studies should be to evaluate the ease with which the potentially abuse-deterrent properties of a formulation can be defeated or compromised." Even if someone does find out what this buffer X is (or buffer G according to the FDA), most of it wil dissolve, and batches will fail due to the complex steps needed to convert the drug back to hydrocodone, adding to the burden and economic cost of extraction. As a committee member Marjorie Phillips acknowledged, "it's more challenging for a large-scale drug operation to try and extract large quantities of pure benzhydrocodone or pure hydrocodone from it if they wanted to do something on a large scale".

Given that the majority of committee members did not comment on Category 1 labeling or were equivocal, and the FDA's qualifying statements about actual extractability (optimized method, product decays, product needs extreme heat / high acidity, and product needs many hours of continuous agitation), and the fact that the extracted product still needs several steps to convert to hydrocodone, I believe that Category 1 labeling is...