Editor’s Note: This article was updated on March 24, 2021, to correct errors related to the financial burdens on KenPharm.
KemPharm, Inc. (NASDAQ:KMPH) has had a really dazzling run-up in the past year. KMPH stock is up 191% over the trailing-12-month period (TTM). Unfortunately, it looks like the stock will not last at these lofty levels.
For example, last July KMPH stock was at just $4.05 per share. By the end of August 2020, the stock was up over threefold to $13.60, and by mid-December, it was up to $18.72. Then, it took a volatile hit, and by the end of the year, it was at $11.20. So, at today’s opening price of $10.69 per share, KMPH stock was actually down a bit, less than 1%.
Investors may also have been able to affect a short-squeeze on the many short-sellers of this biotech stock. This was backed up by recent good news about its main drug candidate. KemPharm is a clinical-stage pharmaceutical company whose main potential product is an attention deficit hyperactivity disorder (ADHD) drug.
On March 2, the Food and Drug Administration (FDA) approved the New Drug Application (NDA) for AZSTARYS™ (formerly referred to as KP415). AZSTARYS is a once-daily product for the treatment of ADHD in patients ages six years and older.
Where the Company’s Value Stands Now
On March 11, KemPharm announced its recent 2020 earnings and also its cash balance. As of March 10, it had $77.6 million in cash. The company made $13.3 million in revenue during 2020, including just $2.4 million in revenue in Q4.
The company burnt through $1.9 million during the year, according to its latest 10-K. This was a good deal better than what happened in 2019, which saw a $23.7 million cash burn. But now the company has no debt, after raising $94 million and paying it all off.
However, given that KMPH stock now has a market capitalization of $284 million, it is hard to see how that valuation can be justified. It is also not clear how profitable that drug will be.
For example, at least one analyst has recently written a report indicating that the drug was nothing special. Seeking Alpha published an article that indicates that KMPH stock is likely to fall once the “momentum dies out.”
The article argues that the approval of the ADHD drug “exhausts the company’s largest catalyst” without anything to replace it. It goes on to say that at its present valuation, KMPH stock is a viable short candidate.
What to Do With KMPH Stock
At least one Wall Street firm is hesitant about the present valuation of KMPH stock. H.C. Wainwright recently downgraded their recommendation on KMPH to “neutral” and they slashed their price target. However, the target is $24 per share, or over double the present price.
The brokerage firm cited issues relating to the commercialization costs and royalty rates that KemPharm would receive from the rollout of its ADHD drug.
Another critical analyst at Seeking Alpha was critical of the company’s prospects. He believes that the drug’s “commercial success will be dependent on KemPharm and the commercial partner’s ability to market the drug against generic competitors.” In particular, he doubts that the company will be able to raise prices. Here is how he described KemPharm’s ability to raise the price of its drug:
“It is like Toyota making a 2008 version of Camry with a $30k price tag just because they added a new iPhone charger and a fancy touch screen.”
He believes that this drug derives 95% of the value of the company. So if its rollout does not go well, the value of KMPH stock could falter.
Analysts are all over the place when it comes to their valuation of KMPH stock. For example, TipRanks.com has a survey of two analysts who have an average price target of $20 per share. That represents a potential upside of 115% from today’s price.
However, Marketbeat.com has a report that indicates the consensus price is $12. This implies a 29% upside for the stock.
Therefore, investors might want to be careful with this stock. A number of analysts are positive about its prospects. But some believe it might be better to wait to see how the company performs marketing and selling its new drug.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.