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Edited Transcript of KMPH earnings conference call or presentation 14-Nov-19 10:30pm GMT

Q3 2019 KemPharm Inc Earnings Call

CORALVILLE Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of KemPharm Inc earnings conference call or presentation Thursday, November 14, 2019 at 10:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gordon K. Johnson

KemPharm, Inc. - Chief Business Officer

* R. LaDuane Clifton

KemPharm, Inc. - CFO, Secretary & Treasurer

* Travis C. Mickle

KemPharm, Inc. - Co-Founder, Chairman, President & CEO

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Conference Call Participants

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* Daniel James Busby

RBC Capital Markets, Research Division - Senior Associate

* Oren Gabriel Livnat

H.C. Wainwright & Co, LLC, Research Division - MD & Senior Healthcare Analyst

* Scott Robert Henry

Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research

* Jason Rando

Tiberend Strategic Advisors, Inc. - COO & EVP

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to KemPharm's Third Quarter 2019 Corporate Update. (Operator Instructions) I would now like to hand the conference over to your host, Jason Rando. Sir, please go ahead.

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Jason Rando, Tiberend Strategic Advisors, Inc. - COO & EVP [2]

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Good evening, and thank you for joining our call today to discuss KemPharm's Third Quarter 2019 Financial and Corporate Results. 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 and represent management's current expectations. Actual results may differ materially. KemPharm disclaims any obligations 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 the reports KemPharm files with the SEC, which are available on KemPharm's website at www.kempharm.com under the Investor Relations section. We encourage you to review these documents carefully.

Speaking on today's call will be Travis Mickle, KemPharm's President and CEO; LaDuane Clifton, CFO; and Rusty Johnson, Chief Business Officer. Following the remarks, we will open the call to your questions. With that, it is my pleasure to introduce Travis Mickle.

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Travis C. Mickle, KemPharm, Inc. - Co-Founder, Chairman, President & CEO [3]

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Thanks, everyone, for joining today. This will be a fairly short call as while activity internally is very high, we know pretty much where we sit today and what our priorities are. We also won't be providing a general overview today. If you're new to the KemPharm story, I please ask that you refer to our corporate deck and our previous disclosures that can be found on our website.

There will be a number of various topics that we'll be addressing. I'd like to jump right into it and move to Slide 5, please. So as expected, focus today, at least initially, on the partnership that we announced back in September, a partnership with GPC. Most of our activity right now is focused on the KP415 NDA filing. We believe GPC is fully up to speed, and we're working with them to finalize the various sections of the NDA.

While time is critical for both parties, any potential missteps here are far worse than any sort of minor delay in the timing. So with that in mind, together with GPC, we believe that the most likely timing of the NDA filing will be on or around January of next year. It certainly could be sooner or certainly a little later, but as you may already know in the agreement, the decision of when to file actually lies entirely with GPC.

In addition to the NDA filing, we are working with GPC to prepare for commercial validation and ultimately, commercial supply. A little unexpectedly, GPC has asked us to manage this effort, which we believe benefits all of us, given our technical expertise and experience with KP415 to date. We also expect that we'll be able to move to more fully discuss and disclose the commercial launch of KP415 and the plan behind it, once GPC has deemed it appropriate to do so. It's certainly something worthwhile to stay tuned into.

As we updated recently, KVK has made some good progress with stocking and managed care access. An awareness campaign is underway, and with that, we believe that Apadaz has officially launched this quarter, as we anticipated when we entered into the agreement last year. With that in mind, we'd like to remind folks on the phone of some of the economics of the KVK license agreement. Specifically, there is a real potential for the $2 million milestone to be achieved in 2020, which could be followed by up to the $1.4 million in reimbursements and subsequently to that, a potential profit share of up to 50%.

As with the KP415 commercial effort, we work closely with KVK and will provide updates as we can. At this point in the call, I'd like to turn it over to LaDuane Clifton, our CFO. LaDuane?

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R. LaDuane Clifton, KemPharm, Inc. - CFO, Secretary & Treasurer [4]

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Thank you, Travis, and we'll go quickly through our results. Q3 is actually a first for KemPharm in that we reported revenue for the first time, which totaled $11.5 million, and of course, that was revenue generated under the KP415 license agreement, the upfront payment plus the additional reimbursements and consulting services as Travis mentioned earlier. That resulted -- led to net income of $3.1 million for the quarter or $0.09 per basic share, $0.06 per diluted share.

Along with that, we also saw R&D expenses for Q3 of $3.6 million, a drastic reduction compared to the same quarter in 2018, which really was based on the completion of the clinical phase for KP415 earlier this summer, and so you see that flow through in the reduction. Also, G&A expenses were $3.6 million, roughly on par with the prior year Q3. There was a modest increase but that increase really was related to professional fees, for the licensing process that was underway and, of course, that ended successfully with the GPC license. We did have a decrease in personnel costs and I'll touch base on that in a moment. At the end of the quarter, we ended with cash of $7 million.

Looking then for more update on our cash runway, our cash runway is really one of the biggest things in that forecast is our near-term debt obligations. But along those lines, we've been working very hard this year to reduce the operating spend. Specifically, we've taken workforce reductions of 33% as well as other G&A cost reductions. We've also, as I mentioned, concluded the clinical phase of 415 so that R&D expenses are reduced.

And so the next section here, the near-term cash from the KP415 license agreement is also an important part of that cash runway. And of course, as you know, we had a milestone payment upfront of $10 million, and then there's another potential milestone payment at acceptance of the KP415 NDA.

In addition to that, we will continue to see a flow of cash into KemPharm as additional cost reimbursements are received from GPC. And as Travis mentioned, again, we will actually be recording an earning consultation fee revenue for our continuing work in these efforts. All of that together then goes into the forecast, as I mentioned here, where current cash will take us into but not through Q2. And really, that's due to approximately $9.2 million of principal and interest payments due in the first half of '20.

So debt obligations, of course, is of a high priority to the company, and we've been working very hard on these issues and trying to bring around an appropriate solution best for shareholders. And so currently, to address the near-term cash runway, we are in negotiations to push out the principal and interest payments due in February and June, respectively, with the goal of extending our cash runway past the approval of 415, so that would essentially take a cash runway into the beginning of 2021.

If successful, our actual cash burn could be as low as $1 million per quarter, and that's primarily because of all of the reimbursements that we believe would be coming to us under the GPC license agreement. In addition to that, we also recognize the need to start now on looking at options for our -- addressing our debt obligations in totality, and so we've actually begun that process as well. One of our first steps is that we've engaged Cowen, who's worked with the company in a number of transactions through the years, to assist us in addressing the larger portion of the debt. And so we would hope to have that process conclude potentially prior to KP415 approval. So we will provide updates on that as the process begins in earnest.

With that, I'll turn it back to Travis.

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Travis C. Mickle, KemPharm, Inc. - Co-Founder, Chairman, President & CEO [5]

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Thanks, LaDuane. As I mentioned earlier, while there is a tremendous amount of internal activity, we know with nearly 100% certainty what our priorities and goals are, while we are working hand in hand with our partners to fully maximize the value of the licenses for all stakeholders. To that, we need to file the best KP415 NDA possible as soon as possible. These 2 licenses will account for substantially all of our near-term value.

In order to accomplish these goals, we must also address both the near-term and long-term debt while still balancing value creation and shareholder needs. While nothing is certain, we believe that we have already made good progress to that goal and could be bringing well respect -- and bringing a well-respected financial adviser along in the process certainly helps further guide us down that path.

At this point, it concludes our formal presentation. I'd welcome any questions if we should have them.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question comes from the line of Randall Stanicky of RBC Capital Markets.

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Daniel James Busby, RBC Capital Markets, Research Division - Senior Associate [2]

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It's Dan Busby on for Randall. A few questions for me. First, on KP415, can you give any more detail around the final gating items there before you file? Do you have any further meetings planned with the FDA? Or is it more a matter of just getting your ducks in a row? And then separately, what's the latest plan for KP44 (sic) [KP484]?

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Travis C. Mickle, KemPharm, Inc. - Co-Founder, Chairman, President & CEO [3]

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So as regards to the NDA filing, as you recall, we just completed the license agreement in September and NDA, and especially in this case, this isn't certainly a light 505(b)(2) filing. The NDA here is a tremendous heft. So getting them fully up to speed, getting their consultants and advisers fully up to speed, allowing for them to review comment and for us to incorporate has been fairly consuming as far as time goes.

So what I would -- what we're doing is to get to finalization. There is no FDA meetings. There's no additional need for any additional work. It's just merely getting your ducks in a row, making sure it's the best filing you have. The message is clear, and then as well, taking commercial feedback on the potential label. So all of that needs to be done as quickly as possible. And we think that's early next year, more than likely.

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Daniel James Busby, RBC Capital Markets, Research Division - Senior Associate [4]

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Okay. And on KP44 (sic) [KP484]?

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Travis C. Mickle, KemPharm, Inc. - Co-Founder, Chairman, President & CEO [5]

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Yes. On KP484, we don't have any guidance as to that yet. There are several other activities that are going on in the commercial side. So once we're able to provide a little more clarity on there. I know there certainly is interest. That's why they licensed the product in the first place. But the timing and how that will work, we'll have to see. There could be some potential other activities with 415 that may supersede that, and that could be of more value to this license for KemPharm. So again, we'll provide the guidance along the way of what's going on and where we believe the product will -- the products here will ultimately be pulled through.

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Daniel James Busby, RBC Capital Markets, Research Division - Senior Associate [6]

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Okay. And then just a couple of questions on Apadaz. First, as it stands today, what percent of the overall hydrocodone/APAP market do you have access to with preferred formulary status? And then if you could give any color around your and KVK's intermediate and long-term coverage targets there? Just trying to get a sense of how quickly this product could potentially ramp.

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Travis C. Mickle, KemPharm, Inc. - Co-Founder, Chairman, President & CEO [7]

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Well, we don't have the complete clarity with KVK. We certainly work with them on this whole process. But we know and have reported before that we have, through the MMIT database, seen about 70% coverage of benzhydrocodone authorized generic versus that -- relative to hydrocodone/APAP. So that's where we know we are. We've confirmed, in many cases, large plans like Aetna, Cigna. We are on a preferred generic tier with those particular products, and we are in a preferred drug list in Medicaid in Alabama and Utah. So we're making good progress certainly with KVK's guidance here. Where do we sit as far as pull-through? I mean that's yet to be determined.

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Operator [8]

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Our next question comes from Oren Livnat of the H.C. Wainwright.

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Oren Gabriel Livnat, H.C. Wainwright & Co, LLC, Research Division - MD & Senior Healthcare Analyst [9]

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I wonder if you could just help me with some of your cash flow assumptions, and I do have a couple of follow-ups. Is your runway into second quarter or longer if you can renegotiate the debt near term? Is that assuming certain milestones come in or are milestones upside? And can you just remind us what milestones you're expecting based on hitting certain targets in the next year?

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R. LaDuane Clifton, KemPharm, Inc. - CFO, Secretary & Treasurer [10]

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Yes. The cash runway includes sort of the NDA acceptance milestone that we would anticipate potentially in Q1, as Travis has mentioned. And then it also contemplates the $2 million milestone under the Apadaz license agreement, which we expect to receive during that first half of 2020.

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Operator [11]

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(Operator Instructions)

Next question comes from Scott Henry of Roth Capital.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [12]

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I just wanted to kind of follow up on a couple of the prior questions. I guess, first, did I hear you correct, you expected to get the quarterly burn down towards $1 million a quarter?

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Travis C. Mickle, KemPharm, Inc. - Co-Founder, Chairman, President & CEO [13]

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So Scott, if we're successful in being able to push out the principal and interest payments, then our operating costs being offset by the revenue we're able to generate or other reimbursements under the license agreement would bring that cash burn down to that level.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [14]

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Okay. So that would imply that those reimbursements are not only covering R&D, but they're also covering a lot of the G&A. Is that a fair statement?

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Travis C. Mickle, KemPharm, Inc. - Co-Founder, Chairman, President & CEO [15]

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Right. So the license agreement provides that, for example, when we help GPC on the commercial, managing the commercial manufacturing for KP415 that we're able to bill a consultation fee, and that's cost plus margin essentially. And so that is revenue to the company and, therefore, covers a large portion of our G&A.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [16]

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Okay. And that expense reimbursement, obviously, for 415 would probably start to end after the filing is -- the work is done? And then does it continue on with 484 and at the same level?

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Travis C. Mickle, KemPharm, Inc. - Co-Founder, Chairman, President & CEO [17]

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So you're right about 415's development costs, they will naturally come to an end. However, commercial activities are going to continue up to and even past launch potentially. And then our ability to bill consultation services is also ongoing as we support the NDA through the review process, and again, are part of that, managing the commercial prep.

With regard to KP484, the -- once that program begins, then in a similar way, the licensee, GPC, would be paying for all the development costs and then we would be billing consultation fees. And in that case, that's really managing the whole program from its inception through the clinical phase and on into -- up to approval, just like with 415. So it does continue at a similar level.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [18]

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Okay. And have you given any disclosure on the magnitude of the milestone for the NDA acceptance? I don't recall seeing that, but I may have missed it.

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Travis C. Mickle, KemPharm, Inc. - Co-Founder, Chairman, President & CEO [19]

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No, unfortunately, that was one of the items that was redacted at the request of GPC and so it's not something we've been able to disclose.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [20]

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Okay. I guess when I read the press release, it talked about initiating a process to explore addressing the debt in its entirety. Now the natural options would be to issue more debt or to issue equity in exchange for debt. Are there any options outside of the normal course that you're considering, any nondilutive options? Or just curious the way I read as if there may be.

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R. LaDuane Clifton, KemPharm, Inc. - CFO, Secretary & Treasurer [21]

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Yes. Another alternative, right, top of mind would be potentially a royalty financing of some kind or a license monetization, so that's another option. We think that would be nondilutive. And then one of the reasons we're working with Cowen is to bring to bear their creativity and see what else could we do in a way that is best for the shareholders.

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Operator [22]

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We have a follow-up question from Oren Livnat of H.C. Wainwright.

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Oren Gabriel Livnat, H.C. Wainwright & Co, LLC, Research Division - MD & Senior Healthcare Analyst [23]

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I got cut off a little faster than expected last time. Just on Apadaz, if I could follow up. I know you're not running the show exactly on the commercialization here. But can you just give us an idea of just the basic model and approach to market here? I mean, obviously, you've got some coverage. I don't think there's a big sales force calling on docs, right? So just explain in these areas, in these regions that you're piloting or target -- or KVK is piloting and targeting in, what's the mechanism to drive prescription uptake? Are they going to be getting substitution at the pharmacy level? Does it have to be written -- prescribed as written Apadaz? Does someone call a doctor back? Just help us understand how this goes down.

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R. LaDuane Clifton, KemPharm, Inc. - CFO, Secretary & Treasurer [24]

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Sure. So I'll take a first pass at some of that, and I know Rusty is on the line, and he can assist as well. Basically, I think you're right, Oren, there is no sales force here. The outreach really is related to managed market, so you're reaching out to PBMs and to payers to gain additional access. And to the extent that you can work with them to create a preference for Apadaz or the authorized generic, then we're looking for those relationships.

The second part of it, I'd say, is making both pharmacies and prescribers aware that Apadaz is available. And so again, we're not being very promotional. We're just simply trying to let folks know that there is something available there that they should consider. Given this environment, I'm sure you can appreciate the sensitivity to that.

And so as you look in -- when we talk about our current access through the Medicaid PDL in Alabama and Utah, what we understand from KVK is they're focusing some of those initial awareness efforts where they have the most formulary access. And in this case, I know that Alabama and Utah are part of that. So there is a possibility that we would use other nonsales force efforts, maybe phone outreach to provide education to pharmacists, for example. So there's a variety of things that KVK is looking at doing without fielding the sales force, as you mentioned. So Rusty, I don't know if you have any thoughts to add to that?

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Gordon K. Johnson, KemPharm, Inc. - Chief Business Officer [25]

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Yes, I think you covered it pretty well, LaDuane, but I would add the following. Where we have formulary access and in a preferred position, it is -- when you talk to some of the managed markets folks, I think all of these entities believe that they have excess utilization of hydrocodone/APAP, from misuse, diversion, a variety of reasons. And there's elements of Apadaz that I think people could conclude that maybe help reduce that, help lower essentially improper utilization. So there's a financial incentive to large plans to perhaps work on that. So we're trying to help KVK pursue that angle on a large-scale basis as well. So it's -- that's sort of the process. I hope that helps.

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Oren Gabriel Livnat, H.C. Wainwright & Co, LLC, Research Division - MD & Senior Healthcare Analyst [26]

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And then, I guess, I could just follow up. So doctors not writing Apadaz, let's say, for some time because awareness takes time. If they write hydrocodone/APAP scripts in an area -- in Alabama or Utah, for example, and it gets to the pharmacy, and their insurance plan, will that say no, pharmacist, "You need to call that doc back and tell them to write Apadaz?" Is that what we're thinking is going to happen here or something else?

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Gordon K. Johnson, KemPharm, Inc. - Chief Business Officer [27]

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It's more complex than that, Oren, and I don't know that this is a good venue to try it. That's right. But there's a lot of things that can be done to get the right result.

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Operator [28]

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At this time, I'd like to turn the call back over to management for closing remarks.

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Travis C. Mickle, KemPharm, Inc. - Co-Founder, Chairman, President & CEO [29]

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Yes. Thank you very much, and thanks, everyone, for your time today. We certainly are very excited here and can't wait to be able to provide some updates over the coming months on all of the various topics we discussed today. So thanks again, and have a nice evening.

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Operator [30]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.