We believe Ampio Pharmaceuticals (NYSEMKT:AMPE) is a stock promotion that is run by management with an alleged history of fraud and is aggressively promoting itself in preparation for a secondary. AMPE is quickly running out of cash and needs to raise tens of millions of dollars. In order to boost its share price ahead of a secondary, we believe AMPE management is aggressively promoting the company and trying to shield investors from the reality that its pipeline assets are worthless. We have a price target of $0 and recommend that investors short the stock.

CEO Michael Macaluso and CRO Vaughan Clift Have an Alleged History of Fraud

Two of the four executives at Ampio have direct ties to Isolagen, an aesthetic procedure company that was accused by shareholders of malfeasance and ultimately went bankrupt. As we documented here in a previous Uni-Pixel (NASDAQ:UNXL) article that we published on SeekingAlpha (link), shareholders of Isolagen filed a class action lawsuit filed against Michael Macaluso, Vaughan Clift and other Isolagen executives alleging that the executives misrepresented the efficacy of Isolagen’s product and probability of success. Michael Macaluso was one of the Isolagen’s largest shareholders and a main perpetrator of the alleged fraud. In a particularly egregious act, Macaluso and other Isolagen executives cashed out of millions of dollars’ worth of stock through secondary issuances and privately negotiated transactions.

The full lawsuit and settlement can be found here and here.

These same executives are now running AMPE, and we believe they are trying to raise more money imminently from naïve investors.

Ampio Pharmaceuticals Needs to Raise Cash

Why do we believe AMPE is trying to raise money through a secondary? AMPE has less than 12 months of cash remaining to fund operations and will run out of money by early 2016. Biotech companies traditionally want to have at least 12 months of cash reserves, and we believe AMPE is now trying to set itself up for another secondary.

At the end of the September 2014 quarter, AMPE had $56.8 million in cash (link). Through the third quarter of 2014, AMPE had burned $32.9 million in cash through negative Cash Flow Used in Operating Activities and Cash Flows Used in Investing Activities. In other words, AMPE has an annual cash burn rate of approximately $44 million. We believe AMPE is likely to end the year at under $50 million of cash, which means they will have enough cash for roughly one year.

This is important because this is usually the point at which biotech companies do an aggressive secondary and sell additional shares. For example, AMPE was in a similar situation at the end of 2013 when it had only $26.3 million of cash after burning through $20.8 million in 2013. AMPE promptly sold 9.775 million shares and raised $63.3 million (link). We think another raise is imminent given the similar timing and relative cash levels.

Ampio Pharmaceuticals’ Pipeline Is Worthless

In order to boost AMPE’s share price, management has recently been promoting two assets in its pipeline, the STRIDE Phase 3 trial for Ampion in osteoarthritis of the knee and Zertane. We believe the STRIDE Phase 3 trial is likely to fail and that Zertane is a worthless compound.

STRIDE Likely To Have A Giant Misstep

Management is touting its Phase 3 STRIDE trial for Ampion in osteoarthritis of the knee. We remind investors that Ampion just recently experienced a failure in a similar Phase 3 trial called STEP. The press release for the failed study can be found here.

Management blamed the Clinical Research Organization (CRO) for mishandling the drug and placebo samples which affected the trial results. AMPE claimed samples of Ampion that were exposed to temperatures below 15o C may lose potency.

However, in a press release (here) two weeks later, AMPE revealed that patients receiving the temperature-affected samples of Ampion actually performed better than the non-affected samples.

We believe this is a clear indication that Ampion failed to show any pain benefit of the knee.

Furthermore, AMPE performed a post-hoc data-mining analysis and found that patients with severe osteoarthritis (OA), as defined by a Kellgren-Lawrence grade of IV, performed better than grade III patients. This indicates that patients with a KL III grade had no benefit. It’s important to note that the phase 3 STRIDE trial has both grade III and grade IV patients, as seen here.

If Ampion had no benefit in the grade III patient population and only tarnished drug samples showed any benefit in the KL IV population, we think the likelihood of success in the STRIDE trial is minimal.

Zertane Has Proven To Be Limp

Recently, AMPE was at the Biotech Showcase 2015 conference to promote its wholly-owned subsidiary Vyrix (here), which it created in 2013 to develop Zertane, a repurposed drug to treat male sexual dysfunction pertaining to premature ejaculation. In April 2014, Vyrix filed a Form S-1 relating to a proposed initial public offering of Vyrix public stock (here). We think Zertane is a worthless drug due to an already existing generic that is readily and cheaply available in the market today.

Why do we believe Zertane is worthless? First, it’s important to note that the previous owner, BioVail, had terminated two European Phase 3 clinical trials for Zertane (previously known as BVF-324) due to “slower-than-anticipated enrollment and a lack of commercial interest in the product.” In the 10-K filing (here), BioVail made clear that its decision to terminate the Phase 3 clinical trial was made prior to its merger with Valeant and was unrelated.

If BioVail did not believe in the viability of Zertane enough to abandon the drug midway through its pivotal Phase 3 trials, why should investors believe in the compound?

Furthermore, since acquiring the drug in 2011, AMPE has signed only two partnerships that have brought in a total of $500,000 from South Korean pharmaceutical company Daewoong Pharmaceuticals (here) and $250,000 from Canadian specialty pharmaceuticals company Paladin Labs Inc (See “Collaboration with Paladin” here). These two upfront payments do not even total $1 million dollars. This is hardly indicative of blockbuster or even meaningful revenue potential.

That is because the compound that Zertane is comprised of, tramadol, has already turned generic and is cheaply available today. Tramadol in 50mg form can be purchased today for $0.27 per pill, as we found here.

Zertane is simply tramadol in a 62mg or 89mg form. There is nothing secret to Zertane or the dosage. In fact, multiple investigative trials using tramadol at 50mg have shown the same purported effects of Zertane at 62mg and 89mg (here). We believe this is why BioVail abandoned Zertane and why AMPE has had difficulty signing any meaningful partnerships in over three years. Tramadol is readily available today at the low cost of almost a quarter per pill.

We believe this is the reason Vyrix has failed to generate any interest in an IPO offering. In its September 2014 10-Q (here), AMPE noted that Vyrix has failed to generate any interest and has shelved Vyrix’s plans for an IPO.

It’s also important to note that Zertane needs to conduct two Phase 3 trials in the US in order to file for approval. These trials will cost around four million dollars (here). Vyrix was capitalized with less than $300,000, which isn’t nearly enough for further development of Zertane. Since Vyrix cannot raise any money, AMPE will need to be the one to raise funds. This is another reason we believe AMPE is desperately trying to raise cash.

Both compounds that the executives at AMPE have been recently promoting are worthless in our view.

Price Target $0

We believe the case against AMPE is clear. Two executives have direct ties to an alleged former stock promotion. AMPE is running short on cash. To raise funds, the Company is promoting worthless assets in its pipeline that have a history of failure and non-marketability. Our price target on AMPE is $0. We believe the pipeline assets are worthless and that the executives will waste any and all cash on its balance sheet. We recommend investors short AMPE.

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