Ampio Pharmaceuticals Inc (NYSEMKT:AMPE) just reported topline from its PIVOT trial and is down more than 60% on the announcement. From this decline alone, it’s clear that the company didn’t report anything great, but despite missing the primary endpoint in the trial, management is shooting for an approval on the data. What are the chances of the FDA giving its candidate the green light, and by proxy, what are the chances an allocation at the current discounted price would turn out to be a rewarding exposure? Let’s try and answer these two questions.

The drug the company is trying to get approved is called Ampion, and it’s targeting the pain associated with osteoarthritis. Much of the pain that osteoarthritis patients suffer from derives from inflammation caused by the condition. Essentially, the joint tissue becomes inflamed, and this leads to a thinning of what’s called articular cartilage – the cartilage that surrounds the end of bones at the joint. This thinning means there is less protection when the joints function, and the bone endings can grind against each other. By targeting the inflammation, a drug can hypothetically halt the thinning of the articular cartilage, while also reducing day to day pain.

Ampion is essentially a brand name for a compound called aspartyl-alanyl diketopiperazine, or DA-DKP. DA-DKP is a molecule that is found organically in human serum albumin, and it has anti-inflammatory qualities. By suppressing the production of certain cytokines (the ones responsible for inflammation) DA-DKP can regulate inflammation, and in turn, serve as the core driver behind the pain management element of an osteoarthritis drug.

Or so Ampio had hoped. Now, it’s not looking so great.

The data that hit press this week came from the above mentioned PIVOT trial. It was a 480 patient phase III, designed to test the safety and efficacy of Ampion across 20 or so sites in the US. The trial measured a baseline using what’s called the Western Ontario and McMaster Universities Arthritis Index (WOMAC), and used this baseline to measure improvement after intra articular injection of Ampion across a twelve-week period. Primary endpoint was simple – an improvement in WOMAC from baseline to week twelve.

This is where things get a bit complicated.

Osteoarthritis is split into 4 grades, called KL grades, varying in severity from low (1) to high (4). Ampio used grades 2-4 for the trial. In all three grades, patients that received the active injection recorded an improvement in WOMAC from baseline, with grade 2 seeing a 52% reduction, grade 3 seeing a 36% reduction and grade 4 a 33% reduction. This is significant, but when compared to placebo, not enough to register as meeting the primary endpoint of the trial.

The grade 4 reduction is the most significant here, despite it being the lowest level of reduction overall. Why? Because normally these patients don’t qualify for these types of trials due to the advanced nature of their condition. That Ampion has shown articular injection of Ampio can reduce WOMAC measured pain by one third after 12 weeks is significant, and it’s this fact that is likely driving management’s decision to carry forward Ampio with an NDA. In fact, chances are, the target indication the company goes for will be this specific subset of OA patients – the grade 4KL patients – as they currently have very limited treatment options outside chronic pain medication. For what it’s worth, the drug was shown to be safe, with little to no AEs and nothing drug-related that warranted discontinuation across the more than 400 tested patients.

So what does all this mean? Can we answer the two posed questions? The first, the chances look OK. The FDA will be fully aware of the limited options grade 4 KL patients have available to them right now, and it wouldn’t be the first time the agency gives a drug the green light despite low efficacy. In short, what’s it got to lose by doing so? To answer the second question, again, pretty good. Of course, if Ampio goes for the trimmed down target population, but analysis suggest late stage OA still occurs in around 10% of healthy weight US adults over 60 and up to 35% in obese US adults over 60, so there’s still plenty of patients to go at.

The company is set to discuss the findings on a conference call early next week, so we might get a bit more info then. Beyond that, a discussion with the FDA, and the resulting actions from that discussion, look to be the major near term milestones.