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Summary

  • The steep 3-day sell-off is unfounded, overdone and misunderstood.
  • 8-drug pipeline with 4 of them in late-stage development.
  • Short-term catalysts are current valuation, NDA filing this month for Epinephrine PFS (Epi Pen) and upcoming clinical trials this summer for their Dry Powder Inhaler (APC-5000).
  • Adamis has now fully acquired 3M's Taper Dry Powder Inhaler (DPI) Technology.

It's not often in the world of investing that you find stocks with the realistic potential to double, triple or even more, but Adamis Pharmaceuticals (NASDAQ:ADMP) is one with that type of potential and they have more than one weapon.

The number one catalyst for many stocks is valuation alone and concerning Adamis, that argument can be made. With yesterday's closing price of $5.15 after a steep 3-day sell-off, Adamis' market cap has plummeted to $53 million and their extensive drug pipeline along with excellent odds for success have been ignored by the market up to this point.

CRT Capital recently raised the same valuation question, initiating coverage with a "Buy" rating and a $15 target in this 22-page report . Their initial coverage came out on Briefing.com, but no one other than CRT's clients saw this past Friday's reiteration of the above after the stock dropped below its trading range and rattled investors.

Back on December 13th, Adamis announced a simultaneous reverse split, capital raise at $5.95 along with an uplisting to Nasdaq. CRT Capital was the sole book-running manager for the offering and according to Adamis' Director of Investor Relations & Corporate Communications, Mark Flather, there were 27 institutions that participated.

Gaining traction after the uplisting has been difficult, as the stock has been range-bound between $6.15 and $6.85 for over three months. A lot of investors had expected the stock to catch fire upon the uplisting due to the new low float and expected awareness of Adamis' arsenal, but it appears that several of the financiers decided to book slim profits right out of the gate. Having a stock filled with retail investors from the OTC days, that grew impatient, didn't help either.

Adamis has an 8-drug pipeline with one generic Epinephrine PFS single dose (Epi Pen) going for FDA approval later this year and generating revenues in 2015. They have three drugs entering Phase 3 trials and another entering Phase 2 trials. The real prize is to grab a share of the generic Advair market, an $8 billion dollar market that's totally controlled by GlaxoSmithKline (NYSE:GSK) with no current competition. Let's keep in mind that Advair has been off-patent since 2010 and currently there are no generics on the market.

It's important to note that all of the above only covers the specialty pharma side of the business and includes nothing from the biotech side, where they have four other drug candidates, including a cancer vaccine similar in theory to Dendreon's (NASDAQ:DNDN) provenge, an immunotherapy treatment.

In CRT's report, they refer to the biotech side of the business as a "free call option" and basically assign no valuation to it. They also only account for Adamis to gain just 2% of the generic Advair market, which I vehemently disagree with based upon what I believe to be a better product and the fact that the only other game in town is Glaxo. Even so, CRT still sees Adamis reaching EPS of $1.42 by 2018 with the numbers they have in place.

Now let's take a closer look at the pipeline.

APC-5000 Dry Powder Inhaler With Blockbuster potential

APC-5000 will be the branded generic Advair, a combination of Fluticasone Propionate and Salmeterol used to treat COPD. Even though it has been off-patent since 2010, no one has been able to bring a generic to market even though some have tried.

Teva Pharmaceutical (NYSE:TEVA) has tried and failed among others. The problem is replicating the Advair diskus delivery system. So why would Adamis Pharmaceuticals be different you might ask ?

They have now fully acquired 3M's Taper Dry Powder Inhaler (DPI) technology. 3M Company (NYSE:MMM) invented the taper dry powder inhaler with close to 10 years of R&D invested in this product. Not only did 3M build a rival product, they built a far superior product.

In 3M's research they have shown they can obtain equal or better efficacy to Advair utilizing over 25% less drug. Any responsible doctor would love to prescribe a product with the same outcome while subjecting their patients to less dosage each and every day, which is another major reason I see Adamis achieving far more than 2% of the market. 3M has a rich history in the inhaler market, having been involved with almost every inhaler, either by license or patent use over the last 50 years. 3M's statistical evidence in going head-to-head with Glaxo's Advair can be seen here, here and here.

So not only does the 3M inhaler work far more efficiently, but most importantly, how will Adamis get this product to market ? They will utilize a 505(b)(2) application, meaning the dual drug used in Adamis' branded Generic Advair product is already approved and the only thing the FDA will be looking at is the delivery system, thus a much easier path and less costly process.

The FDA has a very high approval rate in this type of situation. In September 2013, the FDA lowered the regulatory guideline for generic Advair-type products, thus easing the path to approval. In other words, the FDA is begging for a generic competitor.

APC-1000 for Asthma/COPD - an HFA branded generic inhaled oral steroid for asthma currently in Phase 3 Trials. The overall market for this is currently $2.7 billion dollars.

APC-3000 for Allergic Rhinitis - an HFA generic inhaled Nasal Steroid. Currently in Phase 3 Trials. The overall market for this is currently $4 billion dollars.

TeloB-Vax - an Immune-based therapy that's in Phase 2 Trials. It basically works by telling the body's own immune system to create custom T-cells and kills up to 85% of all cancers, as outlined here.

Financials in the biotech/specialty pharma space are usually tepid, as dilution is certainly always a concern, so let's look at Adamis' financial situation.

They completed a $25 million offering at $5.95 as pointed out earlier, part of the proceeds used for paying off 3M for the inhaler asset. They also bought up all their convertible notes with the exception of a $600K note due in June. Basically, they are a debt free company with over $7 million in cash.

The best part of the offering and simultaneous uplisting to Nasdaq was the fact that they got a straight deal completed with no warrants, which is rather rare for a small microcap company and welcoming news for shareholders. In other words, no warrant overhang choking the stock when Adamis becomes known to more than just the small crowd that now follows its progress.

Management has stated many times that they feel they will have sufficient cash through early 2015. Last week, it was ironic that ADMP's stock depreciation coincided with an 8-K filing that basically pushed the $600K note out until June and they incentivized the note holder to convert into shares by lowering the conversion price from $9.35 a share to $6.00. It's quite obvious the market didn't like this for some odd reason, as I personally thought it was a wise move by the company to hold on to almost 10% of their cash by issuing 100K shares of stock.

Another financial opportunity for the company could be the out-licensing of the Adamis DPI to other drug companies, a generic Symbicort for example, as this inhaler can be used in multiple applications. There has also been the thought that Adamis may split the specialty pharma side of the business from the biotech side, creating a second company and possibly an IPO that would create further shareholder value. Considering the biotech side seems to be valued as a "free call option" according to Adamis' lone analyst, it wouldn't be a bad idea.

Share ownership

The real driver of stock appreciation has always been institutional sponsorship and I have been pleased with the high rate of institutions coming aboard. Adamis only had two institutional holders as of late November, but with the institutional numbers through December 31 and several 13G's filed with the S.E.C., public institutional sponsorship now stands at 4,653,334 shares, or 45% of the 10.3 million shares outstanding. Insiders own a very healthy 905K shares leaving a very small float in the neighborhood of 5 million shares. The quick rise in institutional ownership hasn't been noted by many investors yet and the fact that 27 institutions participated in the $5.95 offering is impressive to me.

Risks

Like any microcap company, there are always risks that need to be factored into your investment thesis. The first and foremost risk that comes to mind is the company's ability to successfully complete the required clinical trials for submission to the FDA. There is always the potential for approval delays on its product filings as well as potential competition from bigger specialty pharmas. Although the company is funded through the remainder of 2014 and possibly through Q1 of 2015, the company will most likely need to secure additional financing after that if a partner hasn't come along by then.

Conclusion

I firmly believe Adamis is a much lower risk, very high reward play when compared with many others in the sector, especially with the $53 million market cap for the pipeline they own. 3M's statistical evidence in the above links is compelling. The stock is not widely followed as evidenced by the average daily volume of just 132K, but I see that changing for the better as the company gets noticed and investors begin to compare Adamis' pipeline with others in the biotech/specialty pharma space.

Disclosure: I am long ADMP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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