It's a tough job nowadays finding a compelling risk vs. reward opportunity in the biotech space considering the triple-digit rise of the broader biotech indices in the past few years. Yet, we managed to discover an intriguing biotech small cap with an excellent risk vs. reward profile called Aradigm Corporation (NASDAQ:ARDM). This company possesses exactly the right features that made us aggressively buy shares in the open market:
Number 1: Aradigm's drug pipeline targets a large unmet medical need
Aradigm has a unique drug portfolio in development targeting undertreated respiratory diseases, a global market nearing $25 billion in size. Everything is right on schedule, as evidenced recently by the FDA granting its lead drug Pulmaquin a QIDP designation, which allowed the company to commence the Phase III trial program last June.
Number 2: Aradigm has already formed a partnership
Aradigm completed a worldwide licensing agreement with Grifols S.A. in late 2013. Partnerships are ideal for emerging biotech companies like Aradigm, because it not only takes sizeable risk off the table, it also validates the drug portfolio's market potential.
Number 3: Wall Street has yet to discover Aradigm
Aradigm recently up-listed to the NASDAQ, and is yet to be discovered by investors. The under-the-radar status of this stock is rare for a Phase III biotech company, and partially explains why Aradigm is such a compelling opportunity.
Number 4: Large insider and institutional ownership
Insiders and institutional investors own more than 80% of the company. This is a very important factor in speculative biotech investing; such a high concentration of closely held shares is a clear bullish signal in our view.
Number 5: Aradigm has excellent financials
The financial statements show Aradigm has plenty of cash, no debt, a moderate cash burn and a growing multi-million dollar revenue stream. On top of that, the company manages to attract non-dilutive funding (grants) from time to time through its partnership. This is the ideal form of financing, especially from a shareholder perspective.
Number 6: Aradigm looks severely undervalued
Aradigm not only looks undervalued in comparison to peer companies, but also in a basic valuation model. The undervaluation reduces downside risk, and amplifies the upside potential.
Respiratory diseases are a large global problem
Let's zoom in what respiratory diseases exactly are, and what the medical need is.
In essence, your respiratory system is the part of your body that enables you to breathe properly. This part includes the airways, like your nose, lungs, blood vessels, mouth etc. Many tiny parts make up for this system, and because of that the chance something goes wrong is, unfortunately, pretty high. Here's a list of some of the better known respiratory diseases:
- Bronchiectasis: An infection in the bronchial tubes. This mainly affects children.
- Influenza: A fever causing virus. This is a common disease, and we probably all experienced it in our lifetime.
- Asthma: Chronic dysfunction of the airway walls, reducing the oxygen inflow in one's lungs.
- Lung cancer: One of the most deadly forms of cancer
- Tuberculosis: An often deadly infection of the lungs and other parts of the body. This disease is still active in many countries.
Lesser known diseases are for example pneumonia, laryngitis and cystic fibrosis. The list is much longer, however; Wikipedia has a good overview.
Respiratory diseases are a global problem. According to MarketsandMarkets, the global demand for respiratory devices will reach $13.5 billion next year. According to BCC Research, the global market for pulmonary drug delivery technologies and products surpassed $32 billion and is expected to grow to $44 billion in 2018. An online search will quickly reveal more estimates all in the multi-billion dollar range.
Respiratory diseases are a high unmet medical need
GBI Research announced the addition of the "The Future of Respiratory Diseases Therapeutics - Market Forecasts to 2015, in which they stated:
... Respiratory disease disorders such as asthma and COPD are currently some of the most explored therapeutic areas while cystic fibrosis and pulmonary hypertension are some of the least explored. The market consists of several drugs with high safety levels. The cystic fibrosis market and pulmonary hypertension is in need of an effective replacement for current therapy to streamline long-term treatment.....
Dr. C. Chang said:
...the care of patients with respiratory diseases has improved vastly in the past 50 years. In spite of that, there are still massive challenges that have not been resolved... Although the incidence of tuberculosis has decreased in the developed world, it is still a significant public health problem in the rest of the world...Respiratory syncytial virus, severe acute respiratory syndrome, and pertussis are other respiratory infectious diseases with special problems of their own, from vaccine development to vaccine coverage... Asthma, one of the most common chronic diseases in children, still accounts for significant mortality and morbidity, as well as high health care costs worldwide. Even in developed countries such as the USA, there are over 4,000 deaths per year....
Dr. Penny Wood elaborated in an interview on the unmet needs of respiratory patients:
...There is more than one major unmet need for patients with lung conditions. These range from the need for improved diagnosis to appropriate treatment, care and increased research funding....
The high unmet medical need explains why the projections for the respiratory market are so enormous. There is an obvious huge opportunity for biotech companies to 'fill in the gap', and we believe Aradigm is in a pole position to do so. Its main drug candidates focus on the least explored of the respiratory diseases market: cystic fibrosis and bronchiectasis. As a matter of fact, there is no approved treatment for bronchiectasis currently available to patients at all.
The obvious economic urgency
Besides the medical need, there is also an obvious financial need to combat respiratory diseases. According to the European Respiratory Society, the associated health care costs are in the billions:
source: European Respiratory Society
And this is a just an overview of the better known variants. For the US, the economic burden is about the same. The trend is unfortunately up; the costs continue to rise on a global scale.
Aradigm Corporation was founded in 1991 as a specialty pharmaceutical company with a focus on the development and commercialization of drugs delivered by inhalation for several kinds of respiratory diseases. The stock was one of the best performing biotech stocks in the infamous dot-com bubble, which happened, as the 'older' generation amongst us may know by experience, more than 10 years ago. The stock hit sky-high levels, but as with so many biotech stocks in the aftermath of the inevitable dot-com crash, the share price dropped to more earthly levels. A few company related setbacks held the stock back too. A few developmental programs got cancelled or delayed, and Aradigm's partnership with Novo Nordisk (NYSE:NVO) back then came to a halt. The stock subsequently got demoted to the OTC exchanges, for failing to comply with the NASDAQ listing requirements. Aradigm appealed, but to no avail. Aradigm was almost left for dead, but the science remained, so management, led by CEO Igor Gonda, took the lead again and refinanced the company, got the NASDAQ listing back, formed a new partnership and launched new product candidates, which are progressing well. This turnaround has gone largely unnoticed though, as evidenced by the share price trading sideways for the past few years. As of now, we believe Aradigm has all the reasons to go up again, and the low and stable share price presents a compelling entry point.
With bronchiectasis, the patient's lung function is often irreversibly reduced compared to a healthy person's lung. A reduction of the lung capacity narrows the airways, causing all kinds of breathing problems and pain. This is often the result of a vicious cycle of bacterial infections, in which damage to the lungs only increases the risk to more infections. The body then tries to fix the damaged lung tissue, which could lead to disadvantageous changes to the lung function. The medical term is pulmonary exacerbation.
Cystic fibrosis is a genetic condition in which the lungs and digestive system become clogged with thick sticky mucus, causing frequent chest infections, and coughing or shortness of breath. Cystic fibrosis is the most common cause of congenital (inherited) bronchiectasis.
The solution to these respiratory diseases? There is always the last resort option of a surgical intervention, but this is very costly, risky and could have a negative impact to a patient's life. Some surgeries go as far as a lung transplantation. A widely used alternative treatment is prescribing ciprofloxacin. This is a medical term for antibiotics with a clear anti-bacterial effect, and can be 'consumed' by merely inhaling. However, the ciprofloxacin drugs sold today need to be taken multiple times a day, and have their side-effects.
Now Aradigm has developed a special formulation of ciprofloxacin, one that could be a superior therapy:
- Aradigm employs liposomes, which are nano-particles made from materials similar to the lipids in the human lungs and dispersed in water that encapsulate ciprofloxacin during storage and release it gradually upon contact with the fluid covering the parts of the respiratory system like lungs and the airways. In other words, the drug is designed in such a way that it allows for a sustained release of the drug within the respiratory system, rather than a 'one-time-shot'. This could prolong the medicinal workings. Studies have already shown that Aradigm's formulation of ciprofloxacin produced higher sustained levels of ciprofloxacin in the lungs compared to regular ciprofloxacin formulations. In many cases, it was still detectable at 12 hours post dosing. This is a great advantage, because the drug then needs to be taken only once a day, rather than multiple times.
- Aradigm states that this 'slow release' inhalation may improve safety and efficacy, at least safer and more effective than is currently available on the market for cystic-fibrosis related bronchiectasis. It's eventually up to all clinical trials and studies to confirm, but the trials and studies finalized so far seem to back up Aradigm's statements.
- Aradigm also believes they can market the drug at a more competitive price.
- The drug is easy to use, which could lessen the need for patients to get therapy at a hospital.
- As for non-cystic fibrosis (acquired) bronchiectasis, Aradigm's solution is unique in the sense that there is currently no treatment available on the market. This is an acknowledged unmet medical need, which creates a huge opportunity for Aradigm.
What has Aradigm to offer on a product-specific level? The company has 4 main drug programs in development:
1) ARD-3150 (Pulmaquin):
This drug targets bronchiectasis. The cause in approximately 10-50% acquired cases is unknown at this point. We are talking about more than 100k patients in the United States alone, and these are all non-smokers.
But that is about to change because on May 20th, 2014, the FDA has designated Pulmaquin as a Qualified Infectious Disease Product (QIDP). The QIDP designation will make Pulmaquin eligible to benefit from certain incentives for the development of new antibiotics provided under the Generating Antibiotic Incentives Now Act (GAIN Act). These incentives include priority review and eligibility for fast-track status. The FDA designation allowed Aradigm to recently start the dosing of the first patient in a Phase III study in non-cystic fibrosis bronchiectasis.
Dr. Douglas Fiedler was the respiratory physician applying the Pulmaquin drug and he stated:
I am very pleased to participate in this study to investigate the potential benefits of a new medication for my patients with a chronic debilitating respiratory disease for which we do not have any good evidenced-based treatments yet...
Advancing upon the successful Phase II clinical trials, the Phase III clinical program for Pulmaquin consists of two worldwide, double-blind, placebo-controlled pivotal trials called ORBIT-3 and ORBIT-4 (Once-Daily Respiratory Bronchiectasis Inhalation Treatment). About 510 patients are to be enrolled, and it will take approximately 48 weeks in total. Then the testing can take place, which should be wrapped up within a year. We therefore expect results to be announced in 2016. Results should include the superiority of Aradigm's Pulmaquin drug vs. a placebo drug during the double blind period, on both efficacy and safety. We consider the start of this Phase III to be a critical milestone, and its partner Grifols awarded Aradigm accordingly with a $5 million payment upon the successful dosing.
Again, what also is so interesting about this drug is its uniqueness: there is currently no drug specifically approved for non-cystic fibrosis bronchiectasis. Aradigm believes Pulmaquin could be a $1 billion-plus opportunity globally.
2) ARD-3100 (Lipoquin):
As for 'regular' cystic fibrosis, Aradigm is developing Lipoquin. In the United States, approximately 30000 people suffer from this disease. Worldwide, the numbers are much bigger, and many of these patients are yet to be diagnosed. In contrast to Pulmaquin, there is a 'solution' already available on the market for patients, but as mentioned existing drugs need to be taken multiple times a day, and have side effects. Lipoquin could be the better alternative for a myriad of reasons.
A Phase 2a study demonstrated Lipoquin's safety and efficacy for patients with cystic fibrosis. There were no statistically significant differences between the active and placebo groups in the number of patients experiencing respiratory related health problems. The incidence of serious adverse events (SAEs) was low; there were a total of six SAEs and none of them were treatment related.
3) ARD-1100 (Liposomal Ciprofloxacin for Biodefense Purposes)
ARD-1100 is a drug currently being tested in pre-clinical trials.
Scientists from the UK Defense Science and Technology Laboratory independently demonstrated the efficacy of Liposomal Ciprofloxacin regarding several bioterrorism agents in November 2012. To quote Aradigm's CEO Igor Gonda on the results:
We are very excited to see that our inhaled liposomal ciprofloxacin has been found to show very promising efficacy against three possible bioterrorism agents, making it potentially a useful broad-spectrum prophylaxis and treatment against such infections. We continue to seek opportunities for additional funding for this type of work via collaborations with government agencies with the view that our liposomal ciprofloxacin may be approved under FDA and similar overseas regulations relating to new drugs or biologics for potentially fatal diseases where human studies cannot be conducted ethically or practically.
4) ARD-1600 (Tobacco smoking cessation therapy)
This product candidate targets a widely known problem: tobacco addiction. Everybody knows smoking cigarettes could cause respiratory diseases. Aradigm has therefore developed a treatment for what CEO Igor Gonda believes is the world's greatest unmet medical need: a nicotine inhaler for smoking cessation. According to the Centers for Disease Control and Prevention, more than 500 million people worldwide are addicted to tobacco, and the economic burden tops $200 billion. Contrary to popular belief, nicotine is not the cause of respiratory diseases. However, the craving for nicotine is very real, that makes stop smoking such a hard endeavor.
Therefore Aradigm's ARD-1600 therapy aims at reducing the craving for nicotine. With it Aradigm has developed the AERx inhaler. With this inhaler, a smoker gets the nicotine quickly into the brain. This is a unique and vital element of the therapy. Most anti-smoking therapies and products do not really stop the craving because the nicotine is not delivered to the brain fast enough (like nicotine patches). An e-cigarette isn't really designed to stop the craving, but is merely a somewhat health friendlier addition to regular cigarettes. Aradigm wants to stop the addiction in its entirety, by gradually reducing the craving for nicotine, so people can really stop smoking.
The AERx inhaler has a multi-functional use, and is also tested in clinical trials for insulin, pain management and recombinant human DNase.
Aradigm intends to spin out the nicotine inhaler as a separate company and launch it for the consumer market. We would like to use this avenue and then work with the FDA to design clinical trials so the inhaler could be approved with health claims. We consider this to be a very valuable asset and a spin-out is a more attractive option at the moment...
Aradigm's partnership with Grifols S.A.
As mentioned, Aradigm now has a worldwide licensing agreement with Grifols in place. Grifols is a blue chip pharmaceutical company and has its HQ based in Barcelona, Spain. Its annual revenue was $2.7 billion in 2013. The details of the agreement are as follows (listed from the press release):
- The parties have agreed to advance Aradigm's proprietary inhaled ciprofloxacin formulations into Phase III clinical trials in Bronchiectasis.
- Grifols will be responsible for all development and clinical expenses up to a maximum of $65 million for the Bronchiectasis indication.
- Aradigm is entitled to receive cash payments of up to $25 million upon achievement of development milestones, like the first dosing to a patient.
- Grifols is responsible for all commercialization activities and will pay Aradigm tiered royalties (12.5% - 20%) on worldwide sales of products utilizing Aradigm's proprietary inhaled ciprofloxacin formulations.
- Grifols was granted an option to license Aradigm's AERx inhaler for use with another molecule.
- In conjunction with the licensing agreement, Grifols acquired 35% of Aradigm's common stock for a total investment of approximately $26 million.
- Existing Aradigm shareholders co-invested in the stock purchase transaction and purchased an additional approximately $15.4 million in Aradigm common stock.
What does this all effectively mean? It means a lot of risk has been taken off the table. By handing over the costs and splitting the potential revenue streams, the critical Phase III clinical trials of the lead drug Pulmaquin are effectively financed, eliminating the need for dilutive capital raises, which plague so many biotech investors. The upside potential remains intact, so this partnership is a win-win deal for both companies in our opinion.
The people leading Aradigm
A very experienced executive management team is leading Aradigm:
President and CEO Igor Gonda, Ph. D, has been leading the company since 2006. Igor Gonda has previously been working on respiratory diseases, as a scientist and as a board member at several pharmaceutical companies. He has a PhD. in physical chemistry.
CFO Nancy Pecota has more than 20 years of experience in financial accounting & reporting. Previously she worked in the life sciences sector as a senior accountant, CFO and financial consultant. She holds a Bachelor of Science in Economics.
CMO Juergen Froehlic, MD, has more than 20 years of pharmaceutical industry experience at both early-stage as more matured companies, including Genentech and Vertex Pharmaceuticals (NASDAQ:VRTX). Dr. Froehlich was closely involved in the commercialization of various drugs' activities. He graduated from the Medical School in Germany and obtained a dual MBA degree in Switzerland and New York.
Furthermore, 6 experienced managers are on the Board of Directors, and 4 scientists on the Scientific Advisory Board.
High insider and institutional ownership leading the way
A very important factor in speculative biotech investing is the level of insider and institutional ownership and their trading behavior. Read this study, and you will come across the notion that a high concentration of closely held shares, in combination with insiders holding on them, is generally a bullish indicator; these stocks tend to outperform. What's the situation with Aradigm? The level of insider and institutional ownership is more than 80%, which is exceptionally high. It also means the supply of shares available for you and me is limited. Aradigm is a classic low float stock.
Check out the next overview. The insiders keep acquiring more shares, and hold on to them (apart from one measly $567 sale).
Source: Yahoo Finance
Aradigm has excellent financials
What really stuck out to us is the excellent financial condition of the company.
According to the Q2 earnings released yesterday, Aradigm has about $50 million in cash sitting on the balance sheet and no debt. The company burns about $5 million per quarter, based on the average of the last couple of quarters. Aradigm should be financially secure for at least 2 years. That's not all. There are a couple of factors that even emphasize and improve the financial aspect:
Number 1: Grifols should award Aradigm with regular milestone payments, as they did 2 months back ($5 million payment).
Number 2: Grifols is responsible for $65 million in expenses related to Pulmaquin.
Number 3: Grifols is also responsible for all commercialization activities.
Number 4: Aradigm has a quarter-to-quarter growing revenue stream:
Q2 2013: $0.25 million
Q3 2013: $4.55 million
Q4 2013: $4.64 million
Q1 2014: $6.63 million
Q2 2014: $12.24 million
The revenue is made up of royalties and existing collaborations.
Number 5: Aradigm's aggregate net losses are fairly limited:
Q2 2013: -$2.71 million
Q3 2013: -$14.87 million
Q4 2013: -$0.65 million
Q1 2014: +$7.75 million
Q2 2014: -$1.36 million
A developmental biotech stock operating at a loss may be no surprise, but the severity is an important factor.
What is Aradigm worth?
Wall Street currently values Aradigm at $125 million. We will take two approaches to estimate what the valuation should be; by comparing the market valuation to peers and by modeling a basic discounted valuation based on odds and multiples.
First a comparison; there are a couple of other similar developmental biotech companies focusing on respiratory diseases.
Vectura Group (OTC:VEGPF) is a British company developing pharmaceutical therapies for the treatment of bronchopulmonary diseases. Its products target various diseases, such as asthma and chronic obstructive pulmonary disease (COPD). Vectura has multiple product candidates in both Phase II and III trials with no FDA approval yet.
Discovery Laboratories (DSCO) focuses on developing life-saving products for critical-care premature infants with respiratory disease and care in pulmonary medicine. It has an FDA approval for Surfaxin, and their other product candidates are in pre-clinical and Phase I trials.
Let's compare on revenue/sales, revenue growth, debt-ratio, and market cap.
Aradigm 'wins' on all factors yet Vectura Group and Theravance have significant higher valuations. Discovery Laboratories is, with a $132 million market cap, slightly higher valued than Aradigm; but, compared to Aradigm, the addressable market of their products is much smaller. Also, Discovery's cash balance looks solid at first glance, but the balance sheet also contains a $19 million debt load. This and a high cash burn, no material revenue and no partner financially backing them up, make its financials significantly weaker than Aradigm's.
This comparison is nothing more than an indication, but Aradigm looks undervalued.
Now let's look at a discounted valuation.
What could Aradigm's revenue be once their product candidates are allowed to hit the shelves? For conservative purposes, we only focus on the 2 main drug candidates: Pulmaquin and Lipoquin. Remember, Pulmaquin targets the niche Bronchiectasis market that has no approved treatment as of date. Grifols has projected sales to be $300 to $400 million a year after Pulmaquin is ready for commercialisation (2016). With a royalty rate of 12.5% to 20%, the projected annual revenue stream for Aradigm is $40 million.
As for Lipoquin, the cystic fibrosis market is growing fast, projected to reach $4.5 billion in a couple of years in the US and 6 major countries in Europe. In the US, about 30000 people are diagnosed with cystic fibrosis. According to the American Lung association the direct annual cost of treating 1 person can be in excess of $40000. Worldwide, the market is probably much, much bigger. Imagine the respiratory problems people face, for example, in Asian countries due to the massive pollution clouding the metropolitan areas. We model Aradigm could capture a few percentage points in market share, which equates to a projected annual revenue stream of about $120 million (2018).
What about the odds for approval? Click on this link to read the excerpts of an in-depth statistical analysis about the average odds for biotech companies seeking approval by the FDA. The chance a drug meets the Phase III trial endpoints is 55%, and the chance a drug will enter Phase III is 33%. The chance that a drug will ultimately be granted approval after submission to the FDA stands at 90%. From a historical perspective, only 9% of all drug programs ultimately make it to the market. It's actually better for Aradigm, because here's an interesting statistic: drugs for infectious diseases had the highest rate of approval of 15% for lead indication.
What does this say about Aradigm? Regarding Pulmaquin, Aradigm has just commenced Phase III, so for a starting point we go with a lower 40% success rate in drug submission for FDA approval, because at this early stage it is not known yet whether the full enrolment of patients will go exactly as planned. For Lipoquin the next goal is to advance to Phase III; the Phase IIa trials have already been successfully completed for the indication of cystic fibrosis. The studies have demonstrated a significant reduction in bacterial infection following once-daily treatment with inhaled liposomal ciprofloxacin in both indications. Also Lipoquin has already received an Orphan Drug Designation for both Europe and the United States. Therefore, we think it's fair and conservative to apply a 50% success rate in Lipoquin advancing to Phase III.
Here's an interesting website listing the revenue multiples by all sectors. The average revenue multiple for biotech is 10. Aradigm is currently valued at 8X sales, so we use that in the valuation.
This survey argues a 15% discount rate is in this case more than reasonable.
Lastly, we don't expect shares outstanding to increase, given the excellent financial condition and agreements made with Grifols.
With these inputs the calculation becomes as follows:
Pulmaquin: (0.40*0.90*40M*8) / (1.15^3) = 76M
Lipoquin: (0.50*0.55*0.90*120M*8) / (1.15^4) = 136M
Adding the 50 million net cash makes a total of $262 million.
So this calculation indicates Aradigm should be valued at $262 million right now, or twice today's share price. Do keep in mind that their other product candidates have value too, which we conservatively set at 0. Aradigm also has a patent portfolio that protects its intellectual property until 2031.
In sum, the discounted valuation model also indicates Aradigm's share price is currently trading far below what it should be.
We think that if management executes well, and either one or more product candidates hit the shelves, Aradigm's market cap could approach $1 billion fast. How will they bring the drugs to the market? Remember, Grifols is responsible for all commercialization activities. They have a presence in many countries, and a huge sales and marketing team working for them. In other words, Grifols is already invested heavily in the healthcare market globally, and bringing Aradigm's drugs to the market should not be that much of a challenge. Certainly, it would be for Aradigm if they had to commercialize the products themselves. This is why partnerships are a must in most cases for developmental biotech companies. Inventing a blockbuster drug is one thing, getting it to the market is another. If Aradigm hits a home run, and the odds are it will, patient shareholders will definitely see their investments multiply in value.
The huge disconnect between the current share price and fair valuation should not last long. There are a couple of catalysts that can push the share price substantially higher:
Number 1: Awareness
Aradigm is virtually unknown, which is rare for a Phase III biotech stock. We could not find any good research, apart from just 1 article on SA, and 1 other (sponsored) report. Compare this to other Phase III biotech stocks; some even have more than 100 articles written on them. We believe the under-the-radar status is caused by the fact that Aradigm's stock was trading at near 0 price levels on the OTC exchanges for a good while. Most OTC stocks trading so low aren't exactly that interesting for the average individual investor, let alone for institutional investors. Things changed however, because Aradigm recently up-listed to the NASDAQ exchange, and the stock underwent a 40 to 1 reverse split.
There is another factor that indicates Aradigm is flying under the radar: the stable share price and low-volume trading:
The trading volume and share price volatility are remarkably low for a biotech company sporting a $125 million market cap. Such a stable price/trading pattern often signals an excellent entry point, especially if you consider that the biotech sell-off of last month did not push Aradigm shares lower. Investors should know that institutional investors aren't barred anymore from getting on board in the open market, given the NASDAQ up-listing and the share price trading above the $5 threshold. We'd like to point out that the strategy of buying shares of undervalued small-cap stocks before the general public finds out about it has often proven to be a very profitable one.
So we expect a revaluation in the market as soon as investors discover this stock. This article, and potential analyst coverage in the near future could ramp up the awareness significantly, at least to normal levels. We think Aradigm could rise 30% to 40% upon this catalyst shortly, especially given the low free float.
Number 2: Updates on the trial programs
Aradigm's product portfolio has a lot going for it. The Phase III trials just started, and the Phase II trials should see its end within a year. We expect related and relevant updates (e.g. results, FDA related news, milestone payments, etc) to be announced later this year.
Number 3: Takeover target
A wave of recent takeovers indicates that respiratory diseases related biotech stocks seem to be popular buy-out candidates:
- Less than a year ago, Meda AB (MEDA-A.st) gobbled up Acton Pharmaceuticals for $200 million.
- On February 4th, 2014, Chiesi Pharmaceuticals took over Cornerstone Therapeutics (NASDAQ:CRTX) for almost $500 million.
- Again two weeks later, Vectura Group bought Germany's Activaero for $181 million.
The takeover premiums range from +60% to well over +100%.
Will Aradigm be acquired too? We don't know, but it does seem fair to say there is reasonable chance it will. If the clinical trials progress as planned, Grifols could of course decide to buy up the company in its entirety.
Number 4: Sale of the tobacco cessation segment
A kicker is a possible sale of the tobacco cessation segment. Wall Street values this segment currently at near 0, but a sale would unlock its real value. It's hard to exactly pinpoint how much, but certainly in the range of millions of dollars. A major pharmaceutical company could also decide to partner up with Aradigm, with the goal of commercializing ARD-1600 and the AERx inhaler altogether.
Aradigm has remarkable low downside risk compared to many developmental biotech stocks, but some risks are not to be ruled out.
The most prominent risk is drug failure. There is no guarantee their products will ever be allowed to be sold on the market. If their main drug candidates fail to meet the endpoints on either safety or efficacy, Aradigm has to start all over again. If a drug meets the endpoints in say Phase I or II, that doesn't automatically mean a higher dosing in the next Phase results in sufficient safety and/or efficacy data too. We can't tell what the odds exactly are (nobody can) but both Aradigm's history and the statistic study prove this risk is material.
A second risk is any delay in patient enrollment. The company has just started patient enrollment, and has projected this will last for a year at least. But the real testing can't be commenced unless enrollment has been completed.
Another risk is competition. There are other firms out there trying to combat respiratory diseases. A fierce competition is to be expected, because the addressable markets are so large.
Lastly, Aradigm's partner Grifols could pull the plug somewhere down the road. There is currently no reason to assume they will, but it does lie within the realm of possibilities (failure in the clinical trials for example). It happened before with Novo Nordisk. Luckily, Aradigm has a decent balance sheet, but the share price would certainly take a dive if such an event would take place.
Aradigm Corporation presents a very compelling risk vs. reward opportunity in the biotech space. Its win-win partnership with Grifols, excellent financials and severe undervaluation make the downside risk remarkably low for a developmental biotech stock, while the upside potential is big. If management executes, and we think they will, the two main drug candidates, Pulmaquin and Lipoquin, should relieve many patients suffering from bronchiectasis and cystic fibrosis globally, enabling Aradigm to incur large revenue streams in the process. We urge you to have a serious look at Aradigm. We did, and bought shares right away.
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Disclosure: The author is long ARDM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.