Adamis Pharmaceuticals: Beneficiary Of Mylan's EpiPen Fiasco?

| About: Adamis Pharmaceuticals (ADMP)

Summary

In today's deep dive we look at a small biopharma concern that sells for just over $3 a share and has an attractive risk/reward profile.

If the company can execute against its plan it could benefit from Mylan's recent Epipen fiasco.

Adamis also has several products in its pipeline as well as its own manufacturing facilities. A full investment profile is below.

"Hell hath no fury like a bureaucrat scorned." - Milton Friedman

Image result for milton friedman

Today we look at a high risk/very high reward small cap concern that could benefit from the EpiPen fiasco that has engulfed generic drug giant Mylan (NASDAQ:MYL) for most of 2016.

Company Overview:

Founded in 2006 and publicly traded since December 2013, Adamis Pharmaceuticals (NASDAQ:ADMP) is a clinical stage pharmaceutical company in the business of providing low-cost, novel drug delivery solutions in respiratory disease and allergies. The stock has had an up and down existence since coming public three years ago and can be seen by the chart below. The stock currently trades just over $3.00 a share and has an approximate market capitalization of $70 million.

Key Product Candidate:

The company's lead pipeline candidate is an ephinephrine pre-filled syringe {PFS} for the emergency treatment of anaphylaxis (mainly food allergies and bee stings) that is designed as an alternative to Mylan N.V.'s highly successful, but highly controversial EpiPen. The story of Adamis and the EpiPen has three sides to it: Adamis, its potential competitors, and the maker of the only EpiPen currently on the market: Mylan.

Starting with Mylan, in 2007 it purchased from Merck a decades old product, the EpiPen auto-injector, which was generating at the time approximately $200 million in sales. Through a solid marketing campaign and price increases -- more on that shortly -- Mylan was able to increase the sales of the EpiPen to an expected 2016 level of $1.1 billion. The increase in revenue can be attributed to two main drivers. First, the number of patients using EpiPen has grown 67 percent over the past seven years. This is thanks in part to the fact that in 2013, Congress passed legislation encouraging states to have epinephrine devices on hand in schools. Now 47 states require or encourage schools to stock the devices. Mylan's CEO's father is U.S. Senator Joe Manchin.

Second, the price of the EpiPen two-pack has increased from $100 in 2009 to $608 in 2016. This 508% price increase is due to the fact that Mylan has a virtual monopoly -- albeit unprotected -- in the space, since French pharmaceutical company Sanofi SA (NYSE:SNY) abandoned its Auvi-Q offering (10% of the market vs MYL's 85% in 2015) after a product recall. Obviously, both reasons for EpiPen's financial success have raised eyebrows in the media and within the Beltway, with Mylan becoming one of the poster children for corporate greed culminating with CEO Heather Bresch testifying before the House Oversight Committee hearing on EpiPen price increases this past September. Then in November, it agreed to pay $465 million to settle an investigation by the U.S. Department of Justice related to the misclassification of EpiPen in the Medicaid Drug Rebate Program. Mylan also greatly increased its patient access program and just came out with a generic version that cut the price of the EpiPen in half. It should be able to put these travails behind it in 2017.

This brings us to Adamis. The company has been working on a device to compete with MYL's EpiPen. It filed an NDA for its PFS in May 2014. In March 2015 it received a Complete Response Letter {CRL} from the FDA that raised questions concerning its ability to deliver volume within the levels contained in the labeling claim and as required by the FDA. Efficacy and safety were not issues. Adamis responded with a resubmission of its NDA in December 2015.

In anticipation of approval, the company entered into a licensing agreement with Allergan's (NYSE:AGN) wholly owned subsidiary, Watson Laboratories, Inc. to commercialize its PFS. Under the agreement, Adamis was to receive an upfront fee and potential regulatory and performance based milestone payments totaling up to $32.5 million along with double-digit royalties on sales.

However, in June 2016, Adamis received another CRL from the FDA, this time requiring the company to expand its human factors study and reliability study to see if any changes made to solve the volume delivery issue would have an impact on patient usability or product dependability. Shortly thereafter, Watson terminated its marketing agreement with Adamis.

Adamis on December 16th that it had resubmitted its NDA. This obviously positive development is tempered by the fact Adamis has given away a two and half year head start on any competition. Whether or not the company gets a marketing suitor before an FDA approval is anyone's guess given its history of not delivering.

However, in late August, and likely in response to the anticipated congressional cries of price gauging and new entrants potentially flooding the EpiPen market, Mylan announced the launch of a generic EpiPen at a cost of $300 per two-pack, which is more than 50% lower the cost of Mylan's current EpiPens. This will negatively impact ADMP's negotiating position in any potential commercialization partnership, but will certainly not discourage the company from the marketplace.

Another potential competitor is Teva Pharmaceuticals (NASDAQ:TEVA) who is looking to harness Antares (NASDAQ:ATRS) auto-injection technology to compete with Mylan's Epi-Pen. However, Teva received a CRL back on February 23rd relating to its epinephrine ANDA in which the FDA identified certain "major deficiencies". This will likely delay any launch into 2018.

The other potential significant competitor is privately held Kaleo Inc., which was Sanofi's partner on Auvi-Q before its recall. Sanofi returned its rights to the product back to Kaleo in February after the recall. Kaleo announced in October 2016 that it plans to relaunch Auvi-Q in 2017. Kaleo says that it will employ a robotic production line for the manufacture of its product, which should address issues that caused the product's recall. Kaleo is also no stranger to price gauging scrutiny. Since 2014, Kaleo has increased the price of its Evzio injectors, which contain the opioid-overdose treatment drug naloxone, from $690 up to $4,500 for two single-dose injectors. Beating Kaleo to market will be important to Adamis as it can establish a foothold in the $1 billion EpiPen market. Kaleo has not given any more visibility since its October press release, nor has it announced a marketing partnership.

What seems to be clear, with all of the negative press surrounding Mylan, is that there will be pressure from Congress to have another generic EpiPen on the market sooner than later.

Adamis has four other pipeline candidates in Phase II development that include an inhaled oral steroid for the treatment of COPD and Asthma; albuterol for Bronchospams; an inhaled nasal steroid for Allergic Rhinitis; and a dry powder inhaler for COPD and Asthma. The COPD/Asthma market is very large and provides substantial potential for ADMP and its market cap of roughly $70 million. The issue is the company's ability to deliver a product to market in a timely manner.

Acquisition:

In April of last year, the company bought a compound manufacturing facility which they bought for $8 million in stock and another $5 million in assumed debt. If operations live up to management expectations, this will look like a steal in hindsight.

This facility based in based in Arkansas manufactures sterile and non-sterile prescription medications for patients, physician clinics, hospitals and surgery centers. It has done approximately $20 million in sales in each of the past two years. Adamis believes this business will generate at least $5 million in operating income over first 12 months and achieve and annualized revenue run rate of $50 million within 24 months of acquisition.

Outlook:

ADMP started the year at $5.40 a share. News of the licensing agreement with Allergan's Watson subsidiary sent the stock to a high of $10.98 on May 10th. After the news of the company's second EpiPen CRL hit the tape in June, the stock plummeted to the mid 2's. Since then the stock has bounced off the mid 2's several times with its year low of 2.40 occurring on October 27th. There is a significant short on the stock with a coverage ratio of 18.83 days. The stock's average daily trading volume is approximately 220,000 shares. The stock has not moved much since its resubmission announcement. Shares of ADMP currently trade at $3.15 a share

The stock is followed by only two Wall Street analysts who both have buy ratings and an average price target of $7.50. The company has $8.8 million in cash as of the third quarter of which $1.0 million is restricted as loan collateral. If a commercialization partner is not found in the next month it is likely that ADMP will have to come back to the capital markets for additional financing, which it has done three times already in 2016, raising approximately $20 million through stock and warrant issues.

Adamis has much potential, but is still experiencing growing pains. A quick approval of its EpiPen product is essential for the long-term prospects of ADMP. A nod from the FDA could mean first competitor to market in the EpiPen arena and a partnership that will keep ADMP away from the capital markets, focusing all of its energies on its pipeline COPD/Asthma candidates.

Obviously, this is a high risk/high reward play. However, I have recently taken a small stake based on the belief that political pressure and modifications will get Adamis' EpiPen competitor on the market on the third try. I offer it up for consideration for aggressive investors within a well-diversified biotech portfolio. I personally am playing ADMP for a short term trade. I could see enthusiasm for and then eventual approval pushing the stock to reclaim at least half the losses it suffered in June.

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Thank You & Happy Hunting

Bret Jensen

Founder, Biotech Forum

Disclosure: I am/we are long ADMP, MYL.

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.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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