ADMA is in the third inning of a corporate turn-around. A manufacturing-related Warning Letter is preventing ADMA from reintroducing Bivigam to the market ($60m Revs/yr) and getting FDA approval for RI-002 (could be a $200m+/yr). While ADMA management has stated that their facility is inspection-ready, there has been a lot of uncertainty about the timing of the required FDA re-inspection and about the success of ADMA's efforts to fix the manufacturing issues.
While ADMA stock has traded up so far in 2018 on the "progress" management has made, the company's valuation has been rather depressed given all of the uncertainty surrounding this progress and the timing of FDA action. In fact, on June 13, one of the sell-side analysts lowered his price target on ADMA, due to the lack of news on the FDA re-inspection.
ADMA acquired its IVIG manufacturing facility (and Bivigam product) from Biotest in June 2017, in order to resolve a November 2014 Warning Letter which Biotest had been unable/unwilling to fix. The FDA issued the Warning Letter three months after an August 14, 2014 inspection, which revealed that the manufacturing process Biotest used to make Bivigam had not been properly validated; Biotest did not even have the proper manufacturing equipment to make cGMP product. The Form 483 that Biotest received after their inspection outlines the most important deficiencies/observations uncovered by the FDA during the site visit. Successful resolution of the observations is required to avoid further legal action. In the case of Biotest, the FDA found their response to the Form 483 lacking and issued the Warning Letter, which blocks any new drug approvals from the plant. Resolving the Warning Letter is what stands between ADMA and relaunching Bivigam and receiving approval for RI-002.
Manufacturing Done Right
It seems that ADMA accomplished about three years' work in about 9 months' time. While management has made comments about the facility being inspection ready, and sell-side reports touched on some of the activities undertaken by management, investors have not fully appreciated the magnitude of what management has actually accomplished:
First, ADMA retained Validant Consulting to lead the remediation effort. Validant is a premier manufacturing consulting firm with particular expertise in biologics manufacturing. In fact, ADMA's VP of Quality joined the firm from Validant in August 2017. Second, ADMA had to complete and document, what seems to be, hundreds of investigations, CAPA's, reports, etc. which had not been done by Biotest. Third, based on the Form 483, ADMA had to validate each step of the manufacturing process from the beginning to end, while at the same time, finding and fixing the issues which were resulting in filter clogging, visible particles, and all the other variability in the manufacturing process. Fourth, ADMA had to install, test and validate new equipment which was required to make the process run correctly. Fifth, ADMA had to write dozens and dozens of SOPs required to operate the facility properly going forward.
The FDA in fact conducted a 10-DAY long inspection (with two inspectors) of ADMA's manufacturing facility between April 3 and 12, 2018. (Which maybe compared to one day and one inspector in 2014.) Since the facility is not large, I am assuming that the FDA must have done an extremely thorough job at making sure all of the issues at the plant had been addressed, and must have reviewed a mountain of information generated by the remediation efforts. At the end of the inspection the FDA issued a Form 483 without a single manufacturing process-related observation. In fact, each of the Eight observations appear administrative and/or routine in nature. They point out a lack of documentation or shortcoming in a laboratory procedure.
I will address each observation below, but there are two general conclusions:
- I am 99% certain that the FDA will upgrade the status of the facility to "VAI" and lift the Warning Letter
- None of these observations appear stand in the way of final approval of ADMA's drugs
These are my comments regarding the observations:
- Observation 1: "Failure to prevent unauthorized access of changes to data and to provide adequate controls to prevent omissions of data"
- Items A-D require new software, which is likely to be "off-the-shelf," potentially with some minor modifications. ADMA may need to install some new instruments to make the resolution easier.
- Items E-H require a few new SOP's to be written.
- Observation 2: "Issuance and use of documents is not controlled"
- These are Quality Practices which can be readily modified
- Need to create training and training documentation
- Observation 3: "Discrepancies were not thoroughly investigated"
- These relate to laboratory assay investigation, validation, etc. procedures
- Readily correctable, routine changes
- Observation 4: "Responsibilities of the quality unit are not in writing"
- Written procedures for certain Quality Functions need to be compiled
- As the inspector correctly noted, this will be done by ADMA's contractor
- These SOP's exist, should take a few weeks to customize for ADMA's needs
- Observation 5: "Studies have not demonstrated equipment does not alter the quality of drug substances"
- this observation is interesting because it is noted to be a "repeat" observation.
- historically, companies had to generate "extractables" data (what might migrate from contact surfaces into the final product), but nowadays manufacturers have this information readily available
- ADMA needs to use the "extractables" data to determine the need for "leachables" analysis, of what actually is found in the final product
- this is a standard risk-assessment analysis that would take a few months to complete from start to finish
- Observation 6: "Scientifically sound test procedures have not been established and followed"
- This relates to validation studies to demonstrate the suitability of laboratory test practices.
- It is likely these tests are adequate, but the support data must be generated.
- Observation 7: "Procedures for monitoring and maintenance of facilities and equipment are not adequately followed or established. "
- These are general quality procedures
- Should not take more than 1-2 months to put into place
- Observation 8: "Procedures describing sanitizers and sanitizing schedules have not been shown to be effective."
- These are routine microbiology quality practice issues.
- Can be contracted out or done by ADMA's in-house microbiologist
Since ADMA did not receive a single manufacturing process-related observation after an exhaustive inspection, I am rather confident that the FDA will remove the Warning Letter and change the facility inspection status to "VAI" from "OAI." While I am not aware of any FDA guidance on how many weeks the FDA has to update the inspection classification, in 2017 VRX was notified by the FDA in August, following a May re-inspection. Coincidentally, the FDA did an 11-day inspection before lifting the VRX/Bausch Warning Letter.
It is important to note that ADMA does not actually need to complete addressing these observations for the FDA to lift the Warning Letter. ADMA had to adequately address the issues raised in the 2014 Form 483 and Warning Letter. They clearly did that, since the FDA did not raise a single issue with their manufacturing process or process validation, etc.
I believe that ADMA must have resolved, or be close to resolving, the majority of these observations by now, since none of them are complex. The few items that may take more than two months to resolve, which depend on scheduling, etc. should be easily resolved in the coming months. However, in my opinion, these issues are minor enough that FDA could easily grant drug approval even if some items were still outstanding. (I believe there is absolutely no chance for any of these items to linger by the time ADMA receives a PDUFA date.) In the case of VRX/AERI, the FDA lifted the Warning Letter and approved Rhopressa even though there were unresolved Corrective Action plan items for 3+ years.
Equity Financing Provides Buying Opportunity
ADMA stock has retreated a little as a result of the recent equity financing. The financing has also lead some investors to anticipate delays in the FDA re-inspection. I believe the financing provides a buying opportunity for a number of reasons:
- Even though ADMA stock has done well in 2018, the company's valuation is depressed given all of the manufacturing and regulatory uncertainty surrounding the story. Management has refused to comment publicly on the FDA re-inspection and many investors believe there is a potential for delays. We now know that the re-inspection was successfully completed two months ago.
- The financing was upsized to $40m, which provides more than enough runway for ADMA not only to remove the Warning Letter, but also to get both of their IVIG products approved and on the market.
- Coming on the heels of extinguishing 8.6mm shares held by Biotest in May 2018, which took place when ADMA's stock price was around $4.80 also, ADMA has more cash and fewer shares outstanding now, than they did in May.
I believe ADMA shares are worth at least $10/shr, before considering the commercial prospects of RI-002. Similar manufacturing facilities have been sold for ~$500m. Assuming $200mm in peak sales for all of their products and a modest, 4x revenue multiple, yields a $13-15/shr stock price, even after assuming ~$100mm financing at $7/shr.
Should there be any unexpected delays or other regulatory surprises as sometimes happen in biotech, ADMA stock could theoretically trade back down to the $3 level. When it comes to manufacturing issues, however, I believe that the vast majority of those can be solved with time and money. Since IVIG manufacturing is a rather standard process, I would not expect these issues to linger forever, even in a downside case scenario.
Disclosure: I am/we are long ADMA.