It has been a long time coming, but AMDL, Inc. (ADL) appears to have finally turned the corner and is now a profitable concern having posted earnings of $0.05 per share for the third quarter. We were of the opinion at the close of the second quarter that AMDL would likely be even or operating cash positive by the end of the year. We find the positive number at the bottom line not only to be a pleasant surprise, but it also goes a long way towards reaffirming our current projections that by the end of 2008, revenues from Jade alone will reach or exceed $70 million.
We also believe that despite the seemingly never-ending hurdles necessary to be jumped as the company continues to work towards the approval by the FDA of DR-70®, that this too will come to pass in early 2008. While we recognize that success in this endeavor continues to remain just out of reach, we continue to keep the faith.
It is this combination of events that has us raising our projected share price $26, although the failure to win approval for DR-70® by the close of 2007 means that we are forced to reset our target date for the share price ahead by three months.
Headquartered in Tustin, California, AMDL’s mission is to develop and commercialize cost effective products for the monitoring, detection and treatment of cancerous tumors in humans.
AMDL is a health care company, which includes pharmaceutical products for treating disease, diagnostic test for diagnosing disease and nutraceuticals for promoting wellness.
Tests, such as those under development by AMDL, can influence a therapeutic decision; thereby assisting physicians in determining which therapy will be most beneficial to a patient, and then allowing them to monitor the patient’s progress.
Sept. 20 – AMDL announced that JPI, the Company’s Chinese division, has a new product development strategy focusing on expanded in-house research and development activities and the in-licensing of new products from 3rd party pharmaceutical research firms. Specifically, the Company’s new product development strategy is expected to provide at least an additional six new products to the existing family of products over the next 36 months.
In addition, the Company pointed out that it currently has two products under review by the SFDA (China State Food and Drug Administration), DR-70® and Docetaxel. Both products are anticipated to be approved for sale in China during mid-2008. Docetaxel is expected to become one of JPI's best selling products, with estimated sales of upwards of $10 million per year beginning in mid-2008.
Additionally, four other products are in an R&D phase, including EO-H, a herbal treatment to improve bone density, TouJin NiangShi, an herbal liver cancer treatment, and Drotaverrine Hydrochloric and Diammonium Glycyrrhizinate, which are both chemotherapy therapeutic products. All four products are currently expected to gain SFDA approval within the next 24-36 months.
Oct. 11 – The Company announces that JPI has signed an agreement with Heze Mudan Medicals Co. Ltd. to distribute Domperidone tablets in the Province of Shandong and the surrounding areas, one of the most affluent regions in China.
Domperidone is an important medicine for treating nausea and vomiting. JPI's generic version of this product is significantly lower priced than competitors. The contract is subject to minimum sales which will be reviewed annually and is expected to add at least $2.3 million in annual revenues.
Oct. 15 – AMDL announces that it has filed with the U.S. Food & Drug Administration [FDA] for clearance to market its DR-70® [FDP] ELISA tumor marker test for use as an aid in monitoring patients previously diagnosed with colorectal cancer. In its submission to the FDA, AMDL and its statistical consultant, Dr. Richard P. Chiacchierini of RPCA in Rockville, MD, have provided statistical evidence that the DR-70® [FDP] ELISA is an "informative test" to validate the claim that the DR-70® [FDP] ELISA is effective at monitoring colorectal cancer patients.
DR-70® [FDP] ELISA is an in vitro diagnostic test for the DR-70® [FDP] antigen in human serum. When cleared to market by the FDA, it will be used as an aid in monitoring the disease status in patients who have been previously diagnosed with colorectal cancer. According to the Company, the test will be useful as an aid in monitoring cancer patients throughout the course of the disease, including after primary surgery, and in determining the response to therapy.
Oct. 24 – JPI's subsidiary JJB launches a new injectable anti-aging and skin care product under the brand name "Goodnak". First in a new line of anti-aging & skin care products currently under development by JJB, Goodnak contains an amalgam of various therapeutic elements including Human Placental Histosolution ("HPH"). JPI began selling Goodnak, in August through wholesale distribution channels that service high-end beauty salons and plastic surgery hospitals and or medical cosmetology institutions.
In concert with the new product launch, JJB signed two new Northern Region exclusive, one-year renewable Distribution and Agency Agreements with Shenyang Beauty Bio-Chemistry Co., Ltd. ("SBB") and Harbin Beautiful Life Cosmetic Co., Ltd. ("HBL"). These agreements cover the key cities in both Liaoning and Heilongjiang Provinces that have a combined population of approximately 21.6 million require the purchase of a minimum of $3,355,525 of JJB's new Goodnak product during the one-year period of the contracts and minimum initial orders of $2,716,377.
Nov. 2 – JPI's JJB subsidiary signs its third round of regional distribution agreements for Goodnak, its new injectable anti-aging and skin care product. JJB has signed three new Western Regional exclusive, one-year renewable Distribution and Agency Agreements with Xian Maryland Cosmetics Co., Ltd. ("XMC"), Lanzhou Charm Trade Co., Ltd. ("LCT") and Wulumuqi Ozi Cosmetics Co., Ltd. ("WOC").
These agreements cover the key cities in Shanxi, Xinjiang and Gansu Provinces that have a combined population of approximately 86 million people. These two separate agreements in combination require these new distributors to purchase a minimum of $6,844,206 of JJB's new HPH product during the one-year period of the contracts and a minimum initial order of $3,422,102.
Nov. 7 – JJB signs three new Central Region exclusive, one-year renewable Distribution and Agency Agreements between itself and Henan Yinji Bio-chemistry Co., Ltd. ("HYB"), Chengdu Fairyland Cosmetics Co., Ltd. and ("CFC"), Guizhou Camry Beauty.
These agreements cover the cities in Henan, Sichuan and Guizhou Provinces that have a combined population of approximately 134.4 million people Technology Co., Ltd. ("GCB"). These two separate agreements in combination require these new distributors to purchase a minimum of $6,790,944 of JJB's new HPH product during the one-year period of the contracts and a minimum initial order of $4,061,250.
Nov. 13 – AMDL received a memorandum of "Review Issues" from the FDA which addresses the pending application for 510(k) approval of DR-70® as an aid in monitoring the disease status in patients who have been previously diagnosed with colorectal cancer. Unlike prior communications from the FDA, this one did not raise the issue of whether the Company's test was substantially equivalent to the existing predicate test, CEA. The memorandum includes requests for clarification of the intended use statement and clinical outcome measures.
The FDA requested a response to the comments within 30 days, but also indicated a request for more time could be made. The Company is analyzing the comments and has not yet determined whether it can supply the requested information within the next 30 days.
Nov. 20 – Jade announces that it has launched significant new expansion plans to increase annualized sales in FY2008, through the introduction of multiple new products and distribution strategies. In concert with the expansion of JPI's new Goodnak product, JPI expects to significantly expand its new JPGreen Health & Beauty Centers that are anticipated to provide a wide variety of anti-aging, beauty, cosmetic and spa related treatments and products for both women and men. There are currently five existing Jade Healthy Supermarkets store locations, which were previously announced, that are in the process of being converted into the new JPGreen retail store design.
In the future, acquired stores will also be re-decorated in JPGreen style, and will highlight JPGreen and JPI products. These JPGreen locations, typically 300-900 square feet in size, are being developed through in-house store openings and through the acquisition of existing beauty and spa businesses. The typical JPGreen store location is anticipated to generate, on average, approximately $170,000 in annual sales with an average net profit margin of at least 30 percent. JPI has initially signed over 50 letters of intent with various existing beauty and spa businesses that have indicated their interest in being acquired and converted to JPGreen stores. JPI currently anticipates acquiring and converting up to 200 locations during late FY 2007 and throughout FY 2008.
AMDL incurred net losses of $3,226,603 and $2,567,324 during the nine months ended September 30, 2007 and 2006, respectively, and had an accumulated deficit of $37,801,746 as of September 30, 2007. In addition, the Company used cash in operations of $1,918,816 and $1,517,308 during the nine months ended September 30, 2007 and 2006, respectively.
For the nine months ended September 30, 2007, the Company’s cash and cash equivalents decreased by approximately $357,000. During the same period, the primary source of cash was a private placement of common stock, which generated net proceeds of $4,572,497. Meanwhile, cash usage continues to exceed cash generation.
As of November 15, 2007, cash on hand was approximately $604,998 and cash is being depleted at the rate of approximately $310,000 per month. This monthly amount does not include any expenditures relating to combination immunogene therapy (“CIT”) technology other than the legal fees incurred for patent protection of the CIT technology.
Assuming (i) the current level of revenue from the sale of DR-70® kits does not increase in the near future, (ii) the Company does not require new cancer samples to satisfy the FDA concerns on its pending 510(k) application; (iii) the Company does not conduct any full scale clinical trials for DR-70® or its combination immunogene therapy technology in the U.S. or China, (iv) JPI generates sufficient cash to meet or exceed its cash requirements, and (v) no outstanding options or warrants are exercised, the amount of cash on hand is expected to be sufficient to meet the Company’s projected operating expenses through mid January 2008.
The only source of additional funds is an additional sale of securities. Therefore, AMDL is in the process of lining up additional capital via this route. The downside is some additional dilution to current shareholders. However, the potential for DR-70® sales worldwide and the continuing increase in the level of growth of AMDL’s operations in China would appear to make an inevitable dilution worthwhile.
As of September 30, 2007, the Company had three reportable segments (see Fig. 1). In China, there are two segments, (i) wholesale distribution to distributors, hospitals, clinics and similar institutional entities (“China-Wholesale”); and (ii) wholesale sales to operators of Jade Healthy Supermarkets which sell to consumers directly (“China-Direct Distribution”). In the United States there is only one segment, sales to distributors and institutional entities (“Corporate”). The Company evaluates performance based on sales, gross profit and net income (loss).
Figure 1 illustrates the Company’s reportable segments for the nine months ended September 30, 2007:
[click all charts/tables to enlarge]
No information for the nine months ended September 30, 2006 is presented because JPI was not acquired until September 28, 2006.
Figure 2 illustrates sales, margin and earnings growth for AMDL as compared to its industry, sector and the S&P 500.
AMDL Peer Group Comparison & Valuation Analysis
November 11, 2007
In looking at AMDL’s performance, we reiterate the point that the Company reaching profitability during the third quarter exceeded our expectations. More importantly, it reaffirms our revenue projection of $53 million in 2008 from Jade’s distribution business alone. In addition, we are anticipating an additional $17 million in revenues from the new JPGreen Health & Beauty Centers under the assumption that not all 200 stores will open immediately. Therefore, the total revenue in 2008 from Jade is currently estimated at $70 million. Assuming the current net profit margin remains at approximately 25%, Jade should contribute minimum net earnings of approximately $17.5 million in 2008.
As we have stated previously, we do not believe that DR-70® will have an appreciable effect on AMDL’s earnings in this calendar year. In light of the FDA’s latest request for additional information and data, we now strongly believe that approval will come sometime during first quarter of 2008 and possibly even later.
However, we want to stress that while we continue to believe that receiving FDA for approval for DR-70® is certainly an important factor to the company’s ongoing success and continue to believe that an approval will eventually be forthcoming, we also continue to stand by our opinion that the importance of FDA approval has diminished somewhat in light of the company’s current and projected performance in China. As such, we are basing our projection for AMDL’s performance in 2008 exclusively on the performance of Jade
Furthermore, we feel that DR-70® is likely to be approved in China during the first quarter of 2008. This is based on the fact that if Jade has not notified AMDL’s escrow agent that the SFDA has issued the approval to market DR-70® before March 28, 2008, or if the Company disputes that the purported approval is satisfactory, 100,000 shares currently held in escrow are returned to AMDL for cancellation.
We are currently projecting Jade to generate net revenues for the year 2007 of $17 million or about more than two and one-half times what Jade did in 2006. As Jade’s new distribution agreements develop their full potential, we believe that overall net sales will increase to about $70 million, for a net profit of about $17.5 million in 2008; all without DR-70® having any consequence.
As of September 30, 2007, there were approximately 12.8 million shares outstanding, with the result that Jade would contribute about $1.36 per share at the close of 2008. However, if we assume AMDL sells additional equity at a discount in order to raise needed cash, using a 25% discount to the current share price of $4.17 or $3.13 per share, an additional $15 million in capital will mean an increase in share count of approximately 4.8 million shares, for a total of 17.6 million shares, thereby reducing Jade’s 2008 contribution to about $0.99 per share.
In our estimation, AMDL will receive FDA approval for DR-70® sometime during the first quarter of 2008. An approval by the FDA of DR-70® at that point in time would result in about $8 million in gross profits during the second half of 2008, of which at least $6 million will fall to the bottom line pre-tax because the majority of all overhead expenses are already covered in the Jade numbers. The after-tax net should then be about $4 million or about $0.23 per share in 2008.
With DR-70® approval in the first quarter of 2008, the two divisions of AMDL would show total net earnings for 2008 of $21.5 million, or about $1.68 per share prior to additional financing and $1.22 per share on our projected increase in shares resulting from the additional financing. If we use a multiple of 22 times earnings, which is comparable other companies in the same industry, we would project a 2008 target for AMDL’s shares of $26 per share. Furthermore, we believe that if AMDL performs in accordance with our projections, the market will allow the company a multiple that is in the 28+ range. However, we want to stress that we have no evidence or knowledge as to the amount of additional capital, if any, that AMDL will raise or under what terms. To that regard, our numbers are a projection based on prior experience with other companies.
In evaluating the risk involved, we feel certain that the Jade division will produce earnings of at least $0.99 per share by the close of 2008. A multiple of 22 equates to $21.78 per share. Therefore, we feel that the downside risk is not only minimal but that there is an opportunity for substantial appreciation in the share price even without FDA or SFDA approval of DR-70®.
CONDENSED CONSOLIDATED BALANCE SHEET
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- Market Capitalization: $53.4 million
- Shares Outstanding (as of 09/30/07): 12.8 million
Disclosure: Opinions are solely those of the staff of The Rudd Report and are subject to change without notice. In the case of AMDL we received a fee for coverage of the current quarter in the amount of $6,000.