A private company that is a walking liability has been acquired by Adamis Pharmaceuticals (Nasdaq: ADMP), posing an incredible danger to the public.
Yet when Adamis announced it was paying ~$9.7 million in stock for the little Arkansas drug store dogged by a big product recall, the uninformed market cheered.
Incredibly, fevered buying continued over several days, ultimately sending Adamis shares this morning to a multi-year high of over $9 per share.
TheStreetSweeper presents six key risks poised to hammer this stock back down to sanity.
*1. Terrible Acquisition
Shares blew up on news that Adamis would be acquiring US Compounding in a stock deal worth nearly $10 million.
What investors didn't understand was what Adamis got for its investment.
Adamis has acquired a company that recently recalled ALL of its sterile products nationwide, at the request of the Food and Drug Administration. In fact, the recall is ongoing (here) for more than 70 veterinary products.
Click here to see the recall list affecting patients, clinics, providers and hospitals nationwide.
All US Compounding sterile products were recalled because the FDA is concerned about sterility.
The recalled human and veterinary products were distributed from March 14, 2015 to September 9, 2015. Before the recall, customers had filed 108 formal complaints with the FDA about US Compounding products.
When the FDA walked in one day last August to inspect the little drug store, agents uncovered their own long list of issues. The problems they discovered spanned 11 pages, here.
Nevertheless, under the acquisition agreement, Adamis will pay the US Compounding CEO more than 866,000 shares plus a $300,000 yearly job with Adamis.
And what will Adamis receive for its investment?
In return, Adamis has gotten $5.7 million worth of debt, the challenge of trying to squeeze some revenue from a troubled drug store, plus a huge dose of liability exposure ... as evidenced by that company's recall "due to deficient practices."
If Adamis had been serious about building a compounding business, it would not have bought a company with deficient practices, sterility concerns and a massive recall under its belt.
*2. Why US Compounding Put Itself Up For Sale
US Compounding found itself in a pickle. Its name had been indelibly tainted by last winter's recall.
Every recalled item from injectable aspirin to injectable testosterone had begun piling up in the little drug store at 1270 Jims Lane, in Conway, Arkansas.
US Compounding CEO Eddie Glover and his four staffers evidently had no choice but to dispose of dose after dose after dose of worthless recalled product.
And, in an already tough environment, former US Compounding customers may well have been saying "No, thanks," even to the drug store's non-sterile products.
So, beaten-down US Compounding needed Adamis. And Adamis needed some company, some revenue, some hope to offer investors. Read on....
*3. Why Adamis Needed An Acquisition: No Revenue, Going Concern Doubts, Overpaid Execs
Like US Compounding, Adamis found itself in a pickle.
Adamis has existed since 1995. The company had gone through several incarnations, even merged with Cellegy in 2008 and has unsuccessfully targeted FDA approval for several products, though despite a disappointment, still holds out hope for its epinephrine syringe.
Adamis had to conduct a 1-for-17 reverse stock split that allowed its earlier delisted shares to once again be traded on the Nasdaq in early 2014.
But since 2010, Adamis has not generated one penny from marketing or selling any drugs or other products.
Today it has zilch revenue and millions upon millions in losses:
(Source: Company SEC filings)
And Adamis has hungry mouths to feed...
While the chief executive, Dennis Carlo, watched his compensation increase ~23 percent in 2015, investors watched the stock price decrease ~12 percent, according to Morningstar.
Yes, $1.8 million does seem like a generous CEO compensation ... for leading a company that auditors have expressed "substantial doubt" about its ability to continue as a "going concern."
Those are the reasons Adamis wants investors to believe that buying US Compounding is a good deal.
But hasn't Adamis overlooked or at least underestimated the very real risks of the compounding field itself? Read on ...
*4. Compounders' Liability Risks
Compounders face significant liability risk.
US Compounding's recalls were based on sterility issues. Sterility issues also led to the compounding industry's most infamous outbreak and the demise of the responsible compounding center itself.
In October 2012 a fungal meningitis outbreak infected 678 people in 19 states and killed 44 people. The outbreak was traced back to the New England Compounding Center in the US.
Consider these sobering headlines:
And, in "Texas compounding pharmacy recalls drugs after 15 infections," CBS wrote:
A lab technician at the US-based New England Compounding Center responsible for the landmark meningitis scandal succinctly explained the risk bubbling up for compounders:
"The company got greedy and overextended, and we got sloppy," lab technician Joe Connolly told 60 Minutes in a 2013 investigation.
"Quantities of drugs increased by a factor of 1,000. … We became a manufacturer overnight," said Connolly.
*5. What Keeps Adamis Afloat: Dilutive Stock Sales. More Coming
Revenue-less Adamis survives on a steady diet of equity deals and stock offerings. The company's recent SEC filings state that it needs to continue selling stock and warrants to keep the doors open.
Right now, the company's earlier issued warrants - representing more than 692,000 shares worth $3.40 apiece - can be sold.
Those shares - a significant dilution risk to current shareholders - are now freely tradeable according to a document filed last week on April 27.
That filing date is interesting because ...
*6. Promote, Promote, Promote
Adamis filed the required warning that warrant owners can start selling their stock as of April 27.
Interestingly, someone who identifies himself as a private investor wrote a Seeking Alpha promotional piece on Adamis ... on April 28 as shareholders began selling apparently in reaction to the stock warrant notice. We disagree with the author's comment that US Compounding could somehow deliver $5 million in income, incidentally, as several sources estimate its revenue - not the net - at $1 million to $5 million. Below is a snapshot from the author's SA profile page.
It's also interesting that the author has written four Seeking Alpha articles and three of them have been about guess who? Adamis Pharmaceuticals.
Meanwhile, Adamis has been hyped previously by professional stock promoters ...another massive red flag for investors.
If somebody handed US Compounding to Adamis in a giant silver flask, we doubt the money-losing, pharmacy-inexperienced company could revive the snake-bitten compounder and come out ahead.
The market has misread Adamis, as well as the acquisition, and completely missed massive risks hidden beneath the hype.
This is a struggling company that has fallen into an even more troubling situation. We expect the stock will quickly swoon to a very fair valuation of ~$2 per share.
Disclosure: I am/we are short ADMP.