Adma Biologics (Nasdaq: ADMA $2.23) is a commercial bio-pharmaceutical company vertically integrated to develop, market, manufacture, and sell specialty plasma-derived products called Intravenous Immunoglobulins (IVIGs). For the last 6-months the company was riding high between $4.50 and $6.50. Most investors and analysts anticipated FDA approval of ADMA’s Prior Approval Supplement (PAS) for Bivigam, including MS Money Moves, and its subsequent commercial relaunch. Unexpectedly, the FDA issued ADMA a Complete Response Letter (CRL) and the stock took a nose dive revisiting 52 week lows. On its last trading session ADMA closed at $2.17 with a market capitalization of $103.6 million and 46.35 million shares outstanding. The question investors need to answer: Is ADMA an undervalued stock to buy cheap now and sell in 5-year for a respectable gain?
ADMA isolates, extracts, and refines specialized Immunoglobulins (IGs) from blood-plasma for the treatment of primary immune deficiency disorders (PIDD) and the prevention and treatment of infectious diseases. IGs are antibodies produced by white blood cells that target pathogens marking them for destruction. An advantage they have over the 7 other companies marketing IG products in the U.S is their proprietary Micro-neutralization Assay.
In 2015 ADMA received a patent “Compositions and Methods for the Treatment of Immunodeficiency” that lasts through January of 2035. Essentially it involves blending plasma from individuals with normal IG levels with plasma from people with elevated levels of neutralizing antibody titers to Respiratory Syncytial Virus (RSV). The outcome is a novel enriched plasma pool. This serves as a standardization for further refinement of anti-RSV antibodies into the final RI-002 product. The patent also permits ADMA to produce hyperimmune globulin compositions to certain pathogens (i.e. collect plasma from people with high levels of pathogen-specific IGs). The Biologics License Application (BLA) for RI-002 is currently under review by the FDA and has a Prescription Drug User Fee Act (PDUFA) action date of April 2nd, 2019. RI-002 initially received a CRL in July, 2016. The FDA did not request additional studies nor question the safety or efficacy of RI-002 for treating PIDD. The issues raised regarded compliance deficiencies at ADMA’s 3rd-party contract facilities. Among these contractors was the drug substance and product manufacturer, fill and finisher, and testing laboratory. The FDA requested documentation showing the deficiencies were rectified.
To date ADMA has two commercial products in the U.S, Bivigam and Nabi-HB. The former is a treatment for PIDD and the latter a preventative/early interventional measure for people at risk of exposure to Hepatitis-B Virus (HBV). Additionally, the company manufactures and sells batches Rabies vaccine paste to contract clients.
An FDA warning letter in 2014 and compliance inspection in 2016 identified issues with Bivigam’s purity and manufacturing process. At this time the facility was still owned and operated by Biotest Pharmaceuticals. Production and sale of of Bivigam immediately ceased. It resumed in 2017 under ADMA’s leadership after acquiring the facility along with commercial rights to Bivigam and Nabi-HB in what was called the “Biotest Transaction”. In the interim revenues have came from Nabi-HB sales in the U.S., RI-002 sales in Europe, Africa, and the Middle East through a licensing agreement with Biotest (ETR: BIO), and plasma and vaccine sales to third party clients. Presently there is a shortage of IVIG products in the U.S.
A Break Down Of The CRL For Bivigam
On December 19th, 2018 the FDA responded to ADMA’s PAS submission for Bivigam with a complete response letter. After a very insightful conference call with the ADMA President & Chief Operating Officer Adam Grossman and several analyst it seems the CRL can be summed up as an informational overload for the FDA. Before diving into specifics I want to highlight significant achievements pertinent to Bivigams PAS submission, RI-002s BLA review, and ADMA’s 2019 financial forecast.
First and foremost, the compliance status of the Boca Raton manufacturing facility purchased from Biotest was upgraded in September of 2018 from Office Action Indicated (OAI) to Voluntary Action Indicated (VAI). This is something Biotest was unable to achieve in 4 years. Moreover, ADMA was issued an Establishment Inspection Report (EIR). The implication of which is ADAM’s manufacturing facility is operating within compliance. With regards to the efficacy and efficiency of Bivigams manufacturing process the company performed a comparative analysis of the old production method with 3 conformance batches using their new “optimized IVIG manufacturing process”. The company found prior issues of filters clogging and impurities in the final product were resolved and everything was in accordance with Good Manufacturing Practices (GMP). The CRL primarily asked for clarification on these topics. Mr. Grossman stated that the CRL has no effect on the review or potential approval of RI-002’s BLA submission.
As stated earlier, the CRL can be summed as an informational overload for the FDA. ADMA submitted 1000’s of pages of robust data and details for the FDA to review. This is most probably why the PDUFA date was extended to December 18th, 2018 from the initial date of October 25th, 2018. ADMA believes all the clarifications requested in the CRL are either already contained within the PAS submission or are on hand.It should be noted the FDA can only extend a PDUFA date once; albeit if they desire they can miss it. It entirely possible that if the FDA had more time to review the extensive information load the PAS submission would have been approved. The aforementioned submission was split into two parts.
- Operations at the Boca Raton Plant
- Fill and Finish of Bivigam at their Contract Manufacturing Organizations (CMO) and final release testing of Bivigam filled and packaged into vials.
All of the third-party labs and associated lot release tests used for Bivigam are in good standing and compliant. Many of these are also utilized for production processes for RI-002.
Concerning cash flow, management and the board of directors agreed to implement a clause containment strategy if needed to slow cash burn by reducing expenditures for Bivigam’s commercial relaunch. This should extend ADMA’s cash flow deeper into 2019, and certainly past RI-002’s PDUFA date in April.
ADMA’s Potential Valuation By 2023
Presently the market values ADMA at $103.36 million ($2.23 per share). In conducting my valuation I will consider company net assets, recurring revenues, conservative revenue projections for Brivigam and RI-002 assuming FDA approval within the next 12 months, and subtract operating expenses.
Operational results in 2017 compared to 2016 show that revenues jumped 113%, largely attributable to the company’s acquisition of Biotest assets. Unfortunately, cost of revenue rose 359% dragging down gross profit year over year by 249%. ADMA went from a $4,300,276 profit to a $(6,403,761) gross loss. Net loss also rose 124%. The company mentions though in the Form 10-K that the operating results for 2017 are not comparable to that of 2016 because of the “Biotest Asset Acquisition”.
As of September 30th, 2018 ADMA had $42,367,489 in cash and cash equivalents, $106,345,100 in total assets, and $69,138,886 in total liabilities bringing net assets to $37,206,214. Total revenues increased an impressive 20% over the nine-month period ending in September, 30th, 2018 reaching $12,928,866. However, cost of product revenue increased substantially too by 80% to $31,052,519. In combination with other adverse changes on the income statement this accentuated net losses 55% to $(47,705,458). But, remember that production of Bivigam was resumed in 2017 in preparation for a commercial relaunch that has yet to happened. Similarly, RI-002 has been produced in anticipation of FDA approval in April, 2019. In total $4.0 million of ‘cost of product revenue’ is from manufacturing of these two compounds, which have the potential to provide sizable monetary returns on investment if commercialized, which seems to be just a matter of time. Moreover, due to the “Biotest Transaction” net losses between 2017 and 2018 are not comparable either. If approved in 2019 Bivigam and RI-002 sales would add substantially to total product revenues positively affecting the directionality of Net income/loss.
Assuming an annual growth rate of 6% the U.S IG market should be worth ~$6.67 billion in 2019. Bivigam is purported by the company to increase penetration 10X into the PIDD market. For our calculation let’s assume 5X penetration by 2023 and consider Nabi-HB and RI-002 Europe sales as the companies current reach.
250,000 patients in the U.S. are diagnosed with PIDD. These patients are a target population for Bivigam. A subset of those are very at-risk for immune complications and/or have rare immune deficiencies and could benefit from RI-002. The average pricing of the top three PIDD medications is $2,266.67. Generally speaking, IVIGs are administered to the patient ever 3-4 weeks; sometimes even every few days. Assuming a similar pricing for Bivigiam and RI-002, a 4 week treatment frequency, and a conservative 10% PIDD market penetration by 2023 brings annual net sales to $736,667,750.
ADMA’s relative valuation, projected sales growth from Nabi-HB, RI-002 in Europe, and plasma sales to third parties (net current product revenue) will be determined using past data. Between the 9-month period ending in 2017 and 2018 net current product revenue increased 20%. For our calculation let’s assume they maintain 10% growth year over year on average, net assets remain stable, and operating expenses fall in line with 2016 levels.
Annual Revenue from Nabi-HB, RI-002 in Europe, and plasma sales- $27,762,758 *5 = 138,813,760
Annual revenue from Bivigam and RI-002 U.S sales- $736,667,750
Net assets- $37,206,214
Operating Expenses- $27,991,00
ADMA’s Projected Valuation In 2023:
$138,813,760 + $736,667,750+$37,206,214 -$ 27,991,000 = $884,696,754 ($19 per share using the current number of outstanding shares).
However, another offering within the next 5-years is likely. Consequently increasing the share count and diluting the share price.
Historically, ADMA has not been profitable due to limited product revenue and high operating expenses. If sales are not on target and the company gets squeezed for cash they would need to raise money through the sale of equity and or debt securities. Growing their cash flow is contingent upon FDA approval of the PAS submission for Bivigam, the BLA for RI-002, and successful commercial launches. Otherwise the ADMA cannot leverage the products to generate additional revenue. Nabi-HB sales, RI-002 licensing sales, and business to business sales will not suffice to support long-term operations.
On the bright side management is ready to implements the clause containment strategy discussed to stem cash flow well into 2019 past the PDUFA date for RI-002. This will give ADMA more time to potentially generate revenue from Bivigam, if approved in the next 60 days. RI-002 could potentially be a revenue source in 2019 too. However, as stated earlier the clause containment strategy would involve slowing cash expenditures for the commercial relaunch of Bivigam. This begs the question: To what extent would that adversely affect near-term sales revenue? Another question is what happens in late 2019? If cash flow is insufficient to fund operations there could be offerings of sorts and or sales of debt securities. Long-term investors might want to wait until then to open a position.
A conservative valuation of ADMA by 2023 suggests the stock is undervalued at $2.23. While nothing is certain, we believe Bivigam and RI-002 will become approved and commercialized in 2019. Approval of the respective PAS and BLA submissions should be positive binary events. The true reward though would be delivered to shareholders if Bivigam and RI-002 significantly penetrate the U.S and global IVIG market; which is currently experiencing a shortage of IVIG medicine. According to a 2016 market research report by BusinessWire the global IVIG market opportunity should reach $11.6 billion by 2021 driven by innovative medicine and targeted drug delivery.
ADMA could be quite the power house leveraging their patented immunotechnology. Superior IVIG manufacturing and testing efficiencies in tandem with an efficacious product line could give ADMA an advantage in capturing part of the ~$6.67 billion U.S market in 2019 and beyond. Another research report by Market Watch puts the global IVIG market value at $17.50 billion by 2025. After approval of the aforementioned biologics the company would proceed to pursue a diversity of indications that would further bolster net product revenues and ADMA’s reach in the IVIG space.
Under the circumstances MS Money Moves rates Adma Biologics a speculative buy with a 850% potential upside over the next five-years. Keep in mind the risks associated with this stock. Primarily that everything hinges on FDA approval and successful commercialization of Bivigam and RI-002. In the short-term the share price should recover towards pre-CRL levels. Long-term investors may want to wait and see how things pan out with Bivigam, RI-002, and to see if there will be a dilutive offering in 2019.
However, in the long-term if ADMA’s sales and marketing strategies are executed correctly we foresee them with the potential to grow into a multi-billion dollar speciality plasma-derived IVIG company serving immune compromised individuals in the U.S and abroad.
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