4x Upside for Adamas Pharma

December 18, 2017 12:21 PM

Adamas Pharmaceuticals (ADMS), a small-cap drug company, will soon launch a treatment for patients with Parkinson’s disease called Gocovri. The mainstay therapy for Parkinson’s is a drug called Levodopa, which usually works well but frequently causes involuntary and often painful movements called dyskinesias.

High-quality Phase 3 studies have proven that Gocovri significantly reduces dyskinesias and improves patients’ overall conditions, leading the U.S. Food and Drug Administration (FDA) to designate Gocovri the one and only drug approved for Levodopa-induced dyskinesia. With the potential to deeply penetrate a $3.5 billion addressable market, Gocovri is worth, $1.6 billion, or $65 per Adamas share.

Adamas is currently trading at a 64% discount to that value – even at a discount to its prior high of $30, reached years before FDA approval. In addition, Adamas is heavily shorted, with short interest standing at 33% of shares outstanding, equivalent to seven days worth of recent trading volume. Clearly many investors have little faith that Adamas will be able to capitalize on the Gocovri opportunity.

We believe this skepticism is misplaced. Criticism of Gocovri stems from aesthetics more than economics. Some market participants find it distasteful to make money by merely repackaging existing drugs in improved forms. This is what Gocovri — a high-dose, extended-release formulation of a generic drug called amantadine — does, leading to suspicion that it’s nothing more than an unsustainable cash grab. But this view fails to appreciate the fact that Gocovri’s generic, immediate-release counterpart, which is not FDA-approved for dyskinesia, has never been convincingly shown to work, with studies pointing to rapidly vanishing benefits and high rates of patient abandonment. By contrast, Gocovri’s efficacy, even over the long term, is well-documented. In addition, multiple lines of evidence strongly suggest that Gocovri works 30% to 50% better than generic amantadine. Patients that switch from generic to Gocovri improve just as much as patients who switch from placebo.

Despite purists’ doubts, many drugs that repackage old, off-patent molecules have done well commercially in recent years. For instance, Raptor Pharmaceutical (RPTP) was acquired for 5x consensus peak revenue even though its main asset was just a delayed-release version of a competing therapy. Despite a huge price premium, this delayed-release drug achieved 66% U.S. market share in only three years. Similarly, Acorda Therapeutics has achieved high market share and $500 million of annual revenue with an extended-release version of an old drug that the vast majority of patients don’t even respond to.    

Gocovri is a good drug, not another poster child for pharmaceutical-industry misdeeds. Besides, even those misdeeds are often quite profitable. Multiple precedents point to the potential for repackaged versions of off-patent drugs to generate billions of dollars of value, even in cases of dubious efficacy or only modestly improved convenience. Gocovri, with a far more convincing story, should do even better.

Adamas’s recent success has been a long time coming. Founded in 2000, Adamas, then called NeuroMolecular Inc., brought together Greg Went, a co-founder of the pioneering genomics firm CuraGen, and several scientific advisors, including the main inventor of the blockbuster Alzheimer’s drug Namenda. The company focused its research on a class of neuroactive molecules called aminoadamantanes, including Namenda and a more obscure generic drug called amantadine. But rather than gamble on novel molecules, Adamas took a more hard-headed approach. It noted in a 2010 report:

Adamas was founded to approach drug development in an extremely practical way. … Adamas scientists work with well-characterized and widely studied drugs, which helps reduce the uncertainties typically associated with the development of new chemical entities.”

In other words, Adamas specializes in the unglamorous, underrated, but nonetheless valuable enterprise of making existing treatments work better.

Beyond Gocovri, Adamas has two little-noticed Phase 3-ready pipeline assets with massive upside; in one case, despite compelling data and obvious M&A potential, no sell-side analyst has quantified what we estimate to be a $300 million opportunity. Overall, we believe Adamas is realistically worth over $100 per share – more than 4x higher than its current price.

Kerrisdale Capital Management and affiliates are long shares of Adamas Pharmaceuticals Inc. (ADMS) and stand to benefit if the price of the stock increases. Please read full legal disclaimers at kerr.co/adms-disclosures.

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