Description

Important Disclosures: Certain funds and accounts managed by us and our affiliates are currently long ADMS.  We may buy and/or sell shares of ADMS in the future for the funds and accounts managed by us without notice, and we are under no obligation or agreement to take, or not take, any action or restrict our actions in any manner.  This is not a recommendation to buy or sell shares.  Our views are subject to change without notice and we may trade in any manner, whether consistent or inconsistent with this investment thesis.  The information below is from public sources.  We have not independently verified this information and we make no representations as to the accuracy or correctness of any such information.  We undertake no obligation to update any information below.

SUMMARY:
Adamas Pharmaceuticals is a drug company focused on the development of neurological disorder treatments. The company currently has two molecules in various stages of development, ADS-5102 and ADS-4101. Adamas also has royalty rights to two commercialized drugs, Namenda XR and Namzaric, which we believe is a substantial “hidden asset”, as well as $136m of cash. We believe ADMS’s cash balance and the present value of its future royalty stream account for the majority of its current market capitalization, implying an extraordinarily low valuation for its development pipeline and therefore an attractive risk/reward.

ENTERPRISE VALUE:

As of May 2, 2017

ROYALTY ASSETS:
In November 2012, Adamas granted Forest City (now owned by Allergan) a license to commercialize intellectual property related to memantine therapeutics in the United States. Allergan has commercialized this license through the marketing of Namenda XR and Namzaric, which are leading treatments for Alzheimer’s disease. In addition to (already realized) upfront cash and milestone payments, Adamas is entitled to receive royalties on the sales of these drugs according to a schedule as follows:

Namenda XR – beginning June 2018, ADMS is entitled to “low to mid-single digit” royalties on sales
Namzaric – beginning May 2020, ADMS is entitled to “low to mid-teens” royalties on sales

Using Q4 run-rate numbers, Namenda/Namzaric are a $650m annual business for Allergan, making it one of the company’s most important franchises. The launch of generic Namenda IR in July 2015 has negatively impacted sales of the Namenda franchise at Allergan, and there are lawsuits pending that challenge Allergan/ADMS’s patents that protect Namenda XR. Somewhat counterintuitively, we believe ADMS may stand to benefit from this assault on Namenda as Allergan has responded with an aggressive campaign to move their customer base over to Namzaric. Namzaric is a once-daily, fixed-dose combination of memantine and donepezil (another common treatment for dementia) which has longer-dated IP protection. ADMS may stand to benefit from the “Namenda to Namzaric” push as it receives ~13% royalties for Namzaric vs. ~3% royalties for Namenda. See quotes from the Allergan CEO & Chief Commercial Officer on the topic below:

<A - Brenton L. Saunders> [11/2/2016]: Let me move over to your other question with respect to what happens if there's generic XR. Obviously, we believe in our intellectual property position. We are going to be in the appeals court likely next year, and we'll see how that settles. I'm not going to try to handicap how a judge is going to rule, particularly with respect to memantine. I've done that in the past, and that has not worked out well for me, so I'm going to stay away from that. I think the better thing that we can focus on is what we can control on a day-to-day basis, which is our promotion of the better product for patients which is Namzaric. Reducing the pill burden from three pills twice a day to one pill once a day is something that we know that caregivers and patients suffering from Alzheimer's really do benefit from.

<William J. Meury> [2/8/2017]: With Namzaric, demand has more than doubled since the launch of the full indication. Formulary coverage is exactly where we need it to be, with coverage in eight of the top nine plans. Our focus now is on execution. We like what we see with Namzaric.

While valuing ADMS’s Namzaric royalty stream is subject to considerable uncertainty, we have done so making a number of assumptions based on our internal estimates and analysis. We assumed for purposes of our analysis that Allergan would be able to move ~60% of current sales of Namenda over to Namzaric by 2020 (when the royalty stream begins paying out). We further assumed that the $400m of sales will decline by 5% per year through 2025, when generics enter the market and sales go to $0. Although actual changes in sales could be higher or lower, we believe the assumptions of 5% per year sales declines and no revenue after 2025 are relatively conservative. Under these assumptions and using a 10% discount rate, we arrive at a PV of approximately $147m, or $6.14 per share of value.  

DRUG PIPELINE:
Given ADMS’s valuation, cash on hand and PV of royalty stream, we believe the market is assigning approximately $100m of value today to its drug pipeline (or arguably $200m assuming an additional $100m of cash burn to stand-up commercial operations). We believe this is too low an implied valuation.

ADS-5102 overview:
ADMS’s primary drug in development is ADS-5102, an extended release formulation of amantadine. The company believes amantadine has a number of potential applications across various neurological disorders including Parkinson’s, multiple sclerosis, tardive dyskinesia and akathisia. The company is also exploring ADS-8801, a fixed-dose combination therapy combining amantadine and other undisclosed agents.

ADS-5102 for levodopa-induced dyskinesia (LID) associated with Parkinson’s disease:
ADMS’s most advanced pipeline program is ADMS-5102 for LID associated with Parkinson’s disease. In April 2015, the FDA granted orphan drug status for this indication and ADMS has an accepted NDA with the Food & Drug Administration with an August 24, 2017 PDUFA date.

Parkinson’s disease affects approximately 1m people in the US today. Common Parkinson’s symptoms include rigidity, slowness and difficulty walking. The most widely used treatment for these motor control symptoms is levodopa. Typically small doses of levodopa work very well for patients early in their Parkinson’s treatment, but over time patients require more and more levodopa to get the same benefits. As levodopa dosing increases, many patients “overshoot” an ideal motor response and instead enter a state of involuntary, uncontrolled hyperkinetic movements. This means Parkinson’s patients are constantly alternating between 3 states — 1) “OFF” time, when Parkinson’s symptoms return (rigidity), 2) “ON” time, when levodopa treatment elicits a “good” motor system response and 3) “ON with LID” when Parkinson’s symptoms are suppressed but a patient suffers from involuntary shaking and other frenetic movements. ADMS believes that over time, 90% of patients on levodopa therapy develop LID. There is no FDA-approved treatment for LID today.

Across Phase 3 studies, patients taking ADS-5102 showed a 40% increase in ON time without LID vs patients taking a placebo. Perhaps just as importantly, patients taking ADS-5102 also saw a 45% reduction in OFF time vs. the placebo. In layman’s terms, patients taking ADS-5102 had nearly 3 hours per day of additional “good” time when they were not suffering from either “OFF” systems or LID symptoms.

ADMS management believes ~ 200k patients suffer from LID. If there were a 20% penetration of the patient pool and a $25 per day rate, we believe the LID indication could see annual sales in the ~$350m / year range. We believe the daily rate is a reasonably conservative starting point in comparison to other Parkinson’s drug on the market such as Azilect ($25 per day) and Nuplazid ($65 per day). Assuming 90% gross margins, 150m/year of opex and a 37% tax rate, earnings power from this indication could be as high as $4.25 per share annually. Although it is not possible to know if these assumptions and estimates will prove accurate, if this earnings potential could be achieved and if ADMS were valued at a 12.5x multiple, assuming no other changes, we estimate that this indication could be worth as much as $50/share to ADMS.  

ADS-5102 for other indications in Parkinson’s disease:
While ADS-5102’s primary endpoint in Phase 3 trials was a reduction in LID, the drug also showed statically significant reductions in OFF time. This creates the possibility of a more expansive use case within the Parkinson’s community. ADMS management believes ~400k patients suffer from OFF and/or LID, which is 2x the LID-only addressable market.

ADS-5102 for multiple sclerosis:
ADMS completed a Phase 2 study evaluating ADS-5102 in multiple sclerosis patients that have walking impairment. The Phase 2 study was successful as ADS-5102 patients showed a statistically-significant 17% improvement in walking speed vs. the placebo. Approximately 275k patients suffer from MS in the US and 80% of these patients are affected by walking impairment. Interestingly, ADS-5102 shows better efficacy than the only drug currently on the market for MS walking impairment; Ampyra (which did not show statistically-significant results for most patients). Ampyra is run-rating approximately $450m/year in sales. It is not inconceivable that the MS opportunity could be as large or larger than the Parkinson’s opportunity for ADMS.

Additional ADS-5102 indications:
ADMS believes ADS-5102 may be effective in treating other indications including post-stroke walking and complications of anti-psychotic treatment including dyskinesia and akathisia.

ADS-4101:
ADMS is also developing a therapy for partial onset seizures in patients with epilepsy, currently named ADS-4101. ADMS completed a Phase 1 study in January of this year. Epilepsy affects 2.2m Americans, 2/3 of which suffer from partial onset seizures so the market is quite large but we do not attempt to value the drug at this time.

CERTAIN RISKS:
Any development-stage pharmaceutical company, including ADMS, faces significant risks. We think the combination of 1) intrinsic value from the royalty stream, 2) cash on hand, 3) promising development pipeline offers some mitigation at current prices, but nevertheless there are risks that may cause an impairment in the value ADMS. The risks we have identified in connection with an investment in ADMS include, among others:

Drug-approval risk
The FDA may not approve ADS-5102.

Commercialization risk:
Even if the FDA approves ADS-5102, there is risk around ADMS’ ability to commercialize the product. ADMS must gain wide-ranging formulary access from payers, build out a salesforce, and drive adoption for their product in the Parkinson’s community. ADMS has not commercialized a drug before.

Financing risk:
ADMS has had a cash burn rate of ~$50m per year for the past 2 years. While development costs for ADS-5102 for Parkinsons will roll off in 2017 (as the Phase 3 studies are complete and the NDA has been filed with the FDA), commercialization costs will ramp. Our base case assumes a steady cash burn rate. We believe ADMS will want to raise an additional ~$100m as it stands up its commercialization operation and continues to develop other indications/drugs. ADMS is loathe to issue equity at current prices and the company believes it has less dilutive financing options (including monetizing its Namzaric royalty stream and/or drug-level financing off its development pipeline). Regardless, ADMS’ need to raise additional capital creates inherent risk.

Catalyst

Potential drug approval & commercialization.