Value Investing

Adamas Pharmaceuticals, Inc. (ADMS) – 4x Upside For A Misunderstood Drug Maker – Kerrisdale

Kerrisdale Capital will host a conference call today at 10:30am ET to discuss the Adamas report.

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We are long shares of Adamas Pharmaceuticals, a small-cap drug company on the eve of launching its first product: a treatment called Gocovri for patients with Parkinson’s disease. 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 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, by our estimates, $1.6 billion, or $65 per Adamas share.

However, Adamas trades at a 64% discount to that value – indeed, 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 7 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 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 ~30-50% better than generic amantadine; for instance, patients that switch from generic to Gocovri improve just as much as patients who switch from placebo.

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.

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 ~$300mm opportunity. Overall, we believe Adamas is realistically worth over $100 per share – more than 4x higher than its current price.

I. Investment Highlights

Kerrisdale Capital Adamas

Gocovri is a good drug. While some modified-release drugs differ little in effect from their immediate-release counterparts, Gocovri’s pharmacokinetics are clearly differentiated, delivering high, smooth levels of amantadine throughout patients’ waking hours, rather than the spikes and plunges associated with side effects. Generic immediate-release amantadine has been long been criticized in the medical literature for the weakness of the evidence supporting its use in levodopa-induced dyskinesia, mainly from small, brief, and poorly controlled trials; moreover, some evidence suggests that its benefits fade away rapidly. Gocovri, however, clearly continues to work for years. In addition, while no ideal head-to-head studies have directly compared Gocovri to generic immediate-release amantadine, looking at previous trials strongly suggests that Gocovri works better, while Adamas has shown that patients switching from generic to Gocovri improve to the same degree as patients switching from placebo to Gocovri, underscoring the weakness of the generic and the strength of Gocovri. Finally, Gocovri has at least one benefit that the generic has never been claimed to have – reducing “off” time, i.e. the periods during which Parkinson’s symptoms elude the control of levodopa. In sum, Gocovri is not some indefensible exploitative dud; it presents a compelling value proposition for patients and doctors.

Gocovri will be a commercial success. Despite purists’ doubts, many drugs that repackage old, off-patent molecules have done well commercially in recent years. For instance, Raptor Pharmaceutical 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% US market share in only three years. Similarly, Acorda Therapeutics has achieved high market share and ~$500mm of annual revenue with an extended-release version of an old drug that the vast majority of patients don’t even respond to.

Additional examples abound. Overall, even mediocre repackaged drugs have generated strong financial results when they offer improved convenience and especially when they boast an FDA approval that competitors lack – two advantages that Gocovri, an FDA-approved once-a-day version of an off-label two-or-three-times-a-day drug – clearly possesses. We thus believe that Gocovri can realistically achieve significant market share within the $3.5 billion addressable market of US patients with levodopa-induced dyskinesia, giving rise to a $1.6 billion present value even when assuming a slow, eight-year-long trajectory toward peak penetration.

Applying Gocovri to multiple sclerosis is a billion-dollar opportunity. One of Adamas’s two major pipeline assets – a program to use Gocovri to treat walking-related difficulties caused by multiple sclerosis – could easily generate as much value as Gocovri in Parkinson’s disease. Our analysis of Gocovri’s Phase 2 results in MS strongly suggests that the drug works better than Acorda’s drug Ampyra (already discussed above as an example of a commercially successful yet mediocre repackaged drug); assuming that Gocovri achieved a similar level of success after completing pivot trials, we estimate incremental value of $1.6 billion or $62 per share. While some sell-side analysts have incorporated some estimate of this value into their existing target prices, they have been needlessly conservative.

“Vimpat XR” could be worth ~$300 million. Adamas’s other pipeline asset is a high-dose, extended-release formulation of Vimpat, a blockbuster epilepsy drug manufactured by the large pharmaceutical firm UCB and valued by the market at ~$3 billion. Vimpat goes off patent in 2022, putting UCB’s earnings at risk – but “Vimpat XR,” if licensed from Adamas, could keep UCB’s highly successful franchise going till 2036. Such a transaction would mirror Adamas’s successful licensing deal for a different extended-release drug with Forest Laboratories in 2012, which generated hundreds of millions of dollars for Adamas and clearly demonstrated the strength of its intellectual property. Even assuming that most of the economics of “Vimpat XR” go to UCB, a deal could produce major gains relative to Adamas’s current market cap and is not, to our knowledge, reflected in current sell-side target prices.

II. Company Overview

Kerrisdale Capital Adamas

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. As the company wrote in 2010:

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. The Company’s resulting product candidates hold advantages in efficacy, tolerability and compliance over other offerings in their markets.

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

This approach clearly bore fruit by 2012, when Adamas struck a deal with Forest Laboratories to give the multi-billion-dollar pharma company – the manufacturer of Namenda – access to Adamas’s patents relating to extended-release and combination-therapy versions of the drug. In exchange, Adamas would go on to receive $160 million in cash, along with a portion of future sales of both extended-release Namenda and Namzaric (a combination of extended-release Namenda and another Alzheimer’s drug). This transaction allowed Forest’s successors (first Actavis and then Allergan) to dramatically extend the lifespan of their Namenda revenue at a time when the original version of the drug was on the verge of losing patent protection; indeed, as we describe in further detail below, Namenda XR has succeeded far beyond Forest’s initial expectations.

For Adamas, the deal powerfully demonstrated the strength – both substantive and legal – of its intellectual property. Interestingly, Forest agreed to give up a percentage of its extended-release Namenda sales in the “low to mid-single digits”1 even though it had already announced plans to bring such a product to market using only its own patents.2 Evidently Forest concluded that coming to terms with Adamas made more sense than fighting in court – a striking validation of Adamas’s commercial savvy and negotiating ability, skills that will likely come in handy as it seeks to strike deals with big pharma in the future.

Having monetized its Namenda research, Adamas focused on amantadine, an old drug originally used to treat the flu but later found to modestly improve the symptoms of Parkinson’s disease. In particular, published research and real-world experience suggested that amantadine can ameliorate the condition known as dyskinesia – involuntary and often painful movements, including flailing and writhing, that arise as a side effect of the main Parkinson’s treatment, levodopa. (A video created by one dyskinesia sufferer helps illustrate how difficult the condition can be.) Despite these hints of efficacy, though, only a small minority of Parkinson’s patients with levodopa-induced dyskinesia take amantadine, and many who try it can’t tolerate it and give up. Moreover, the clinical studies supporting the drug’s use were weak, and multiple studies suggested that its benefits wore off quickly. Indeed, amantadine is not actually FDA-approved for the treatment of levodopa-induced dyskinesia, contributing to its limited adoption.

By creating (and patenting) a high-dose, extended-release version of amantadine, Adamas, in keeping with its philosophy, hoped to develop “advantages in efficacy, tolerability and” – thanks to the ease of once-a-day dosing – “compliance.” The resulting drug, now branded Gocovri, significantly outperformed placebo in two Phase 3 trials, leading to FDA approval in August. The drug is now set to make its commercial debut in January 2018. Meanwhile, Adamas has made progress on two promising new opportunities: first, the use of Gocovri to treat the walking impairment associated with multiple sclerosis, and second, a high-dose, extended-release version of the blockbuster epilepsy drug Vimpat.

For a small company, Adamas has racked up several major victories. However, doubts linger. The knee-jerk reaction among some casual observers is that Gocovri exemplifies the pharmaceutical industry’s usual bad behavior: repackaging an old, generic drug as a patent-protected “innovation” for the sake of a quick buck. From an investment perspective, such tactics have often served shareholders well, even as critics decried them as unsustainable all along the way. In the case of Gocovri, however, we believe the criticism is misplaced: Gocovri represents a genuine advance for Parkinson’s patients, with superior efficacy and tolerability, backed by superior evidence. As patients and doctors learn more, doubts will fade, and Adamas’s revenue will surge.

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