Dissection of ADMP and VSTM Sell off following FDA Approvals

Last Updated on June 13, 2019 by Sultan Beardsley

Introduction

Last week in the market we witnessed two unexpected, and initially misunderstood, sell offs following FDA approval of Adamis Pharmaceutical’s (NASDAQ: ADMP) SYMJEPI Jr. and Verastem Oncology’s (NASDAQ: VSTM) Duvelisib, now marketed as Copiktra.  If you read our article on September 25th, ‘ADMP Poised for NDA Approval and Potential Buyout‘ you know that our thesis asserted that Jr. would be approved catapulting the share price to $5+. We were only half correct.

The FDA did approve Jr., but the market reacted by selling the news instead hammering the share price down 20% in the following trading session. VSTM’s PDUFA (i.e. FDA decision date) for Duvelisib was scheduled for October 5th. Instead, the FDA decided early on September 24th and approved Duvelisib as a third-line treatment for FL, and CLL/SLL (types of blood cancer). During trading halts that occurred pending the news sentiments were high. The consensus among investor on StockTwits was that both drugs would be given the green light by the FDA and a spike to new 52 week highs would ensue. Obviously, the spike did not come. In this article I want to dissect the markets negative reaction to seemingly positive news and  how the conditions leading up to, and, after approval factored into the sell off. I’ll conclude with our current stance on both companies.

 For ADMP Approval was not enough

In our opinion there were two primary drivers of the 20% sell off. First, there was a widely accepted argument that Jr. would be approved, as outlined in the article referenced above. Before getting SYMJEPI Sr .30 mg. approved ADMP received two CRL’s, one in 2015 and another in 2016, before finally getting the go ahead for commercialization in June of 2017. MS MoneyMoves and most investors believed that after successfully responding to the FDA’s issues with Sr. that ADMP learned their lesson and should’ve been able to secure approval for Jr on their first try. After all, they only had to submit the same device but output .15 mg of epinephrine instead of .30 mg. Thus, approval was anticipated and investors started buying pushing the share price up 30% leading into the PDUFA date. So why the sell off once approval was confirmed?

Approval of Jr. was already baked into the share price by the time the PDUFA date arrived . In other words, the approval of Jr. as a stand alone announcement deemed a 30% increase in ADMP’s valuation according to the market. So when the news was official the market makers and tutes were not compelled to take substantial buying action based on what was already expected. Buying pressure from retail investors fueled a fleeting after hours spike to a high of around $4.60 before fizzling back to $4, the same price preceding the trading halt. This leads into the second driver. There was no icing on the cake. The press release issued by ADMP was underwhelmingly basic and  lacked an update regarding the commercialization timeline with Sandoz (a division of Novartis Pharma). That missing piece of information ultimately decided the stock prices direction following the binary catalytic event. No update and thus, no spike. Remember, SYMJEPI Sr. has been approved for over a year and still no sales. Therefore, approval of nearly the same product with no assurances or guidance regarding commercialization dettered high value and retail investors from raising there stakes. Consequently, as the share price retraced investors who bought the run-up hoping to double their money sold in disappointment. But, was that really the prudent decision? We’ll get to that later.

It’s Time for Copiktra to Prove Itself

Like with ADMP, when trading halted pending the FDA’s decision of VSTMS’s Duvelisib investor  sentiments were high and approval expected. And, like ADMP there was a 20% sell off  the following trading session, despite an announcement of an exclusive license agreement for the Development and Commercialization of Copiktra in China with CSPC Pharmaceutical Group (CHJTF). Any rational investor would expect a the stock to close green after news like that. But no, VSTM continued to decline to a low of around $6.50 from a high of $9.10 preceding the FDA’s decision. The causal factors for VSTM’s sell off has some similarities with ADMP, but distinct differences too.

Let’s start with a similarity. Approval was already factored into the stock price leading  into approval of Duvelisib. But, unlike ADMP which was trading near its 52 week low prior to the run-up, VSTM was up over 200% in the past 6 months. So, while a 30% sell off on news that Duvelisib became the third oncology drug to be approved in the U.S. in 2018 seems harsh, from a macro-perspective VSTM is still in good shape and up over 100% in the same 6 month period. Let’s look another difference between the two sell offs; A crucial one at that.

Copiktra comes with a ‘Black Box Warning‘  due to several potentially fatal toxicities. And, over 20% of the patients who took Copiktra in clinical studies experienced a host of adverse reactions ranging from diarrhea to respiratory infections, which could be fatal. Because of these serious risks investors are concerned doctors won’t be inclined to prescribe it and insurance companies to cover it. Now that any speculation regarding approval of Duvelisib is settled the focus has shifted to can VSTM execute on the sales front. If not, VSTM will see further decline. VSTM has an earning report coming up in early November where they will provide a sales update. We feel this will be a binary catalyst, the directionality of which determined by the sales update.

Is ADMP and VSTM a Buy

In our opinion, yes. Both these stocks are trading at discounts. You could argue that they are fairly valued given that the undervalued argument is based upon ‘potential’ revenues which is perfectly true. It is our opinion however that both companies will execute commercialization of their products successfully and on par with expectations. For the remainder of the article I will elaborate on our bullish sentiment.

ADMP’s SYMJEPI is Superior to Auto-Injectors Competitors

The market for epinephrine autoinjectors has formidable competition. Prior to 2016 Mylan  (NASDAQ: MYL) reigned dominant because of patent rights for the autoinjector technology used in the Epipen that lasts until 2025. This made it very difficult for competitors to enter the space without conceding product utility and efficacy. Following Mylan’s Epipen price gouging scandal of 2016 challengers came out of the woodworks pouncing on the opportunity to chip away at Mylan’s monopoly. By the end of 2017 Epipen alternatives increased from 5% of the market to 30%. A market that is with 15 million potential customers and an increasing amount of whom are children. Therefore, this demographic would directly benefit from SYMJEPI .15 mg approval.

Epipen Alternatives

Adrenaclick, innovated by Amneal pharmaceuticals (NYSE: AMRX), was one of the first generic auto-injector competitors to hit the market. Its main competitive advantage was a lower price tag only costing $110 compared to above $600 for the Epipen at the height of the price hike. Biomed Engineers went a step further and developed a reusable epinephrine auto-injector costing $80 and $16 for refills. Impressive as their product is by offering customizable needle lengths for individuals with different biometrics, they lack funding for a commercial launch. More recently and notably Teva Pharmaceuticals (NYSE: TEVA) gained FDA approval for the first generic Epipen. Sales performance expectations are high for Teva’s version of the Epipen. But today Seeking Alpha author Charles Santoro wittingly pointed out in his article “Adamis And Novartis: Gunning For Mylan’s EpiPen“, Teva failed to address a major flaw in the Epipen design. By preserving the Epipen construction feature masking the needle, Teva inadvertently designed a device without enough distinction between it’s ends, potentially causing confusion in a life threatening allergic reaction event.

Note that Mylan’s Epipen and the other devices discussed are epinephrine auto-injectors. Yet, until Teva generic Epipen, the alternatives on the market are mechanically distinct from the Epipen because they couldn’t infringe on Mylan’s patents. This limitation has bred inferior  products considering Mylan has retained over 70% of the market share despite cheaper alternatives. When it comes to life and death people tend to pay a premium for an improved chances of survival. Going toe to toe with established pharma companies generating more revenue and with more resources is daunting from the perspective of shareholders, and probably ADMP executives too. But, we argue that that ADMP has an advantage absent in it’s competitors and may disrupt the market dynamic. Mr. Santoro  tactfully articulated in his article that the prefilled syringe Symject technology is more efficacious and intuitive.

Prefilled Syringe>Auto-Injector

A myth regarding Epinephrine auto-injectors and prefilled syringes is that auto-injectors are superior delivery mechanisms. But as outlined in Mr. Santoro’s article and supported by scientific research, this is not true. Initially, yes the volume of epinephrine injected into the tissue is greater from an auto-injector than a prefilled syringe. But, studies have shown that after 1 minute the percentage of epinephrine present in the body is greater from a syringe. That is a significant advantage because more epinephrine in the blood stream for a longer period of time translates to more time to get to the hospital, and ultimately a greater chance the patient lives.

ADMP is Backed by Big Pharma

In July ADMP struck a favorable supply and commercialization agreement with Sandoz Inc., a division of Novartis Pharmaceuticals (NASDAQ: NVS). Under the terms of the agreement Sandoz get commercial rights to SYMJEPI in the U.S. and first rights to negotiate for territories outside the U.S. In return ADMP will receive an upfront fee and potential milestone payment depending on sales performance. The two companies agreed to split equally the net profits. The following statement is from ADMP’s CEO expressing his feelings about the relationship.

 “We are very excited about our collaboration with Sandoz.  They are among the top pharmaceutical companies in the world and we believe they have the commercial presence and proven track record to maximize the value of Symjepi.  We believe the financial terms of this agreement have the potential to bring meaningful recurring revenue to Adamis and we look forward to growing, and possibly expanding, this partnership with Sandoz based on the future success of Symjepi in the market.” 

It is also possible that Sandoz will want to serve as ADMP’s partner when it comes time to commercialize the prefilled Naloxone syringe using the same Symject technology. On that front there are only three commercial products. Furthermore, ADMP is in a strong financial position through 2019 after raising over $40 million in cash in the latest public offering, and more cash should flow in once SYMJEPI commercialization is launched via upfront fees and milestone payments from Sandoz.

VSTM Positioned well in the U.S and Chinese Markets

VSTM wasted no time generating a sales force and deploying them into the field to work with practitioners and spread the good word. There is now a another option for patients with relapsed FL and SLL/CLL. Before Copiktra patients with relapsed FL and CLL/SLL that failed two systemic treatments had one option. Hospice. Theoretically, they could continue trying various cocktails of chemotherapy, radiotherapy, immunotherapy, and targeted therapies, but the results would likely be nil. Now there is alternative to death that can boast a  73.5% and 85% response rate overall and in Lymph Nodes, respectfully. Which is nearly double and quadruple the response rates compared to Ofatumumab in the DUO trial. The only thing holding back investors is proof that Copiktra sales will meet expectations.

The demand for new oral therapies for patients with FL and SLL/CLL is growing as baby boomers age. In total, disease prevalence in 2018 is projected at 338,000 patients. Only roughly 11% of them are first-line treatable patients; meaning they will respond to the first treatment regime and not need a second or third one. That leaves 89% of patients diagnosed that do not respond to first-line treatment and must advance immediately to second-line treatments like chemotherapy and and anti-CD20 inhibitor combo therapies. Even 80% of those who respond to the first initial treatment will need the chemo-anti-CD20 cocktail. However, the treatment approach for blood cancers like FL and SLL/CLL is starting to move away from chemo and immunotherapies and towards targeted oral therapies like Copiktra. It’s an unfortunate reality, but nearly 50% of patients relapse after treatment with chemotherapy.   According to a study in the European Medical Journal, 60% of patients relapse eventually after two treatments. That means approximately 202,000 patients in the U.S. will require third-line treatment, i.e. Copiktra for a total sales revenue of $2.39 Million annually using VSTM’s pricing model. And, that is not even factoring in the patients who will try Copiktra in combination with first and second-lines of treatment to bolster their lifespan or the new tapped chinese market.

The exclusive licensing agreement reached on September 25th between VSTM and CSPC Pharmaceutical grants the company $15 million upfront and eligibility to receive up to $30 million in development and milestone payments in addition to Double-Digit Percentage Royalty Payments. Cancer rates have exploded in China in recent years due to air pollution and because 1/2 of men smoke. Because could not find stats on NHL in China let’s be conservative and assume the same prevalence and patient number. That calculates out to another several million on an annual recurring basis. Another bullish indicator is while investors decided to sell off analyst all reiterated or raised their ratings on VSTM with a high price target of $18.50 and low of $15 by B.Riley/FBR and H.C Wainwright analyst respectfully.

Conclusion

Sales need to be proven in ADMP’s and VSTM’s newly FDA approved products. The share price of both companies won’t move until theory becomes reality. We believe that ADMP’s  Symject technology will disrupt the auto-injector market and become the first-line of defense in treating emergency allergic reactions in adults and children, and then in opioid overdoses. A significant factor will be pricing for ADMP. If they offer a comparable, easier to use product than the Epipen ,then Mylan and Teva will be in big trouble. VSTM seems to have all the elements and pieces in place for a successful launch of Copikta. Now it’s time to execute. Until then, we believe we are presented with a great buying opportunity and plan to accumulate discounted shares of ADMP and VSTM.

I am we are long ADMP/VSTM

This article expresses my own opinions and I wrote it myself. I was not compensated and have no business ties with any company mentioned in the article.