Adial share price: this is what the market thinks right now
By Daniel Wilhelmi
Part 1: Facts of the ONWARD Phase III-trials
Part 2: Mistakes around the data readout and how they affect the future of Adial
Part 3: The assessment of Adial by the stock market and where we go from here:
Preamble: I have been working as a financial journalist and analyst for small cap companies and growth stories for over 20 years. I also work as an investor relations-consultant for publicly traded companies. But I am not a native English-speaker. I apologize for any language mistakes.
Part 3: The assessment of Adial by the stock market and where we go from here.
In part 1 I analyzed the topline data of the ONWARD phase III trials. Part 2 focused on the management communications with capital markets about the trial results. This final part will focus on the stock, the perception of Adial Pharmaceuticals by the capital markets and where we go from here.
Let us jump right in: After the announcement of the topline-results of the phase III-trials and the conference call, Adil-stocks lost about two third of its value from prior days close. Since then, the stock is drifting sideways between 0,50 to 0,60 USD. The market cap of Adial is now about 13,5 Mio. USD (at a share price of 0,55 USD).
Why is the stock price down so much? The first explanation is obviously the trial results. Investors didn`t understand the true results of the trial. All they saw: it didn`t reach its primary endpoint, missed statistical significance in one of two groups (even though that group was much smaller) and additional trials are needed. For these investors, the trials look like a miss – which it clearly isn`t. So, they dumped their shares after the call with management didn`t provide them with a clear picture of the trial results.
The second explanation are the additional trials. The management has said for years that additional trials will be needed. However, if the ONWARD trials would have been a success, Adial would have been in a strong position to get a partner and financing on their terms. Now Adial is in a weaker position and interested partners could be able to dictate the terms.
Investors misinterpret the ONWARD results
This leads us to the third reason: the Adial-story will now take another two to three years to play out. The clock was basically reset to the situation in 2018/19. But – and here is the fourth and most important reason: the market clearly believes that there is very little chance, Adial will be able to get the financing for these additional trials without significantly diluting shareholders.
The comments from the old management stated, that the next trials are supposed to be in the US with a larger patient population from the Heavy Drinker-group, where AD04 was successful and achieved statistical significance, and a longer timeframe. As we know after analyzing the data: these are the right corrections the management needs to make to increase the success rate of the next Phase III trials.
But this also means: these trials will be expensive. I estimate the costs will be around 30 Mio. USD. That is more than twice the market cap of the whole company. The share price shows us: At this moment, the capital markets do not believe that Adial will get the money or a partnership to conduct these trials.
Capital markets question ability to finance new trials
This leads to two additional side-effects of the decline of the stock price: the outstanding warrants are so far out of the money that it is very likely they will expire worthless. The only exception would be an approval of AD04 by the EMA, which could catapult the stock to about 5,00 USD. While that is a possibility, this possibility is small.
The expiration of the warrants is good for the capital structure of Adial, as no additional shares are added. However, the exercise of warrants at a much higher stock prices would have provided the company with significant liquidity and further strengthen its position in negotiations with potential partners. This option is basically off the table now.
According to the business update from August 22nd, Adial had about 9,2 Mio. USD in the bank. With the advances of the Purnovate-drugs, I would value the loss per quarter at around 1,0 Mio. USD. So, the good news is: Adial does not have any money problems for the day-to-day operations for this year and the next year.
Adial has enough money for 2022/23
We must give a lot of props to CEO Bill Stilley and the old management for closing the financing deal for 10 Mio. USD in February 2022 – before the markets turned south. Everybody hated it at that moment (including me). But I tip my hat to him and his foresight now. In the current environment it is almost impossible for a nano cap-biotechs to get this kind of financing. Adial is in no immediate need to raise capital, which is very good.
However, what needs to be addressed by the new management is the share price. According to Nasdaq regulations, the share price needs to be above 1,00 USD or a company will lose its Nasdaq-listing. That would be a disaster for the company. So, it has to be avoided at all costs.
If the share price of a company trades below the minimum bid price of 1,00 USD (closing price) for 30 days, the company will receive a deficiency notice from Nasdaq. This should be happening to Adial right now. But no reason to panic. The company then has a compliance period of six month (180 days) to get the share price over 1,00 USD.
The normal strategy for a nano cap, whose stock is far away from the 1,00 USD-barrier and doesn`t have any upcoming positive news flow to move the share price over this mark, is a reverse split. The new management will likely wait until they hear from the EMA, which is the right move. But if there is no approval – the most likely scenario currently – a reverse split is coming. Probably 5:1.
Share price severely undervalues AD04 potential
So where do we stand now? The current market cap is 13,5 Mio. USD. If we value the cash position at 0,- USD – as this money will be burned for spend on day-to-day operations and the advancement for AD04 and the Purnovate-drugs – the market values Purnovate 0 USD and AD04 at 13,5 Mio. USD.
I am okay with the markets valuing Purnovate at 0 USD as it is in the preclinical stage. Adial wants to start one to two Phase 1 trials in 2022/23. That will be positive, but doesn`t move the needle. This is still an AD04-story. However, 13,5 Mio. USD for a potential blockbuster drug, which has proven itself to be safe and effective in Phase III trials, is way too cheap.
Let me explain my point in another way: I first was introduced to Adial Pharmaceuticals in October 2018 and bought my first shares around 1,45 USD. Back then we only had Phase 2b data, which was excellent. But it was only Phase 2. The Phase 3-trials were supposed to be one to two years away and Adial only had about 4 Mio. USD in the bank.
Today we have Phase 3 data that proves AD04 works and is safe. The next Phase 3 trials are about one to two years away and Adil has about 9 Mio. USD in the bank. We also have the Purnovate-pipeline, which didn`t exist in 2018.
So, we have a fairly comparable situation today, with the exception that Adial needs substantially more money for the upcoming trials then they needed in October 2018 for the ONWARD trials. This is partially offsets by the lesser risk profile for AD04 after the Phase 3 results. But the share price today is about -60 % lower than in October 2018. It should at least be at the same level.
EMA-response and partnership are the key dominos
The market values the completion of the next trials as a long shot with low probability. At this moment, the market thinks that Adial won`t be able to get the money for the next trials or find a partner for them. The chance of an approval of the EMA is currently valued at zero.
That makes no sense and shows: the market lost trust in the company. I estimate only a 5 % chance to a negative reaction of EMA. The data of the ONWARD trials is too good. On the other end of the spectrum, I estimate the chance for a conditional approval at 20%. The biggest probability is a request of an additional, bigger, and longer trial by the EMA.
I don`t expect much movement in the Adial-stock in the near future – before the EMA-response. It is unlikely that a pharma partner will jump on board before the EMA has given its decision. After the EMA-response the clock starts again. The FDA-response is only important in terms of trial construction, if Adial wants to hit two birds with one stone.
If you want to invest in Adial or are a shareholder like me, you have to understand: this is now an investment story with a two-to-three-year time horizon. It will likely include at least two capital raises and a potential reverse split. But the blockbuster-potential for AD04 and the investment case for the upside for Adial are unchanged.
If the EMA response is as positive as I think it should be (most likely in the way of “the data looks promising, but we need another trial”), Adial should find a partner. The real question will be: how much does Adial have to give up? At this price level, Adial offers a 10x to 20x return. For older shareholders, the return potential is probably in multibagger-range from entry price of 2,00 to 3,00 USD. A 10x is possible with a good deal.
Conclusion: The risk-reward of Adial is to the upside now. Currently no positive news about the EMA-response or a partnership are priced into the share price. The market has given up on Adial – and that offers possibilities for patient speculative investors to make money. Adial has now turned into a two-to-three-year investment-story with significant upside potential.
– Disclaimer –
All information provided is never investment advice and reflects my very own opinion. My company, W.J. Investor Strategies GmbH acts as an investor relations provider for small cap companies in the European market and, in some cases, owns shares of mentioned companies which could be a conflict of interest.
