by Daniel Wilhelmi
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.
Jim Cramer sure talks a lot. He hits on some recommendations. He misses on others. But he is 100 % right about one of his statements: “There is always a bullmarket somewhere”. Even in vicious bear markets or ultra-volatile times, some stocks are offering shareholders the opportunity to make a lot of money. You just have to find them before they pop.
I have been through three bear markets (stock markets in 2000-02 and 2007-09 as well as the commodity market 2011-16) and three stock market crashes (LTCM 1999, Flash Crash 2018 and Covid-Crash March 2020). In my experience of over 20 years the hidden gem-stocks always show the same characteristics:
- These companies have small market-caps, which enables their stocks go up even if the market is going sideways or down.
- They have a new product that is or will be in high demand and offer massive growth potential in the future. A product. Not a story. Stories are for bull markets. Nobody cares about a hot story in a market like we have now.
- The product or the business offers massive revenue growth to the company – even in challenging economic times. If a company can show high growth with a new product or show a clear path to future growth, the money will flow into the stock of that company.
- Ideally, there is a fourth point: The stock has been unfairly beaten down along with the broad market, giving speculative buyers a great entry price, when nobody knows about this company…yet.
Company information
The small biotech-company Adial Pharmaceuticals, founded in 2010 and publicly listed in 2018, fits all these criteria. It will be one of the hottest stories in the biotech-space in the next month. If things break their way, it has the potential to become one of the hottest biotech-stories for the next years. In my opinion this stock has one of the best risk-reward-ratio for any speculative biotech-stock I have seen since the New Economy-Crash 2000/01.
Company information:
Name: Adial Pharmaceuticals
Nasdaq-Symbol: ADIL
Stock Exchange: NASDAQ
Share Price: 1,27 USD
Average Daily Volume: 225.778
Marketcap: 32,6 mio. USD (excl. warrants that are far out of the money)
Full disclosure: I hold long positions in Adial Pharmaceuticals.
Company profile
The small biotech company from Virginia, US, is developing its lead drug AD04 for the treatment of alcoholism. More specifically AUD – the compulsive and uncontrolled binge drinking of a person. Think of the videos of a drunk David Hasselhoff. Unfortunately, we all know that alcoholism is one of the biggest medical problems in our society, that no one likes to talk about.
But it is a gigantic health problem and a billion USD-market. It is the number one cause of death for people in the age range of 15 to 49 (Lancet Report). In the US alone 35 mio. people are suffering from AUD (10 % of the US-population). In Europe it is 55 mio. people. The market for medication to treat alcoholism is valued at 30 bil. USD/year. Only for the US market.
A new drug in this market has blockbuster-potential (over 1 bil. USD revenue per year). Especially since there are almost no medications and treatments for AUD on the market right now. The products and treatments that are available have severe side effects, require massive life changes (AA-programs) or show suboptimal effects for the patients.
Adial’s lead drug AD04 would be a new approach to the treatment of AUD in a severely underserved billion USD-market. It is important to understand, that AD04 doesn`t cure AUD. It helps patients to control their alcoholism, improve their daily lives and will hopefully be used in combination with therapy to create successful lives without alcohol for the patients.
AD04: The ultimate catalyst is only days to weeks away!
This leads us to the clinical development of AD04 and this is where things get really interesting! Because AD04 has finished its ONWARD Phase 3-trials earlier this year. The emphasis is on the word “finished”! According to the Adial-Management the first data-readout for these Phase 3-trials will be coming in the next weeks!
Not Fall. Not 2023. The management expects the data readout for the middle to end of July! In the next weeks! If this data is good and hits the endpoints of the EMA (the European version of the FDA), it will be a complete gamechanger for Adial Pharmaceuticals and the stock price. In this case, we are talking about a company with a tiny market cap of 33 mio. USD – that all of the sudden has successful Phase 3-data for a potential blockbuster-drug!
We don`t need degrees in rocket science from MIT to figure out, what will happen with the Adial-stock, if the Phase 3-data is good: It will take off like a rocket! In this case, this tiny biotech-stock has the potential for multibagger returns in the short- to midterm timeframe and a tenbagger in the mid- to long term timeframe (if they don`t get taken over by a big biotech-company before that, which should still bring in major profits for shareholders).
On the other hand, I need to point out the risk: AD04 is the only drug in clinical trials for Adial Pharmaceuticals. Adial has a promising drug development-platform called Adenosine (from a small biotech company named Purnovate, that Adial bought). But it is in a very young stage. The company has identified several promising components, but they are all in the pre-clinical developmental stage. At this stage, the markets will value this program close to 0 USD. That means: If the data of AD04 is bad, the stock will implode.
AD04: How does it work?
AD04 blocks Serotonin 3-receptors in the human body. This reduces the production of Dopamine when patients consume alcohol. The missing feeling of happiness should lead to a reduction in the craving of alcohol. The Phase 2b-tests have supported this thesis in impressive fashion.
Before we look at the Phase 2b-results, one more important point about AD04: AD04 is NOT based on a newly developed component, the FDA or EMA have never seen before (which could increase the risk of a longer approval process and potentially more trials to get more data). AD04 is an ultra-low dosage of an already approved component called Ondansetron.
Ondansetron was already approved in 1991 in the medication Zofran. The patents for Ondansetron have expired and Adial can use it for AD04. However, nobody else can use the ultra-low dosage of Ondansetron against AUD and other addictions, due to a shield of patents in over 40 countries that Adial has built up over the past years. The patents run till 2032.
Ondansetron was tested in the 1990s in high dosages against alcoholism with some success. However, the side effects were severe and the studies were stopped. The Adial-scientists reduced the dosage of Ondansetron to the ideal ultra-low dosage that had the highest success rate but the lowest side effects. The current dosage of one AD04-pill includes 0,33 mg, which is about 1/12 of the Zofran-pill with the lowest dosage.
Adial also improved the chances of success by adding a genetic test to its ONWARD Phase 3-trials: The previous trials showed, that a subgroup of patients (about 1/3) carry a genetic disposition, that increases their response for successful treatments with AD04. These patients have more Serotonin-receptors then normal people – and therefor reacted more positive to AD04 in the Phase 2b-trials.
Adial used the genetic tests for their Phase 3-trials to only take patients with this genetic disposition, which in theory should increase the success probabilities of the Phase 3-trials. The genetic tests are patent protected as well.
AD04: What we know about the ONWARD Phase 3-trials today
By now, you clearly see where the investment case is going: It all comes down to the ONWARD Phase 3-data of AD04 (the full name of the trial is ONWARD Phase 3). What do we know so far? Obviously, the data for the Phase 3 is not public yet. The study is still blinded. It is supposed to be unblinded in the next weeks.
But we can take a look at the data of the Phase 2b-trials. These tests were very successful. It is important to note, that the Phase 2b-trials included a big group of 283 patients (93 of which had the desired genetic disposition). That is a large number of patients for Phase 2-trials and makes these results more meaningful.
AD04 showed convincing results in safety and effectiveness. Due to the ultra-low dosage of Ondansetron, there were no safety-concerns (the big red flag for FDA or EMA) and only minimal side effects in the Phase 2b-trials. The effectiveness in the subgroup with the genetic disposition was so high, that the Phase 2b-trials even reached some endpoints, that the management originally set out for the Phase 3-trials.
The number of “heavy drinking”-days was dramatically reduced (over -50 %) by patients with the genetic disposition, who received AD04. The average number of drinks per day on drinking days went down almost -55 % compared to the baseline (no treatment for AUD). On the other hand, the number of abstinent days increased. Adial-CEO Bill Stilley called the results: „The trial was very successful“.
(source: www.investor-strategy.com)
Take a look at the p-value gathered from the Phase 2b-trials. It is extremely low. That is excellent. The very low p-value tells us: The probability is very high, that these results were based on AD04 and are not a coincidence.
(source: Adial Pharmaceuticals, inc.)
AD04: Phase 3-trials
The recently concluded Phase 3-trials are the first part of two to three Phase 3-trials to get approval in the US and Europe (the final number of trials needed will depend on the data of this trial and the required trial-structure and endpoints of the FDA). These trials were conducted in Eastern Europe, as the percentage of people with the genetic disposition is higher then in other countries. The trials included over 300 patients and are completed. The war in Ukraine does not affect the trials at all.
So far, we only have one important indication about the trials. It refers to the safety/side effects of AD04: The retention rate of the participants in the Phase 3-trials was 86 %. That is an extremely high percentage for patient retention in treatment for addictions. It was well above the internal company expectation of 76 %, which was a high number already.
This high retention rate is an indication that AD04 is well tolerated by the patients, that the side effects should be low and that there should be no safety concerns. Since we saw very positive data about low side effects and no safety issues in the Phase 2b-study, I believe we can assume, that the safety data of AD04 in the Phase 3-trials should be good to great.
That makes the upcoming Phase 3-data even more interesting. Usually investors have to worry about the efficiency and the safety of a drug. I have seen plenty of Phase 3-drugs (mostly in cancer-treatment), that showed effectiveness in the trials. But the side effects and safety issues were so severe, that the drug failed in the end. The available information shows, that we should not be too worried about the safety-side of AD04. Only about efficiency. Which reduces the failure-risk of the Phase 3-trials.
Why is the stock price so low?
So why is the stock trading near the all time low? There are four reasons:
- The overall “risk off”-sentiment in the equity markets and specifically the sell off in biotech in the second half of 2021 and 2022 dragged down the ADIL-stocks along with all other stocks. On average healthcare-stocks are down -75 % in this downturn.
- Adial has been a small-cap since it become public. The stock is basically unknown to the public and it is too small to attract institutional investors.
- As many other small-cap-companies in the biotech-sector, Adial was attacked by short sellers in 2021. There are no claims of fraud. The short seller simply used the next point to their advantage.
- Because Adial is a one-drug-company, there wasn`t much news flow to attract new buyers in the difficult market once the Phase 3-trials started. It didn`t help that the start of the trials was prolonged due to the Covid-shutdown and that these trials are in Europe, which leads to less awareness of US-investors.
The main point: the deterioration of the stock price, while extremely frustrating, has no correlation to the success of the Phase 3-trials or the development of AD04. The short sellers are covering their reported short positions. The short interest has decreased from over 5,0 % to currently around 3,5 %. However, there are rumors of big naked short positions, which offers the chance of a massive short squeeze in the ADIL-stock, if the Phase 3-data is good.
SWOT-Analysis of Adial Pharmaceuticals
Strength |
| Weaknesses |
· AD04 could be a potential blockbuster drug for treatment of AUD. · AD04: Phase 2b data was excellent. · AD04: First in class. No competing drug in similar developmental stage. Only AUD-drug in Phase 3. · With about 12,0 mio. USD in cash and liquid assets, Adial doesn`t need to raise money after the Phase 3-results. · High insider ownership: CEO W. Stilley holds 10 %. | · ADIL-stock is a completely dependent on AD04. If the trials fail, the stock will tank. · The pipeline behind AD04 is very young and will take years to develop if AD04 fails. · Investor relations-work and communication with markets by the management have been suboptimal in the past, though we have seen improvement in recent months. | |
| ||
Opportunities |
| Threats |
· ADIL-stock is massively undervalued if Phase 3-trials are successful. · Mechanism of AD04 suggests, the drug could be efficient against other addictions (opioids etc.). · Stock offers a 10x potential mid- to longterm if trial results are good. · No pharma-partnership yet. Adial hold the global rights for AD04. · Potential take over-target for big biotech or pharma. · Potential for massive short-squeeze. | · AD04 results show disappointing results. · AD04 results are inconclusive or miss the EMA-endpoints and demand additional tests. · Short Sellers start another attack on the ADIL-stock if data is below expectations. | |
The SWOT-analysis shows the high risk – high reward-character of an Adial-investment. Everything hinges on AD04. But: The analysis also shows the incredible upside in the company and the ADIL-stock if the ONWARD Phase 3 trials are successful. This is the kind of catalyst that can start a massive rally in a small cap-stock – even in volatile markets.
Conclusion: The biggest catalyst in the history of Adial Pharmaceuticals is coming in the next weeks. This is an all-or-nothing investment. But based on the previous results and the information we have, the odds are in favor of a successful outcome. More trials will be likely be needed in the future to receive approval in the US, as the FDA wants different endpoints then the EMA. But if these results don`t disappoint, Adial has successful Phase 3-data for a potential blockbuster-drug in a billion USD-market and should receive a valuation north of 100 mio. USD.
Please be advised: This is NOT a recommendation to buy Adial-stock. Do your own research. This is a high risk-high reward-stock. Never invest money you can’t afford to lose. Never speculate on credit.
– 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.
