Adamas Pharmaceuticals: Unjustified Sell-Off Following Another Strong Quarter (NASDAQ:ADMS)


Adamas Pharmaceuticals (ADMS) recently reported an amiable earnings report with a slight beat on EPS and a slight miss on revenue. Despite the strong quarter-over-quarter growth, the ticker was not immune to the recent healthcare sector sell-off following the outcome of the U.S. presidential election. ADMS once again has experienced an unjustified sell-off and is trading at a discount. As a result, I am looking to reapply some profits and take advantage of the dip.

I intend to review the company’s Q3 earnings report and point out some bullish points for investors. In addition, I take a look at its current valuation and discuss the prospects of a long-term position. Finally, I reveal my strategy for reloading my Adamas position.

Q3 Highlights

It is common to hear positive phrasing that should rally investors and project some confidence from the C-Suite. Typically, you hear words or phrases such as robust, transformative, or encouraging, and most of the time, I take those statements with a grain of salt. In terms of Adamas, I have to concede the company should be using this language when describing its accomplishments in 2020… considering the COVID-19 pandemic. During Q3, Adamas made progress in advancing its commercial strategy, which produced $19.0 million in GOCOVRI product sales. In addition, the company started receiving royalty revenue from NAMZARIC, which pulled in approximately $1.2 million. Together, it recorded $20.2 million in total revenues for the third quarter, which is a 45% increase over Q3 of last year.

Figure 1: GOCOVRI Q3 Numbers

(Source: Company presentation)

Admittedly, these numbers are far from being a blockbuster, but one needs to admit the company appears to be finding its stride with GOCOVRI, which recorded a 36% increase in sales and about 19% volume growth over the same quarter last year. What is more, Adamas reported that it saw a 16% increase in paid GOCOVRI prescriptions compared to Q2. So far, the company has seen a 36% growth in product sales for the first nine months of 2020 over 2019 in spite of the challenges of the pandemic.

When looking at these commercial numbers, we can say Adamas has accomplished robust growth in product sales that was reinforced by patient persistence and is setting the company up for additional growth if we can get this pandemic under control. It is important to note that there are roughly 200K Parkinson’s disease patients in the U.S. who are battling dyskinesia and OFF, so the opportunity for GOCOVRI growth is substantial (Figure 2).

Figure 2: PD Dyskinesia and OFF Population in the U.S.

https://static.seekingalpha.com/uploads/2020/11/10/48523746-1605032399318659.jpg

(Source: Company presentation)

Focusing On The Financials

Now that the company is starting to gain some commercial traction with GOCOVRI and is receiving royalties for NAMZARIC, we need to focus on the cash runway and a path to profitability.

When looking at the top line, the Street expects Adamas to continue to record strong year-over-year growth for the next few years (Figure 3).

Figure 3: Company Annual Revenue Estimates

https://static.seekingalpha.com/uploads/2020/11/10/48523746-16050323999051065.jpg

(Source: Seeking Alpha)

It might not be explosive growth, but a steady 20-30% growth in the next few years should outpace the company’s expenses. For Q3, Adamas reported a drop in its R&D expenses to $2.3 million, and its SG&A expenses dropped to $26.1 million. As a result, the company updated its expense guidance from $120-135 million to $109-121 million.

Figure 4: Company Annual EPS Estimates

https://static.seekingalpha.com/uploads/2020/11/10/48523746-1605032399242988.jpg

(Source: Seeking Alpha)

Looking at Figure 4, we can see that improvements in the top and bottom lines will start moving the company’s annual EPS from negative to a positive EPS. It appears the Street expects Adamas to come close to breaking even at some point in 2023 or 2024.

Does Adamas have the cash to get to 2023? At the end of Q3, it had around $92.5 million in cash and cash equivalents, and the overall cash burn was $11 million. The company was able to decrease its cash burn from around $12 million in Q2, and down from about $18 million in Q3 of last year, so there has been some progress. If Adamas can hold $11 million a quarter in cash burn, it should be able to operate into 2022. Obviously, we have to accept the company will be looking for financing before the checks start bouncing. Hopefully, it will have a strong enough track record to find non-dilutive funding or perhaps raise capital with an offering at a much higher valuation.

Valuation

Once again, the primary motivation for reloading my Adamas position is valuation. Looking back at Figure 3, we can see the company is currently trading around 1.29x forward price-to-sales (at the time of writing) for its estimated 2020 revenue. The industry’s average is 5x, so we can say Adamas is undervalued when compared to its peers. In addition, the company is expected to experience growth in the coming quarters without a massive increase in OpEx. What is more, it looks as if there is a path to profitability without crushing debt or dilution. Essentially, ADMS is a bargain I can’t pass up.

My Plan

I found a way to manage my ADMS position very well in 2020 by averaging down and selling on spikes. Admittedly, I made most of my decisions based on technical patterns on the daily chart (Figure 5) and remembering that good news doesn’t create longstanding momentum for the stock. Despite my long-term bullish outlook, I had to concede that ADMS will not demand a premium price after GOCOVRI’s lackluster commercial launch.

Figure 5: ADMS Daily Chart

https://static.seekingalpha.com/uploads/2020/11/10/48523746-16050324002014978.jpg

(Source: TrendSpider)

Now that the company has figured out some of the issues and has found a rhythm, I am willing to add onto my core position reload to a full size in the coming weeks.

The daily chart shows an abrupt sell-off, but it appears to be under lower trading volume. Consequently, I am looking to pull the trigger on a small buy in the immediate term and will look for a potential retest of $3.00 before pulling the trigger again. If the share price fails to hold $3.00, I will look for another buy around $2.50 per share and will wait for the sector to reverse before committing to another addition.

Long term, I am looking to hold the majority of this reloaded position for 3 years in anticipation the company can get to breakeven. If the company fails to hit the Street’s expectations for two consecutive quarters, I will look to downsize the position and look for an opportunity to exit the position at a favorable bid.

Disclosure: I am/we are long ADMS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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