Adial Pharmaceuticals: Opportunity Knocks For Micro Cap Targeting Multi-Billion Alcohol Use Disorder Market (NASDAQ:ADIL)

Investment Thesis

Buying Adial Pharmaceuticals’ (ADIL) stock is an investment opportunity I have considered several times in the past 12 months, and recent developments at the company have finally persuaded me to add the stock to the Actively Traded model portfolio I maintain via my marketplace channel at Haggerston BioHealth. The decision is broadly based on 2 main factors.

Firstly, although primarily a developer of drugs to treat alcohol use disorder (“AUD”), and potentially other types of addiction, Adial has been awarded an Emergency Use Authorisation (“EUA”) for a serology-based point of care (“POC”) test for the SARS Cov-2 virus using fingerstick blood samples – the Assure/FaStep COVID-19 IgG/IgM Rapid Test Device.

Adial’s test kit is the first of its kind to be given an EUA by the FDA, and the news sent the microcap’s share price skywards, from $1.2 on 25th September, to $3 by COB on the 29th, although the price quickly corrected to ~$2. Adial announced its first sales order – for 10,000 test kits, which retail at $297 – a few days later. Management views the overall market opportunity to be in excess of $3.5bn, although there is likely to be intense competition in this market as more and better resourced firms launch test kits.

Adial had been using the fingerstick tests in its pivotal phase 3 ONWARD trial of lead drug candidate, AD04, for treatment of alcohol use disorder. Exploiting this sideline opportunity may well provide a meaningful, medium-term revenue stream which will not only boost its share price but also help to support the costs of its late stage trial of AD04 – good news for investors who now have less reason to fear being diluted by further at the market fundraisings.

Secondly, in light of the ongoing pandemic and the difficult social conditions that it has caused, which the National Institute on Alcohol Abuse and Alcoholism (“NIIAD”) has warned may increase risk of relapse in individuals with alcohol and substance use disorders, Adial has submitted a formal request to the FDA for an expedited review for AD04.

AD04 – an ultra-low dose formation of a drug – Ondansetron – used to treat nausea and sickness in patients during chemotherapy, radiotherapy, or surgery – has demonstrated a promising safety and efficacy profile in a phase 2 trial in patients with AUD who are genotype positive for the treatment, which is estimated to be around 33% of all patients, and determined by a genetic screening tool that is also provided by Adial.

Adial has designed phase 3 trials in both the US and Europe in an effort to secure FDA and European Medicines Agency (“EMA”) approval, with management targeting a commercial launch in 2024 if the trials prove successful.

An expedited approval nod from the FDA, however, could see the treatment approved before the end of 2021, given that it usually takes the FDA up to 60 days to review the request, followed by a 6-month rather than 10-month application review process, with factors such as a rolling NDA submission or Accelerated Approval also coming into play.

A rapid approval process would be a significant coup for Adial, and given the paucity of available treatments for AUD, an approval at least 2 years ahead of schedule certainly seems like a possibility, if not a probability.

With the COVID test kit and expedited approval push, I believe Adial has shown astute management, and because Ondansetron is already approved in other indications, the trial process ought to be relatively inexpensive and, based on phase 2 data, likely to meet its endpoints in a pivotal trial.

Adial IPO’d in July 2018, raising $7.32m at a price per share of $5, and I can see the company’s current momentum driving the stock price back towards that figure, and certainly back beyond $3 per share if its COVID test kits generate significant Q3 or Q4 ’20 revenues for Adial, as seems likely.

These are the 2 main reasons I am bullish on Adial’s prospects and consider the company to be an attractive investment opportunity. In the remainder of this article, I will take a deeper dive look at the company, its management, products and financials.

The considerable risk of a trial failure related to its only credible asset – AD04 – may put many investors off Adial, but the COVID opportunity, although increasing the stock price from close to $1 to $1.87 at the time of writing, provides valuable downside protection as well as an exciting price catalyst.

Company Overview

Headquartered in Virginia (but reincorporated in Delaware in 2017 via a reverse merger), as mentioned above, Adial IPO’d in 2018, raising a modest $7.3m, and was founded in 2010 by William B. Stilley, who has served as CEO throughout.

An ex-Marine Captain, prior to founding Adial, Stilley worked at Clinical Data Inc. (acquired by Forest Laboratories in 2012 for $1.2bn) on the successful phase 3 trial of major depressive disorder treatment Viibryd, a serotonin reuptake inhibitor that is now marketed and sold by Allergan (AGN), making $412m of sales in FY19. Prior to that, Stilley was COO & CFO at Adenosine Therapeutics. Joseph Truluck, Adial’s COO and CFO, also worked at both Clinical Data and Adenosine Therapeutics.

Another key figure at the company is Chief Medical Officer and ex-Chairman of the Board Bankole Johnson – the inventor of all patents related to AD04. Johnson was previously Chair of the Department of Psychiatry at the University of Maryland School of Medicine, and has spent more than 30 years pioneering addiction research and treatment development, winning several awards for his work, and acting as a Principal Investigator on National Institutes of Health (NIH)-funded research studies into neuropharmacology and molecular genetics.

Johnson holds a 15.4% stake in Adial, and Stilley holds a 9.4% stake, whilst another board member, Kevin Schulyer – Senior Managing Director at Virginia VC firm CornerStone Partners LLC – owns a 19% stake. Another board member, James Newman, founder of med device company Medical Predictive Science Corporation, owns 9% of Adial, and interestingly, Armistice Capital – the VC firm which made a 200% ROI on its investment into oral COVID vaccine developer Vaxart – owns a 5% stake.

In its 2019 10-K submission, Adial reported just 4 employees, and its market cap is a miniscule $25.53m, with 13.56m shares issued to date.

AD04 – An Innovative Way To Tackle An Unmet Need

Adial’s only current treatment in development – AD04, targeting AUD – is a micro-dose formulation of Ondansetron, which was first approved by the FDA under the brand name Zofran in 1991. Marketed and sold by GlaxoSmithKline (NYSE:GSK) to treat nausea and sickness, mainly in patients undergoing chemotherapy, Zofran sales peaked at ~$1.3bn in 2006 before the drug went off patent, allowing generics to enter the market.

In 2012, GSK paid a $3bn settlement after admitting to promoting several drugs, including Zofran, for off-label use. GSK is currently facing >250 lawsuits from women who had been prescribed Zofran for morning sickness and whose children may have suffered birth defects as a result. GSK is thought to have known about the potential risk of prescribing Zofran to pregnant women since 1992. AD04 contains less than 1/12th the lowest Zofran dose, however, meaning its safety profile can be considered to be strong, and not subject to the issues that have plagued Zofran, since AD04 is highly unlikely to be prescribed off-label.

AD04/Ondansetron’s mechanism of action is based on the blocking of serotonin-3 receptors which decreases the release of dopamine, and therefore decreases the dopamine reward system that is triggered by alcohol consumption, theoretically reducing an AUD sufferer’s craving for alcohol.

Adial management believes that a micro-dose of Ondansetron is only likely to be effective in a particular genetic subset of patients who have a sensitivity to the serotonin modulation effects of Ondansetron, and as such, the company has developed a genetic test to screen for such patients, which handily for the company, also conveys a unique form of patent protection.

The use of genetic screening to detect the presence of at least one of up to four identified genotypes, which are thought to be present in ~33% of all patients (the figure may rise to ~50% in patients in Europe) is a key component of AD04’s 3 patent families – issued in >40 countries and lasting until 2032 at the earliest. The unique testing element and genotype definitions will protect against competitors developing their own ultra-low dose Ondansetron solutions and bringing generic AD04 competitors to market.

Adial’s IP strategy for AD04 to treat AUD and other types of addiction. Source: Adial investor presentation.

Furthermore, in a recent webcast given at the LD Micro 500 Conference in September, CEO Stilley argues that using another dosage of Ondansetron (other than AD04’s 0.33 mg/tab) would be ineffective in treating AUD since serotonin-modulating drugs are highly sensitive, and a too high or too low dose would not trigger the same effect on the dopamine reward system, which adds to AD04’s level of protection against generics.

There are further advantages worthy of consideration. AD04 does not require patients to be abstinent for a period of time before starting treatment, unlike FDA approved Acamprosate (Campral), for example, or Naltrexone (Antabuse). Its twice daily, orally administered tablets are discrete and minimally disruptive to a patient’s lifestyle, and there is no requirement for patients to undergo painful injections, or for the dosage level to be increased.

If approved, the safety and efficacy profile of AD04 will likely compare favourably to existing AD04 treatments, based on data readouts from its phase 2 trials.


Adial phase 2b trial results meet primary and secondary endpoints. Source: Adial Investor Presentation.

In its University of Virginia sponsored phase 2b trial of 283 patients, Adial was able to show that AD04 demonstrated a statistically significant difference compared to placebo for its target genotype in both its primary and secondary endpoints. Patients in the AD04 arm of the trial reduced drinks per drinking day from 9.5, to 4 – a ~60% decrease – whilst those on placebo dropped from 9.5 drinks, to 6. In terms of % of days abstinent (the secondary endpoint) patients using AD04 were abstinent for nearly 50% of days, up from a baseline of 17%, which compares favourably with placebo (35%).

Importantly, patients using AD04 also reduced their % of heavy drinking days to 30%, compared to those on placebo – ~40% – vs. a baseline of 70%. After discussion with the FDA and EMA, Adial management anticipate that this will be accepted as the primary endpoint in its phase 3 trials, which will take place in Europe across two 24-week trials enrolling 294 patients each, and in the US, where at least 580 patients will be required. In Europe, despite wide-scale disruption caused by the pandemic, trials have been approved and started in Poland, Latvia, Sweden and Estonia, with data expected to be available in 2021.

Manufacturing & Marketing

Adial has an agreement in place with a third party vendor to manufacture and supply its low-dose Ondansetron tablets, and calculates the cost to be no more than $0.01 per dose, with packaging costs expected to be less than $0.05 per dose. Management says it has sufficient supplies for its initial phase 3 trials, although there is no long-term manufacturing commitment in place – with several alternative suppliers under consideration. Drug stability is expected to exceed 4 years.

Research shows that AUD constitutes a major health problem in the US – where it is estimated that there are 35m sufferers (9% of men and 5% of women, according to the National Institutes of Health), and excessive alcohol use is the third leading cause of preventable death. The problem is even worse in Europe, where there are an estimated 55m sufferers, and the prevalence of AUD is estimated to be as high as 31% in Russia, for example, where alcohol plays a part in 30% of all deaths, according to the World Health Organisation (“WHO”).

Only Acamprosate, aldehyde dehydrogenase inhibitor Disulfiram, and Naltrexone, an opioid antagonist – marketed and sold by Alkermes (ALKS) as Vivitrol, making sales of $335m in 2019 – are currently approved by the FDA for treatment of AUD, but none of these three have demonstrated sufficient efficacy to be considered a standard-of-care, whilst anti-depressants such as Sertraline and Prozac are often prescribed despite there being no hard evidence that they have a positive effect on a patient’s drinking habits.

Adial management’s estimated market opportunity for AD04. Source: Investor Presentation.

As such, Adial views its theoretical total addressable market to be in the region of $36bn, after the removal of all patients who are not genetically predisposed to treatment with AD04. Based on current levels of patients actively seeking help for AUD seen by a healthcare practitioner, the market is estimated to be ~$1.3bn.

Adial has a marketing strategy in place based on a specialised sales team targeting incremental growth in core markets at first, followed by expansion into targeting General Practitioners and direct-to-consumer sales, as well as international expansion, and rates AD04 as a potential blockbuster (>$1bn) selling drug.

Personally, I would think the company would do exceptionally well to hit peak sales of $500m within 5 years of launch owing to its small size and inexperience handling sale and marketing operations, but long term, there is no question that if AD04 proved superior enough to current treatments to become an accepted standard-of-care, blockbuster sales could be achievable, based on the scale of the demand. When we factor the possibility that Adial could follow up an approval in AUD with further approvals in smoking cessation, gambling addiction, and opioid addiction, the long-term market opportunity begins to look very attractive indeed.

However, it’s important to remember this is dependent both upon the company securing approval in Europe and the US, and its patent protection holding up against generics.


Although I think Adial management appears to have a well-defined market opportunity, and an innovative and differentiated solution that has performed well in phase 2 trials, and that the company has potentially found a way to hold off generic and off-label competition, it would probably not be wise to rate the company’s chances of commercial success any higher than 50/50.

Adial highlights its genetic testing capabilities as a strength, arguing that it engages patients seeking help for AUD, and provides an incentive – if there is a genotype match – for a patient to pursue the treatment option. But it is also a convoluted strategy that may dissuade many people who are not ready to accept that their alcohol use is problematic from pursuing the treatment.

Similarly, the patent workaround also seems convoluted, and with limited funds, if a rival company brought a copycat treatment to market, Adial may struggle to defend its patents in the courts.

A small team with limited sales experience may also find it very tricky to find favour with influential figures within the AUD treatment market, despite the presence on the team of an industry veteran in Bankole Johnson, and to persuade prescribing physicians that micro-doses of Ondansetron is a credible treatment option, even if phase 3 trial results indicate the product is efficacious.

The phase 3 trials may well represent the biggest obstacle for Adial, however. Once again, management does not have much experience operating clinical trials, and is reliant upon its outsourcing partner Crown CRO Oy – with which it has entered into a 5-year agreement – to manage operations, which, as mentioned, have already been severely disrupted by the pandemic.

From a financial perspective, the company’s cash burn in FY19 was $8.2m, and $7m in FY18, with R&D spending rising from $0.4m in FY18 to $4m in FY19, whilst G&A expenses declined from $6.6m to $4.3m over the same period. Total current liabilities as of Q220 were just $0.7m, although the company’s accumulated deficit now stands at $24.7m.

Adial estimates the total cost of its phase 3 trials in Europe to be $9.1m, of which it has already paid $2.9m, and as of June 30th this year, the company had a cash position of $8.6m. The phase 3 trials in the US are expected to cost $20m, however, meaning that Adial will almost certainly need to complete further fundraisings. The company’s share price fell by 17% in June when it completed a $5.2m offering of 2.82m shares at $1.85, and Adial could raise up to $50m thanks to a shelf offering agreed in February.


On some levels, Adial’s attempt to convert Ondansetron into an AUD treatment at an ultra-low dose may prove to be too convoluted for the company to firstly persuade regulatory authorities, and then prescribing physicians, that AD04 is a better treatment option than what is already available, and that the genetic testing angle is worth the effort.

On the other hand, if the company’s clinical trials do demonstrate that the treatment compares favourably to current standards-of-care – none of which are truly satisfactory based on their inconclusive clinical trial results – and the treatment gains approval and finds favour with physicians, then Adial’s value as a company will almost certainly increase exponentially and share price gains in the triple digits would be almost guaranteed, in my view.

Approval in 2 major markets (Europe and the US), combined with the increasing prevalence of AUD, and perhaps, an increasing willingness for doctors to diagnose the disease (knowing there is an effective treatment option available) and an increasing willingness for patients to acknowledge the illness and opt for treatment (for the same reason), suggests that AD04, if marketed correctly, is a potentially huge market opportunity.

Matching the sales of e.g. Vivitrol over time would suggest that Adial could achieve sales close to $500m per annum, but there is a good chance that AD04 could prove to be safer, more convenient, and more effective as a treatment option than Vivitrol, or Antabuse, or Campral, in which case Adial management would be correct to suggest that AD04 can target blockbuster sales. Furthermore, if we assume that Adial’s patent strategy pays off – not entirely unreasonable given that a pivotal trial has been signed off by the FDA and will shortly be underway – then Adial’s value as a business increases still further.

Inevitably, if this were to prove the case, Adial would become an acquisition target, and its management team, who helped develop Viibryd at Clinical Data Pharmaceuticals, which turned the company into a $1.2bn acquisition target (and created a $400m selling MDD drug), may have the experience and know-how to secure favourable terms.

In the short term, investors almost certainly face dilution if the US trials of AD04 go ahead, given the $20m costs involved, but as I mentioned in my intro, any share price losses may well be offset by gains in relation to sales of Adial’s fingerstick COVID tests.

It’s hard to put a value on the size of this opportunity, since Adial has not revealed the terms of its agreements with distributors iRemedy and Brik LLC, or the test-kit manufacturer BioLab, but selling 10,00 test kits at $300k translates to $3m of revenues. Investors don’t know how that figure has been divided up, but may discover when Q3 results are released, which ought to happen this month or early next month.

To summarise, investing in Adial is somewhat speculative and opportunistic, because Adial’s business plan is also speculative and opportunistic in nature, its management team relatively inexperienced, and its resources limited.

However, I believe the company scores highly on ingenuity, has a credible case for approval in a very large market with a high unmet need – which has advanced as far as the pivotal trial stage – plus there are numerous short-term catalysts in play – notably the COVID test kit opportunity, the expedited review request, and the progress of European trials.

Any of these could trigger a surge in price of >50%, and more likely >100% – if the news is positive. As mentioned, if Q3 results reveal that sales of COVID test kits have opened up a revenues stream >$1m, and there is the possibility

I reiterate my belief that positive news-flow could – in a best case scenario – see the share price return to its original IPO price of $5, particularly if the COVID testing opportunity can create a sustained revenue stream, and that longer term (by YE24), an approval in AUD would create enough goodwill to potentially drive the share price into double figures.

I would expect to see a >50% gain in the stock price if Q3 results (due later this month) reveal that the COVID opportunity can provide a meaningful and sustainable revenue stream, and an expedited review agreement could provide even more substantial upside (>$3), with a decision likely to be made within the next 3-6 months.

Readouts from the European phase 3 trials should be available in the first half of next year, whilst the US trials will keep investors waiting longer, perhaps as early as H2 2021 if an expedited approval is received, but if not, no earlier than H1 2023. It is likely results in the US will mirror those in Europe, although efficacy may be harder to prove in a region where it is thought patients may be less predisposed to benefit from treatment.

Gain access to all of the market research and financial analytics used in the preparation of this article plus exclusive content and pharma, healthcare and biotech investment recommendations and research / analytics by subscribing to my channel, Haggerston BioHealth.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ADIL over the next 72 hours. 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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