For a company that just racked up two significant regulatory wins, ADMA Biologics Inc. (ADMA, Financial) has been looking rather dour as of late - at least as far as its stock price is concerned.
Heavy selling by one shareholder and a lawsuit have been the primary drivers of the recent pessimism. Investors, however, should not fret about these developments. The underlying growth story is unchanged and the company remains poised for an important inflection point in the second half of the year.
Investors who have been on the sidelines thus far might be well served to take the recent weakness as an opportunity to enter before the growth story begins to unfold later in 2019, and into 2020.
Class-action irritation
Small public companies are magnets for lawsuits, especially those that have experienced significant stock price volatility and rely on periodic dilutive secondary offerings to continue operations. For developmental biotech and pharmaceutical companies, risk, volatility and dilution tend to be even more prevalent.
In the case of ADMA, which undertook a significant secondary offering in the wake of the Food and Drug Administration's approval of its two intravenous immune globulin (IVIG) drug products, Asceniv and Bivigam, the dilution ended up stinging some investors.The raise brought in $40 million, significantly growing the company’s float. In response, class-action law firm Levi & Korsinsky stepped into the action on June 6:
“Levi & Korsinsky announces it has commenced an investigation of ADMA Biologics, Inc. concerning possible breaches of fiduciary duty.”
The stock reacted poorly to the announcement, as one might expect. Lawsuits can be expensive, spurious or not. This case, however, appears to be far more bark than bite, even by the loose standards of such actions. Indeed, the investigation being undertaken appears to be little more than a fishing expedition. Those investors who could claim harm are likely to represent a relatively small group and likely would not end up being considered sufficiently valuable to Levi & Korsinsky to even pursue.
Currently, there is nothing to worry about as the lawsuit is unlikely to even progress beyond the investigation phase. Were the firm to actually file a suit, its case would not be particularly strong. As ADMA begins to execute on a commercial strategy, its share price should improve, further reducing the credibility of such a suit.
Heavy selling pressure
A bigger drop in ADMA’s share price came as a result of heavy selling last week. The selloff was due, in large part, to the sale of 5.8 million shares by the Biotest Divestiture Trust. This entity was created last year by Grifols SA (XMAD:GRF.P, Financial), a global health care company based in Spain, in response to an order by the Federal Trade Commission. In its settlement with the FTC, Grifols agreed to divest itself of its significant ADMA holdings in order to acquire a controlling interest in another blood-testing company, Biotest.
Selling millions of shares into the open market is pretty much guaranteed to drop a company’s stock price. The impact tends to be even greater when it happens to small, historically volatile stocks like ADMA. Worse still, it came on the heel of the company’s secondary offering, which appears to have magnified the negative impact on both the share price and shareholder confidence.
Once again, this is a case of temporary selling pressure. The Biotest Divestiture Trust was mandated to sell its ADMA shares as part of the Grifols settlement. It is not a mark of lost confidence by a major shareholder, but this seemed to be the interpretation of the market, at least in part.
In any event, this selloff is more or less a one-off event. There may be a few other block sales to come from forced divestitures, but these will also prove to be only temporary setbacks, if they have much impact at all. It is rare for a major shareholder liquidating a position to simply dump shares. The actions of the Divestiture Trust were, and ought to be considered, unusual and not likely to see repetition.
Verdict
ADMA Biologics remains an attractive growth play, having derisked in the past month through FDA approvals and a strengthened balance sheet. As we stated in our last entry on the company, it has transitioned from a drug development and approval story into an execution story. The market sometimes takes time to adjust to such changed realities. Yet, while many companies face rocky roads in such situations, ADMA looks especially well poised for success. It has a significant product stockpile and plenty of cash to execute. The IVIG market is massive, growing and undersupplied.
A number of analysts have weighed in on ADMA in recent months, and most see significant upside for the company. In April, Oppenheimer lifted its price target from $14 to $16. More recently, H.C. Wainwright reiterated its $13 price target. With shares currently trading under $4, there is clearly plenty of room to run.
The economics are working in ADMA’s favor. The stock price will too.
Read more here:
- Lyft Struggles With an Uncertain Path to Profitability
- Investors Are Often Their Own Worst Enemies
- Grand Canyon Education Embraces Life as a Different Kind of Business
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
