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Monday, November 06, 2006

Adolor Still Isn't Cheap After the 44% Meltdown

Despite the implosion seen in Adolor (ADLR), the shares might not have been hard enough. We aren't calling for more of a meltdown on a definite basis but the 44% drop still doesn't make it cheap.

Here is the problem with the Approvable letter for its bowel-disorder drug that the company disclosed today: The FDA requested a 12-month safety data, including analysis of serious cardiovascular events in an ongoing safety study in opioid-induced bowel dysfunction. The FDA also requested a risk management plan as part of the submission. The study is targeted to end in early 2007, but now this pushes it out after effective review periods.

As of September 30, 2006, the Company had approximately $202.1 million in cash, cash equivalents and short-term investments; with total assets at $217.6 million. All revenues from the company are partnership and contract revenues rather than actual drug or product sales, so revenues are somewhat misleading. The company has listed a total of $47.8 million in total debt. The company is burning close to $20 million per quarter.

If we pretend that the review only goes out to the end of Q1 2007 with no added delays, then it would have $162 million in cash and equivalents and after you back out liabilities it would have an implied cash value as of that date at $114.2 million. The implied market cap of $361 million at a $7.85 stock price still has this company valued at 3-times a tangible book value on a forward basis. That is only because this was an APPROVABLE letter. If this turns south and is denied outright or even goes to a NON-APPROVABLE status, then there are going to be worse problems. When you get true implosions from drug problems it is quite common for these emerging biotech companies that have no products on market to trade down around 1-times a tangible book, although many trade at closer to 2-times tagible book.

There are some other hopes for the company, but Adolor just recently reported ahead of earnings last week that it had discontinued its sterile Licocaine patch development. So even with ADLR trading down 44% the stock still has downside risks compared to many other biotech implosions from FDA delays. It is possible that the company will get entirely past this hurdle if you trust it in the release, but if there are more issues or further delays then consider yourself warned about more downside to ADLR shares.

Its partner GlaxoSmithkline (GSK) is actually trading up on the day by 0.6%. With its endless pipeline and its current mix of endless products on market it is essentially insulated from any fallout here.

Jon C. Ogg
November 6, 2006
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