Expert Financial Analysis and Reporting

Investment Thesis

I upgraded Adolor to a BUY after the company announced that it had reacquired all rights to Entereg from Glaxo. I did this even though binary phase II data on ADL 5945, their new drug for opioid induced constipation, was due at any time. I felt that the stock was attractive on the basis of Entereg alone and this induced me to take the risk of being in front of an important data release. I was holding my breath, but fortunately of phase II data on was very positive.

I am now carefully watching two key events to see how they unfold. I am carefully watching the transition of Entereg from a co-marketing agreement with Glaxo to Adolor assuming all responsibility for marketing. The second key event is the progress of partnering discussions on ADL 5945. I recently attended an investor conference and spoke with Adolor’s management on these two issues. I was encouraged by their responses and I am reiterating my Buy recommendation.

Q from SmithOnStocks.com. Will there be a downward blip in Entereg sales as the product is transitioned from co-marketing with Glaxo to Adolor assuming all marketing responsibility?

A. Adolor doesn’t anticipate any disruption from the transition. There is a great deal of “stickiness” with Entereg’s existing sales base. In order for Adolor to be able to sell Entereg, a hospital has to register for the REMS safety program and the product has to gain acceptance on the formulary. It takes considerable time and commitment on the part of the sponsoring doctors in the hospital to go through this process. The product is put on the formulary because the doctor or doctors have made the decision to incorporate Entereg into their practice. On the upside, Adolor has doubled the size of its sales force by adding 30 full time reps. They are all trained and hit the ground running after Labor Day. Adolor feels that even though the number of salesmen behind Entereg is less than was the case with the Glaxo co-promotion, this is more than offset by the total focus of each rep on Entereg. The Glaxo sales reps had other products to sell in addition to Entereg, so that it was not always their top priority.

Q from SmithOnStocks.com. What is happening on the partnering front for ADL 5945? As way of background, Nektar and their partner Astra-Zeneca recently started phase III with NKTR-118 and are in the lead in the race to develop an effective drug for opioid induced constipation. In the partnering deal between Astra- Zeneca and Nektar, AZN paid an upfront fee of $125 million and potential additional milestones could be as much as $995 million.

A. They are just getting started. Over the year and one-half since the release of phase I data on ADL 5945, there were a number of discussions with potential partners. The more important phase II data came out in the middle of August, a heavy vacation period. They are just now getting the phase II data out to potential partners and hope to get into partnering discussions soon.

Q from SmithOnStocks.com. How does ADL 5945 phase II data compare to NKTR 118 phase II data.

A, Nektar’s NKTR-118 had a responder rate of 90% with the 50 mg dose and 76% with the 25 mg dose, each of which is given once a day. ADL 5945 had a 56% responder rate with the 0.25 mg dose given twice a day. In comparing the phase II results, management noted that in the NKTR-118 phase II trials, Nektar looked at 5 mg, 25 mg. and 50 mg. doses. For phase III, they have chosen to go with the 25 mg dose and a 12.5 mg dose because of the level of side effects seen with the 50 mg dose. Adolor feels that the phase II efficacy results for the two drugs are comparable. On tolerability, they feel that ADL 5945 has an edge as all patients on NKTR-118 reported abdominal pain and 40% had diarrhea, nausea or vomiting. ADL 5945 had side effects comparable to placebo and management feels that this gives an edge to ADL 5945 on tolerability. In the phase II trials, the discontinuation rate of ADL 5945 was less than placebo and 95% of patients completed the trial. Tolerability should be a meaningful differentiation for ADL 5945 from NKTR-118.