Aradigm’s Pipeline Undervalued

Aradigm Corp (ARDM - Analyst Report). is a difficult company to value. We like the product pipeline, specifically the inhaled Cipro product (ILCH) for BE and CF, but more visibility is needed before we can recommend investment in the name.

Plus, Aradigm continues to post operating losses and unless the company can sign a development and commercialization partner for ILCH in 2010, the company is going to have to raise additional cash. We already witnessed an 82% dilutive offering in February 2009. At this point we think that management is going to have to raise as much as $30 - 40 million over the next 3+ years in order to get to cash flow positive operations and positive EPS in 2013.

Hopefully the bulk of this will come in the form of an upfront payment on ARD-3100/3150. Other potential non-dilutive cash raising opportunities exists from Zogenix, the anthrax program, or through partnering ARD-1600 or ARD-iDMS.

The company’s AERx Essence technology is among the best we have seen in the market. The technology compares well with other inhaled platforms we have seen including Alexza’s (ALXA - Snapshot Report) Staccato platform, Mannkind’s (MNKD - Analyst Report) Technosphere, and Alkermes' (ALKS - Analyst Report) AIR technology.

AERx Essence alone is probably worth a market value of $50 million to a company looking to develop next-generation inhalable drugs. The platform is broadly applicable and allows for the development of treatments for a host of diseases, including diabetes, cystic fibrosis, anthrax, asthma, COPD and pulmonary arterial hypertension.  

The best near-term catalyst on the horizon is the initiation of a phase IIb program with the inhaled liposomal ciprofloxacin hydrochloride (ILCH) candidate in non-CF bronchiactisis (BE). Assuming this trial starts in the third quarter 2009, data should be available before the end of the year.

If positive, it could allow management to form a development and commercialization partnership in 2010.  As such, Aradigm might be an excellent purchase for the high-risk tolerant biotech investor. Although we are hesitant to recommend the purchase of a volatile OTC traded name with limited daily trading volume, the upside is significant. Our near-term target is $0.50.