The Rudd Report Investment News and Research

1st Quarter Update Report on AMDL, Inc.
Symbol: ADL American Stock Exchange.
June 8, 2007
Share Price - $3.90
Risk Level: High 18 Month Target: $22.00 Recommendation: Buy

OVERVIEW

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Headquartered in Tustin, California, AMDL’s mission is to develop and commercialize cost effective products for the monitoring, detection and treatment of pre-cancerous conditions or cancerous tumors in humans.

AMDL is a theranostics company. The term “theranostics” describes an evolving group of products that combines treatment with diagnosis.

Tests, such as those under development by AMDL, can influence a therapeutic decision, thereby assisting physicians in determining which therapy will be most beneficial to a patient and then allowing them to monitor the patient’s progress.

DR-70®

AMDL is the inventor, developer and worldwide marketer, through exclusive distribution and non-exclusive agreements, of the DR-70® non-invasive cancer blood test. DR-70® has demonstrated its ability to detect the presence of certain cancers in humans 84 percent of the time overall.

In a study published by the Journal of Immunoassay (1998, vol. 19, pp 63-72) DR-70® was shown to detect 13 different types of cancer (lung, breast, stomach, liver, colon, rectal, ovarian, esophageal, cervical, trophoblastic, thyroid, malignant lymphoma, pancreatic), although the sample size for 9 of the cancers was not statistically significant.

In non-technical language, levels of DR-70® increase with the progression and stage of a particular cancer. While DR-70®is helpful in diagnosing whether a patient has cancer, the attending physician then needs to use other testing methods to determine and confirm the type and kind of cancer involved.

After clinical trials of DR-70® in Canada, China, Germany, Taiwan and Turkey, it was shown that DR-70® can detect many kinds of cancer using a single tube of blood, thereby eliminating the need for costly, multiple tests.

Furthermore, it is well known by physicians that many patients who have had a colonoscopy and positive biopsy are CEA blood test negative. In fact, the AXSYM (Abbott Labs) CEA package insert states that, “Patients with confirmed carcinoma frequently have a pretreatment CEA level in the same range as healthy individuals.”

Meanwhile, between June of 1995 and the present, the performance of the DR-70® immunoassay has been evaluated in multiple clinical trials. Over 3,670 patients have been tested using the DR-70® immunoassay, and the DR-70® values consistently correlate with either the positive detection or the positive progression of cancer.

Combination Immunogenic Therapy (CIT)

AMDL also owns a Combination Immunogene Therapy (“CIT”) technology that could lead to a vaccine or possibly treat those already diagnosed with cancer. CIT could eventually be used to build or protect patient’s immune system, for those known to be at risk because of a family history for certain types of cancer. The combination therapy both builds the body's immune system and destroys cancer cells.

AMDL’s Combination Immunogene Therapy uses an innovative approach whereby two genes are inserted into tumor cells to both build the immune system and destroy cancer cells.

On May 25, 2004 AMDL received a United States Patent for its CIT. By 2006, the global cancer market is projected to total revenues of 25.5 billion, reflecting a compound annual growth of 10.7% from 2001 to 2006.

Most gene therapy to date has attempted to replace all defective genes in every cancer cell, which is theoretically and practically impossible. AMDL’s new approach combines the Granulocyte-Macrophage Colony-Stimulating Factor (GM-CSF) gene with the B7-2 gene to enhance the anti-tumor immune response. CIT targets cancer cells for immunological attack, while simultaneously stimulating a stronger immune response.

The GM-CSF gene function alters the tumor cells and attracts antigen-presenting cells, which in turn activate tumor-specific T-cells within the immune system. The B7-2 produces a larger number of stronger T-cells to attack the cancer.

This innovative technology was developed by Lung-Ji Chang, Ph.D. at the University of Alberta, Edmonton, Canada, and acquired by AMDL in September 2001. Dr. Chang serves as the Company’s Consultant for Gene Therapy in the continued development of CIT.

In Europe and the U.S., close to 20 million people live with cancer, and overall costs amount to $107 billion in the U.S. alone. Cancer gene therapy is expected to be worth $3-5 billion by 2010.

Jade

Jade Pharmaceutical Inc. (“JPI”), a direct wholly-owned subsidiary of AMDL, is the sole stockholder of Jiangxi Jade Bio-Chemical Pharmacy Company Limited (“JJB”) and Yanbian Yiqiao Bio-Chemical Pharmacy Company Limited (“YYB”). JJB and YYB are pharmaceutical companies located in the Peoples Republic of China (PRC).

JJB is located in Shangrao, Jian Province, PRC, and has land use certificate rights to approximately 24 acres of land on which is constructed a manufacturing facility for prescription and over the counter pharmaceuticals and injectables. The facility is certified for Chinese Good Manufacturing Practice and JJB has 52 production licenses for large volume injection fluids, small volume injection fluids, tablets and tinctures and related products.

YYB is located in Tuman City, Jilin Province, PRC, and has land use certificate rights to approximately 3.45 acres of land on which is constructed a manufacturing facility that is certified for Chinese Good Manufacturing Practice and YYB has over 80 product licenses, primarily for herbal extracts.

JPI is currently in phase III clinical trials for a new liver cancer treatment.

Among its accomplishments, JPI has obtained China State Food and Drug Administration (SFDA) approval for their drug Ondansetron® (Ondansetron Hydrochloride Injection) for immediate use in hospitals and clinics.

Ondansetron® is highly effective in preventing the emesis and nausea caused by cancer treatments such as radiotherapy and chemotherapy. The global market for drugs to combat chemotherapy-induced nausea and vomiting exceeds $2 billion dollars, according to the Multinational Association of Supportive Care in Cancer. If not prevented, this nausea afflicts 85 percent of cancer patients undergoing therapy and can result in a delay or discontinuation of treatment.

JPI is also collaborating with the gene therapy research team of the Academy of Military and Medical Sciences (ACMMS). This collaboration will gain powerful support for AMDL’s CIT product development in China including clinical trials and a path for regulatory approval in that nation.

JPI has entered into a research and development agreement with New Way Pharmaceuticals of Haikou, Hainan Province, China. New Way will provide use of their research facilities free of charge and the provincial government has committed to provide land and grants to build a manufacturing base for gene therapy products. China is the first country in world to approve gene therapy for the treatment of cancer and it is currently being used in the treatment of mouth cancer.

FDA UPDATE

Management has reiterated on numerous occasions that it remains dedicated to task of achieving Food and Drug Administration (FDA) approval of DR-70®. To that end, Company management met with the FDA on January 25, 2007. This was a Pre-IDE meeting to obtain further guidance on the Company’s submission of DR-70®.

After a responsive submission is filed, the FDA will likely raise other issues in furtherance of the approval process. Therefore, at this time it is impossible to predict the length of time it will take for the FDA to review the new application or whether approval will ultimately be obtained.

Meanwhile, during the fourth quarter of 2006, AMDL received regulatory approval to sell DR-70® in South Korea. In February 2007, the company entered into a letter of intent to grant MyGene an exclusive distributorship for DR-70® in South Korea. No definitive arrangements have as yet been made with MyGene.

The company has also received certification for EN ISO 13485, a key global standard to ensure quality within the medical and diagnostic device industry. It has also complied with the regulations allowing it to affix the CE (Conformite Europeenne) Mark to the DR-70® kit.

The CE Mark is required to be displayed on regulated products placed for sale in the European Union and allows AMDL to market DR-70® in the European Union, subject to any additional specific country regulatory requirements or limitations. However, the greatest demand for DR-70® is currently coming from Asia.

Operations in China

The People’s Republic of China (PRC) has over 1.31 billion people and as such is the world's most populous country. At over 9.5 million 3.7 million square miles, it is the world's third or fourth largest country in terms of total area. Due to its vast population, a rapidly growing economy, its large research and development investments, its military spending and its status as a declared nuclear weapons state, and other capabilities, the PRC is often considered to be an emerging superpower.

From a marketing standpoint, it is the world's fourth largest economy and the second largest at purchasing power parity. Market-based economic reforms since 1978 have helped lift 400 million people out of poverty, bringing the poverty rate down from 53% of the population in 1981 to about 8% as of about 5 years ago and that number has probably decreased somewhat since then.

As such, AMDL’s opportunities for increased earnings in the PRC via Jade and in turn its JJB and YYB subsidiaries, is likely to far exceed what AMDL will receive from DR-70® in the United States after receiving FDA approval.

Both JJB and YYB operate as a wholly foreign owned enterprise or 'WFOE' in the PRC. The WFOE is a common investment vehicle for mainland China-based business. The unique feature of a WFOE is that involvement of a mainland Chinese investor is not required unlike most other investment vehicles. The end result is greater control over the business venture and avoidance of a multitude of issues resulting from dealing with a Chinese joint venture partner.

Such problems often include profit not being maximized, leakage of the foreign firm's intellectual property and the potential for joint venture partners to set up in competition against the foreign firm.

However, WFOEs often have difficulty building up the necessary personal relationships or “guanxi” which are of great importance in conducting business in mainland China.

WFOEs are often used to produce the foreign firm's product in mainland China for later export to a foreign country. They do not automatically have right to distribute their products in mainland China though a recent variant (the Foreign Invested Commercial Enterprise WFOE) has the ability to do so.

Risks associated with operating as a WFOE include unlimited liability for claims arising from operations in China and potentially less favorable treatment from governmental agencies in China than JJB and YYB would receive if JJB and YYB operated through a joint venture with a Chinese partner.

JJB and YYB are also subject to the Pharmaceutical Administrative Law, which governs the licensing, manufacture, marketing and distribution of pharmaceutical products in China and sets penalty provisions for violations of provisions of the Pharmaceutical Administrative Law.

Compliance with changes in law may require AMDL to incur additional expenditures which could have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

Furthermore, the value of the RMB fluctuates and is subject to changes in China’s political and economic conditions. (The renminbi, literally "people's currency" is the official currency of the PRC. Its principal unit is the yuan and it is issued by the Peoples Bank of China, the monetary authority of the PRC. Although the official symbol is CNY, it is often referred to as RMB.)

Historically, the Chinese government has benchmarked the RMB exchange ratio against the United States dollar, thereby mitigating the associated foreign currency exchange rate fluctuation risk. However, the RMB is being allowed to float to some degree. Additionally, the RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions.

OUTLOOK GOING FORWARD

DR-70®

Market acceptance of DR-70® kits has been slower than originally anticipated, in part due to the fact that DR-70® has not yet received FDA approval. In addition, AMDL has not signed any material new distribution agreements this year as new potential distributors have experienced similar delays and face similar market acceptance issues because of the lack of FDA approval.

Therefore, we concur with management’s statement that sales of OEM products for the remainder of the year will be at the same level the company saw during the first quarter of 2007.

Assuming FDA approval of DR-70® sometime in 2007 sales of DR-70® could increase to some extent in 2007, but any such increase is not expected to impact significantly the company’s operating results for 2007. Although the likelihood appears small at this point in time, we must point out that there is always the possibility that sales, with or without FDA approval, could be negatively impacted by potential competing products and/or overall market acceptance of DR-70®.

Jade

Sales of JJB’s products are approximately 40% over the counter and 60% to institutional or hospital customers. JJB employs regional sales managers and over three hundred representatives who contact distributors throughout China. There are eighteen distributors who purchase products from JJB. Distributors have the right to return unsold product and returns have historically averaged 2% of sales.

YYB has established a multi-level marketing program of approximately forty sales managers and engages over 1,000 sales representatives who act as individual marketers of YYB’s products. YYB also has eight distributors. 60 percent of YYB’s products are sold over-the-counter and 40 percent are sold to institutional or hospital customers.

Both JJB and YYB are developing educational programs for hospitals, doctors, clinics and distributors with respect to JJB’s and YYB’s product lines. These educational programs are intended to improve sales and promotion of JJB’s and YYB’s products. Both JJB and YYB sell to hospitals, retail stores and distributors who act as agents. One primary distributor has 29 retail outlets throughout the PRC. In addition, JJB and YYB have a dedicated sales team that manages its own direct sales force and retail outlets all over China.

As JJB’s and YYB’s resources permit, both JJB and YYB anticipate expanding their current domestic Chinese distribution beyond the cities in which they currently sell through the utilization of new distribution firms in regions currently not covered.

Furthermore, JPI is in the process of engaging in direct distribution of pharmaceutical products by opening retail outlets to be known as “Jiexhong Healthy Supermarkets.” JPI will engage in this new line of business through joint ventures in major cities throughout China.

JPI has also submitted DR-70® for approval by SFDA, the Chinese equivalent of our FDA.

New distribution agreements

In an effort to increase its sales, Jade recently announced the signing of three new one-year renewable distribution and agency agreements through its subsidiary JJB. The first of these agreements was signed with Double Crane Medicine Co. Ltd. (Changsha), and covers the provinces and cities of Hunan, Hubei, Sichuan, Chongqing, Guangxi, Yunnan and Guizhou.

The second was with Shanghai SiFul Medicine Co., Ltd., (Shanghai SiFul), an indirect subsidiary of China Resources (Holdings) Co., Ltd. (China Resources), and covers primarily the city of Shanghai.

The third was with Anhui Huayuan Medical Co. Ltd., (AHM) a direct subsidiary of China Resources (Holdings) Co., Ltd. (China Resources), and covers primarily the provinces and cities of Anhui, Shandong, Hebei, Shanxi, Beijing, Tianjing. All three companies will initially be selling 12 of Jade’s products.

With over 20 million people, Shanghai is one of the most affluent population bases within China today and gaining market share for Jade's products in this key China market is a cornerstone of AMDL’s sales growth strategy in China.

It should be noted that China Resources (Holdings), with assets of over $15 billion dollars, had sales last year of $8 billion, while Double Crane had sales of $455 million.

These three new distribution agreements together require a minimum sales threshold of $11.4 million. Furthermore, there is a potential to increase Jade's sales by as much as $24 million over the next 12 month sales cycle.

ISRAELI PATENT

AMDL recently received an Israeli patent for an animal model that would be used for the evaluation of vaccines as a part of its unique CIT technology. AMDL also has patents and patents pending claiming a novel model, and methods of using these models, derived through the CIT technology it believes will be far more useful than animal studies because AMDL's "humanized" mice have human-like immune systems.

The "humanized" mouse as claimed by AMDL has been engineered to possess a human-like immune system. This "transgenic" mouse is extremely useful for studying the potential therapeutic benefits of candidate gene therapy compositions.

Because the natural mouse immune system differs from the human immune system, experiments conducted in conventional mice are not always predictive of how new therapeutic compounds will work in humans.

However, transgenic mice made in accordance with AMDL's patents have an immune system more like a human's. Results obtained from experiments using this mouse may correlate significantly better than traditional animal models. That is why these mice are referred to as "humanized mice."

At this time it is not possible to ascertain the monetary value to AMDL for this patent during 2007.

FINANCIALS

On May 4, 2007, the Company conducted the closing of a combined private offering (“April 2007 Offering”) under Regulation D and Regulation S for the sale to accredited investors of shares of common stock and warrants to purchase a number of shares of common stock equal to one-half the number of shares sold in the April 2007 Offering.

AMDL received approximately $3,789,500 in aggregate gross proceeds, exclusive of placement agent fees and expenses of approximately $492,600 from the sale of a total of 1,443,620 shares. The shares were sold at a price of $2.625 per share, representing a discount of 25% from the average of the closing prices for the five consecutive trading days prior to the second trading day before the closing date. The exercise price of the warrant shares issued in the April 2007 Offering was $3.68. These dollars will be used for new production lines and distribution necessary for the new products recently announced, as well as general operations. The new products include: Ondansetron, Lomefloxacin, Docetaxel, and Levofloxacin.

Total assets decreased to $18,883,814 as of March 31, 2007 from $19,240,613 on December 31, 2006. This decrease was due primarily to decreases in cash, accounts receivable and inventories offset by increases in prepaid expenses and other current assets.

The company’s total outstanding indebtedness increased to $7,589,461 as of March 31, 2007 as compared to $6,577,457 on December 31, 2006. The primary reason for the increase is due to increases in accounts payable and accrued expenses and taxes payable.

From January 1, 2007 to March 31, 2007, AMDL’s cash and cash equivalents decreased by approximately $1,116,000, primarily due to working capital requirements of JPI and general and administrative expenses incurred by AMDL. Cash usage continues to exceed cash generation.

As of May 11, 2007, cash on hand was approximately $3,000,000 and cash is being depleted at the rate of approximately $200,000 per month.

This monthly amount does not include any expenditures related to further development or attempts to license CIT technology, as no significant expenditures on the CIT technology are anticipated other than the legal fees incurred in furtherance of patent protection..

Revenues

During the three months ended March 31, 2007, the Company generated aggregate net revenues of $1,424,179 from product sales.

AMDL - U.S.

Net revenues for AMDL domestic operation were $14,150 for the three months ended March 31, 2007 compared to $15,375 for the same period in 2006. There was a decrease in revenues from AMDL’s traditional products of approximately $1,225.

JPI - China

JPI’s net revenues were $1,410,029 for the three months ended March 31, 2007. Sales were adversely impacted by the temporary sales prohibition of Yuxingcao and delay of approval of the application of GMP license for manufacturing large injection fluids.

The GMP license application was completed at the end of November 2006 and manufacturing resumed. In addition, no sales were generated during the Lunar New Year holiday in February 2007 which also adversely impacted sales for the three months ended March 31, 2007.

The lack of production during this period was partially offset by an the increase in demand for Domperidon, increases in demand for other medical products in China and sales expansion to new regions.

Gross Profit

The Company’s gross profit for the three months ended March 31, 2007 was $726,869, of which $715,299 was contributed by JPI

AMDL - U.S.

Gross profit increased approximately 20% to $11,570 for the three months ended March 31, 2007 due to the adjustment of the cost of inventory on hand.

JPI - China

JPI’s gross profit for the three months ended December 31, 2006 was $715,299. The major components of cost of sales include raw materials, wages and salary and production overhead. Production overhead is comprised of depreciation of manufacturing equipment, utilities and repairs and maintenance. JPI’s gross profit was positively impacted by increased production efficiencies and manufacturing of products with higher margins.

Management anticipates future gross profit margins for JPI to remain at the same level for the year ending December 31, 2007, even with the introduction of new products.

Research and Development

Research and development expense for the Company for the three months ended March 31, 2007 was $11,776 compared to $47,648 for the same period in 2006.

AMDL - U.S.

All research and development costs incurred during the three months ended March 31, 2007 was incurred by AMDL. These costs comprised of funding the necessary research and development of the DR-70® test kit for the FDA as well as funding the application and research needed to receive approval from the SFDA for marketing the DR-70® test kit in China.

JPI - China

JPI currently performs all of its own research and development activities on new products at their own facilities, but only a nominal amount of research and development was conducted during the three month period ended March 31, 2007 by JPI.

General and Administrative Expenses

General and administrative expenses for the Company were $1,995,635 for the three months ended March 31, 2007.

AMDL - U.S.

AMDL incurred general and administrative expenses of $1,390,937, primarily consisting of consulting (including financial consulting) and legal expenses, director and commitment fees, regulatory compliance, professional fees related to patent protection, payroll taxes, investor and public relations, professional fees, and stock exchange and shareholder services expenses.

Also included in general and administrative expenses were non-cash expenses incurred during the three months ended March 31, 2007 of approximately $677,000 for common stock and warrants issued to consultants for services.

JPI - China

JPI incurred general and administrative expenses of $604,698 for the three months ended March 31, 2007. Major components were depreciation and amortization, payroll and related taxes, transportation charges, meals and entertainment and insurance.

Net Loss

As a result of the above, in the three months ended March 31, 2007, the AMDL’s net loss was $1,385,406, or negative18 cents per share.

Figure 1 - Financial Summary

OUR OPINION

We do not believe that even if it is approved in 2007, that DR-70® will have an appreciable effect on AMDL’s earnings in this calendar year. While we believe that receiving approval is certainly an important factor to the company’s ongoing success, we also believe that the importance of FDA approval has diminished somewhat in light of the company’s current and projected performance in China.

We currently are of the opinion that DR-70® is likely to be approved in China before the FDA acts on AMDL’s application. As such, we are basing our projection for AMDL’s performance 2007 exclusively on the performance of Jade.

With AMDL’s most recent round of funding now completed, we look for the additional funds to enable Jade to increase its net sales number by $12.8 million, thereby bringing Jade’s net revenues for the year 2007 to $14.2 million or about double what Jade did in 2006.

As Jade’s new distribution agreements develop their full potential, we believe that net sales will again double by the end of 2008, reaching a total of $28.4 million. That should result in gross profits for the company of about $7.1 million in 2007 and about $14.2 million in 2008, all without DR-70®.

Furthermore, we believe that Jade will be able to show a net profit at the close of 2008 of approximately $4.26 million, or 15 percent of net sales. With AMDL expected to have about 12.12 million shares outstanding after the recent financing that equates to a profit of about 35 cents per share.

In our estimation, AMDL will receive FDA approval for DR-70® sometime during the fourth quarter of 2007. As such DR-70® will not contribute significantly to 2007 revenues or profits.

However, we stand by our prior opinion that an approval by the FDA of DR-70® in 2007 will result in about $16 million in gross profits for AMDL in 2008, of which at least $12 million will fall to the bottom line pre-tax because the majority of all overhead expenses are already covered in the Jade numbers. The after-tax net should then be about $8 million, or about 66 cents per share.

With DR-70® approval, the two divisions of AMDL would show total earnings for 2008 of $12.26 million, or about $1.01 per share. Assuming a multiple of 22 times earnings, which is comparable other companies in the same industry, we are revising our 2008 target for AMDL’s shares to $22 per share.

From a risk viewpoint, we feel relatively certain that the Jade division will produce earnings of 35 cents per share in 2008. A multiple of 22 equates to $7.70 per share or nearly 100% above where the shares are trading today. Therefore, we feel that the downside risk is not only minimal but that there is an opportunity for substantial appreciation in the share price even without FDA approval of DR-70®.

AMDL, Inc.
2492 Walnut Avenue
Suite 100
Tustin, CA 92780

Gary L. Dreher, President and CEO

http://www.amdl.com

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