Executive Summary / Key Takeaways

• Adial Pharmaceuticals is a clinical-stage biopharmaceutical company focused on developing AD04, a genetically targeted therapy for Alcohol Use Disorder (AUD) in patients with specific genotypes, positioning it in the precision medicine segment of the addiction treatment market.
• ADIL's core technology lies in identifying specific serotonin-related gene variations (HTR3A, HTR3B, SLC6A4) that predict a patient's response to AD04, aiming for potentially higher efficacy and lower side effects compared to non-targeted therapies.
• Recent positive regulatory feedback from the FDA on AD04's in-vitro bridging strategy and acceptance of heavy-drinking-day and WHO risk reduction endpoints are critical steps advancing the program towards a planned Phase 3 study in the second half of 2025.
• Financially, ADIL is a pre-revenue company with recurring losses and a significant accumulated deficit ($84.22 million as of March 31, 2025). Recent financing activities, including a May 2025 warrant exercise yielding approximately $2.35 million net proceeds, are expected to fund operations into the fourth quarter of 2025, but substantial additional capital is required for planned Phase 3 trials ($8M-$12M each).
• The Company faces significant risks, including its ability to secure necessary future funding, potential dilution from equity raises, and maintaining its Nasdaq listing compliance, which raise substantial doubt about its ability to continue as a going concern.

A Targeted Approach to Addiction: The ADIL Story

Adial Pharmaceuticals is carving out a niche in the challenging landscape of addiction treatment, focusing on a precision medicine approach to Alcohol Use Disorder (AUD). Founded initially in 2010 and reincorporated in Delaware in 2017, the Company has dedicated its efforts to developing therapies for addiction and related disorders. While its history includes exploring other areas, notably through the now-divested Purnovate subsidiary focused on non-opioid pain, Adial's core identity and strategic focus remain firmly centered on its lead investigational drug candidate, AD04, for AUD.

The market for AUD treatments is substantial, yet existing therapies often face limitations in efficacy and patient response due to their broad, untargeted mechanisms. Adial's strategy directly addresses this by identifying specific patient populations most likely to benefit from AD04, leveraging a companion diagnostic genetic test. This approach aims to offer a more effective and personalized treatment option, potentially improving outcomes and reducing the burden of this widespread disorder.

The Precision Edge: AD04's Technological Differentiator

At the heart of Adial's investment thesis is AD04, a serotonin-3 receptor antagonist. While the active ingredient, ondansetron, is known, Adial's innovation lies in its application as a genetically targeted therapy. The Company's research indicates that patients with specific variations in serotonin-related genes, including certain genotypes of HTR3A, HTR3B, and SLC6A4 (such as the LL genotype of 5-HTTLPR in combination with variations in rs1150226, rs17614942, and rs1176713), are more likely to respond positively to AD04.

This genetic targeting is the Company's primary technological moat. Based on competitive analysis and ADIL's clinical data, this precision approach offers several potential advantages over non-targeted therapies:

• Enhanced Efficacy: The genetic targeting is designed to achieve 20-30% greater efficacy in reducing alcohol cravings and heavy drinking days in the identified patient subgroup compared to treating an unselected population.
• Reduced Relapse Rates: Clinical data suggests the potential for 15-20% lower relapse rates in genetically predisposed patients treated with AD04.
• Faster Onset of Action: AD04 could offer a potentially 25% faster onset of action in trials, which could improve patient adherence and outcomes.
• Improved Safety Profile: By targeting a specific mechanism in a responsive population, the approach may lead to a 10-20% reduction in side effects compared to broader treatments.

These quantifiable benefits, if confirmed in further trials and reflected in commercial performance, could translate into stronger customer loyalty, potentially allowing for 10-15% higher pricing power post-approval and boosting future gross margins by an estimated 20%. The Company has also been strengthening its intellectual property around this approach, receiving new U.S. patents in February and May 2025 covering methods for identifying genetic markers and administering AD04 as a precision medicine for addiction.

Adial continues R&D efforts, including developing clinical supplies for the upcoming Phase 3 program and revalidating its companion diagnostic. While specific target metrics for next-generation versions of AD04 are not detailed in the recent filings, the strategic intent is clear: leverage genetic insights to optimize treatment response and differentiate AD04 in the market.

Navigating the Competitive Currents

Adial operates within the broader addiction treatment market, competing with established players and other biotech companies developing novel therapies. Key direct competitors include Alkermes (ALKS), Indivior (INDV), and Axsome Therapeutics (AXSM), each with their own focus and market position.

Alkermes, with products like Vivitrol for AUD, holds a significant market share and boasts established revenue streams ($1.1 billion in 2023) and positive financial metrics (gross margins 75-80%, net margins 10-15%). Indivior specializes in opioid dependence treatments with products like Sublocade, also generating substantial revenue ($1.0 billion in 2023) and positive cash flow. Axsome Therapeutics focuses on CNS disorders, including depression, and while pre-profit, shows high revenue growth rates from recently launched products.

Compared to these larger, revenue-generating peers, Adial is a clinical-stage company with no approved products and zero revenue. This places it at a significant financial disadvantage, reflected in its negative operating cash flow (-$1.59 million in Q1 2025) and substantial accumulated deficit ($84.22 million). ADIL's R&D investment, while increasing (up 65% to $747 thousand in Q1 2025), is a much larger proportion of its overall expenses (nearly 100% of operating expenses are R&D and G&A) compared to peers like ALKS (20-25% of revenue) or AXSM (60-70% of revenue), highlighting the high burn rate relative to its size.

However, Adial's competitive positioning hinges on its differentiated technology. While ALKS and INDV offer broad-market solutions, ADIL's genetic targeting provides a potential edge in efficacy and patient response for a specific subgroup. This precision approach could allow ADIL to capture a niche market share post-approval, potentially eroding the broader market dominance of competitors by offering a superior option for responsive patients. The competitive analysis suggests ADIL's innovation speed in this specific AUD niche could outpace the development cycles of larger, more diversified companies, although its smaller scale and financial constraints pose significant challenges to rapid market entry and scaling. Indirect competitors like digital therapeutics also present a challenge, offering lower-cost alternatives, which could impact ADIL's potential pricing power and market penetration.

Adial's strategic response is to focus intensely on the regulatory pathway for AD04 in the genetically targeted population and seek partnerships to leverage larger distribution networks, acknowledging its own limitations in scale and financial resources compared to established players.

Operational Progress and the Path to Phase 3

Adial's operational focus is squarely on advancing AD04 through the regulatory process. The Company completed the Phase 3 ONWARD trial, which showed promising results in reducing heavy drinking in heavy drinking patients within the target genetic subgroups, with no overt safety or tolerability concerns.

Recent interactions with the FDA have been crucial. In April 2023, the FDA reaffirmed the acceptance of heavy-drinking-day based endpoints for AUD approval, a significant regulatory clarity. In January 2025, the FDA further accepted a 2-level reduction of WHO risk drinking levels as another acceptable efficacy endpoint. Most recently, on February 4, 2025, Adial received a positive response from the FDA regarding its proposed in-vitro bridging strategy for AD04, a key step to support the 505(b)(2) regulatory pathway which allows leveraging existing data for the active ingredient. This positive feedback enables the Company to proceed with manufacturing clinical supplies for the next Phase 3 program.

Adial is preparing for its next FDA interaction to confirm the Phase 3 clinical plan in the United States. The Company plans to begin a Phase III study in the second half of 2025. To support this, a contract for approximately $2.3 million has been signed with a vendor to produce sufficient drug product for the study, validate the manufacturing process, and manufacture registration batches.

Financial Health and the Funding Imperative

As of March 31, 2025, Adial held $2.37 million in cash and cash equivalents, down from $3.75 million at December 31, 2024.

The Company's net loss for the three months ended March 31, 2025, was $2.23 million, compared to a net loss of $6.48 million for the same period in 2024 (the prior year included a significant non-cash inducement expense).

Operating expenses increased to $2.27 million in Q1 2025 from $1.85 million in Q1 2024, primarily driven by a 65% increase in R&D expenses ($747 thousand vs. $454 thousand) related to CMC and consulting costs for the upcoming program, and a 9% increase in G&A expenses ($1.52 million vs. $1.39 million).

Cash used in operating activities was $1.59 million in Q1 2025, a slight decrease from $1.63 million in Q1 2024, mainly due to changes in working capital.

Investing activities provided $150 thousand in Q1 2025, related to a milestone payment received from the Adovate divestiture. Financing activities provided $51 thousand in Q1 2025 from the sale of common stock under the new SEPA, significantly lower than the $3.82 million raised in Q1 2024 primarily from warrant exercises.

Subsequent to the quarter, as of May 12, 2025, the cash balance increased to approximately $3.9 million, primarily due to net proceeds of approximately $2.35 million from a warrant inducement transaction that closed on May 5, 2025. This transaction involved the immediate exercise of existing warrants at a reduced price and the issuance of new warrants exercisable upon stockholder approval.

Despite these recent funds, the Company explicitly states that its existing cash and cash equivalents are expected to be sufficient to fund operations only into the fourth quarter of 2025. The estimated direct expenses for the two additional Phase 3 trials currently expected are substantial, ranging from $8 million to $12 million each, plus up to $5 million in additional other development expenses. This highlights a significant funding gap that must be addressed to complete the clinical development program.

The Company has incurred recurring losses since inception, resulting in an accumulated deficit of $84.22 million as of March 31, 2025. These factors, particularly the limited cash runway relative to significant future development costs and the lack of committed funding sources, raise substantial doubt about Adial's ability to continue as a going concern.

Key Risks and Challenges

Investing in Adial involves significant risks inherent in clinical-stage biopharmaceutical companies. The most prominent risks include:

• Going Concern Risk: The Company's limited cash runway and need for substantial additional funding to complete planned clinical trials raise significant doubt about its ability to continue operations. There is no assurance that necessary financing will be available on acceptable terms, or at all.
• Financing and Dilution: The need to raise significant capital will likely result in future equity or debt financings. Equity raises, including through the existing SEPA and exercise of outstanding warrants (4.20 million warrants with a weighted average exercise price of $8.45 and 739,999 options with a weighted average exercise price of $9.64 as of March 31, 2025), will cause significant dilution to existing stockholders.
• Clinical Trial Success: The success of AD04 hinges on the outcome of future Phase 3 trials. Clinical trials are inherently uncertain, and AD04 may not demonstrate sufficient safety or efficacy to gain regulatory approval.
• Regulatory Approval: Even with positive trial results, obtaining FDA and other regulatory approvals is a complex and lengthy process with no guarantee of success.
• Nasdaq Listing Compliance: The Company has faced challenges maintaining compliance with Nasdaq listing requirements, including the minimum bid price and stockholders' equity rules. As of March 31, 2025, stockholders' equity ($2.13 million) was below the $2.5 million minimum requirement, and the Company received a minimum bid price notice in March 2025. Failure to regain and maintain compliance could result in delisting.
• Competition: The addiction treatment market is competitive. Even if approved, AD04 will face competition from existing therapies and new entrants. Adial's smaller scale and lack of established commercial infrastructure are disadvantages compared to larger competitors.

Conclusion

Adial Pharmaceuticals presents a compelling, albeit high-risk, investment narrative centered on its precision medicine approach to Alcohol Use Disorder. The Company's lead candidate, AD04, leverages a genetically targeted strategy that holds the potential for improved efficacy and patient outcomes in a specific subgroup, offering a differentiated value proposition in a market with significant unmet needs. Recent positive regulatory feedback and concrete plans to initiate a Phase 3 study in the second half of 2025 represent critical milestones in advancing this thesis.

However, the path forward is heavily dependent on securing substantial additional financing. The estimated costs for the planned Phase 3 program far exceed the Company's current cash position, and the explicit going concern warning underscores the urgency of this need. While recent financing activities have provided a temporary bridge, the ability to raise the necessary millions to complete trials and pursue regulatory approval remains the paramount factor determining Adial's future. For investors, the story of Adial is one of potential breakthrough science in a large market, balanced against the significant financial hurdles and execution risks inherent in bringing a novel, genetically targeted therapy from clinical development to commercialization. The investment thesis hinges on the successful navigation of these challenges and the realization of AD04's promise in the clinic.