JAZZ - Avadel: Lumryz Lights Up The Oxybate Market Maintaining Buy Rating

2023-11-14 16:00:00 ET

Summary

• Avadel Pharmaceuticals reported strong Q3 earnings for Lumryz, exceeding consensus estimates and demonstrating successful market launch.
• Avadel's strategic market positioning and focus on high-volume prescribers contribute to its strong market position.
• Avadel is actively pursuing opportunities for expansion, including new indications and a low sodium formulation, to drive future growth.
• We maintain a buy rating moving into 2024.

Executive Summary: Q3 earnings update

Avadel Pharmaceuticals ( AVDL ), with its flagship product Lumryz, presents a compelling investment opportunity moving into 2024. This report delves into the rationale behind maintaining a 'Buy' rating for AVDL, emphasizing the company's strategic market positioning, unique product offering, and robust financial performance.

In the third quarter of 2023, Lumryz reported sales of $7M, surpassing consensus estimates of $5M. The product's successful launch is evidenced by the growing number of prescribers, patient enrollments, and positive feedback from the medical community. The substantial increase in REMS certifications and patient enrollments in the RYZUP program highlight Lumryz's growing acceptance in the medical community and among patients. We believe the launch of Lumryz has been met with robust demand, as evidenced by the high number of patient sign-ups and the increasing number of treated patients. The product’s pricing strategy, low discontinuation rates, and favorable payer coverage further reinforce its strong market position. These factors collectively indicate a successful market introduction with potential for sustained growth.

Avadel's strategy leverages Jazz Pharmaceuticals' prior investments in the oxybate market, allowing for enhanced operating margins for Lumryz. This approach indicates a potential for high profitability with lower incremental marketing and development costs. We believe Avadel’s commercial strategy for Lumryz has been effective, reflected in the extensive payer coverage that now includes over 100 million commercially insured lives. This coverage represents approximately 60% of the total commercially insured population, indicating significant market penetration. The focus on high-volume prescribers, who account for the majority of oxybate prescriptions, demonstrates a targeted and efficient marketing approach.

Future Growth Prospects and Lifecycle Management

Avadel is actively pursuing opportunities to expand Lumryz's indications. The submission of an sNDA for pediatric patients and the initiation of a study on idiopathic hypersomnia by the end of 2023 represent significant steps in this direction. These expansions, coupled with the development of a low sodium formulation, signal Avadel's commitment to innovation and market expansion.

Attractive Market Dynamics and Growth Opportunities

The oxybate market is witnessing significant growth, driven by an increase in narcolepsy diagnoses, the advent of once-nightly oxybate options, and the expansion of treatment indications. Avadel, through Lumryz, is poised to capitalize on this market expansion. The market's potential is further enhanced by the introduction of Xywav for the hypersomnia indication, creating new patient segments and broadening the market scope.

Product Differentiation and Market Share Prospects

Lumryz’s once-nightly dosing regimen positions it uniquely in the oxybate market, primarily dominated by twice-nightly options. This distinct feature is anticipated to capture a 20-30% market share (BTVI estimate). Lumryz’s ease of use and compliance-friendly profile are key differentiators that are likely to attract patients, especially those transitioning from existing treatments like Xyrem and Xywav. Lumryz’s unique once-nightly formulation provides it with a competitive edge over existing treatments. Despite potential market challenges, including the entry of generics, Avadel’s strategic positioning and focus on differentiating Lumryz suggest a resilient growth trajectory. The company’s proactive approach to lifecycle management and market expansion further bolsters its long-term viability.

Financials

With a cash reserve of approximately $153M as of Q3 2023, Avadel is well-positioned to sustain its growth trajectory. Considering that the company spent ~$35M during Q3 2023, with the rising sales of the lead program, we expect the company to have at least 1.5+ years of cash runway (with a conservative estimate), which is highly reassuring for an SMID cap biotech first launching.

Valuation

Using consensus sales of $325M (bellow), using a conservative peak sales multiple of 3, the stock should be trading at $970M enterprise value, which is around 15% additional upside from the current level. We note that this estimate may be too conservative because the management has indicated that they expect $1Bn of peak sales in the future.

Risks

1. Competitive Market Dynamics : The narcolepsy treatment market is highly competitive, with established players like Jazz Pharmaceuticals, which markets Xyrem and Xywav. These companies have a strong foothold in the market and significant resources to counter new entrants. The arrival of new treatments or improvements in existing therapies could erode Lumryz's market share or limit its growth potential.

2. Dependence on Lumryz : Avadel's current and future financial performance is heavily reliant on the success of Lumryz. This dependency creates a risk if Lumryz fails to meet sales projections, encounters unforeseen market resistance, or faces issues like adverse clinical findings or regulatory challenges.

3. Payer Coverage and Pricing Pressure : While Lumryz has made significant strides in securing payer coverage, continued success in this area is not guaranteed. Changes in healthcare policies, insurance coverage, or pricing pressures, especially with the potential entry of generics or low-cost alternatives, could negatively impact Lumryz's market penetration and profitability.

4. Regulatory and Legal Risks : The pharmaceutical industry is subject to rigorous regulatory requirements. Any failure to comply with these regulations, or changes in the regulatory landscape, could adversely affect Lumryz’s market standing. Additionally, patent disputes or litigation could result in financial burdens or restrictions on Lumryz's sales.

5. Market Adoption and Physician Prescribing Habits : The shift from established treatments to Lumryz hinges on physician prescribing habits and patient acceptance. Despite its benefits, there may be reluctance to switch from familiar treatments to a new therapy. Achieving a significant change in prescribing behavior requires time and substantial marketing efforts.

Conclusion

Net-net, we maintain a buy rating after the positive Q3 2023 earnings. We believe Avadel Pharmaceuticals presents a robust investment case backed by its strategic market positioning, innovative product offering, and strong financial performance. The company’s ability to capitalize on emerging market opportunities, combined with its operational efficiency and proactive lifecycle management, supports a bullish outlook for AVDL in the oxybate market.

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