AVDL - Avadel May Continue To Outperform With Positive Launch Momentum

2024-01-11 11:31:29 ET

Summary

• Avadel Pharma's launch of its product LUMRYZ is expected to drive the company's stock performance.
• LUMRYZ appears to have momentum and is differentiated from current narcolepsy treatments.
• The potential revenue for Avadel from LUMRYZ could ultimately range from $500 million to $2 billion, depending on market share and expansion into new indications.
• If things continue to go well, that might drive the share price beyond current levels on a multi-year view, but execution risks do remain.

Avadel Pharmaceuticals (AVDL) received FDA approval for LUMRYZ in May 2023 . Early data suggests the launch has gone well and, prior to this, the company, was loss-making, so as basically a one product company the launch is likely to drive the stock for better or worse.

Launch Momentum Is Important

A McKinsey study from 2014 found that most drug launches underperform expectations. The drivers of a successful launch aren't too surprising, but a differentiated product is obviously crucial to launch success.

As investors, successful launches can be an important driver of return, and though there's a lot of celebration once FDA approval is obtained, achieving commercial success can sometimes be even more challenging than achieving FDA approval.

LUMRYZ Appears To Have Momentum

Now, LUMRYZ appears to have real momentum. We can come at this two ways. Firstly the product appears to be demonstrably superior to current offerings, so we can have some a prior conviction that the launch will go well. Secondly, we're seeing encouraging signs in early sales data that might confirm that initial hypothesis.

Why Is LUMRYZ Differentiated?

The frustrating thing about current solutions to narcolepsy, which can cause sleep problems among other things, is that you have to get up in the middle of the night to take a second dose of the medication (sodium oxybate).

Obviously, a solution to help you sleep that requires you to take more drugs 4 hours after you've gone to bed is imperfect, and many patients are simply unable or unwilling to follow the prescribed regime and give up.

Avadel have shared data showing that 65% of patients on a two-dose regime have missed a dose in the past 3 months and generally felt worse the next day as a result. Also, Avadel's studies suggest patients on existing medication give up at a rate of 20%-25% after a month and 40%-50% after a year. ( see Avadel Jan 2024 investor presentation for study data ). This is important as Avadel may have a very real opportunity to grow the market here with a superior product. Growing a market with something new and different is somewhat easier than a head-to-head battle for market share.

Market Size

Also, for further reference, competitor Jazz Pharmaceuticals expects approximately $1.9B in revenue (on recent guidance) from its sleep medications Xywav, Xyrem and associated royalties in 2023.

However, this is not apples-for-apples since these products address both narcolepsy and idiopathic hypersomnia - IH. Furthermore, Xywav is a low-sodium version of Xyrem which is helpful for patients with high blood pressure.

That said, Avadel has plans to broaden its offering to include IH indications, low-sodium dosing and pediatric approval. The latter approval for under 18s could come in September 2024.

Potential Revenue

In Q4 2023 LUMRYZ delivered $19M of revenue, compared to $9M for Q3. The company said the following. "The majority of RYZUP enrollments and patients currently being treated with LUMRYZ are patients who switched from first generation oxybates, with the balance made up of patients who previously tried and discontinued a first generation oxybate and patients who are new to oxybate treatment." (source, Jan 8, 2024, 8-K).

If Jazz's $1.9B of revenue from similar products also excludes a large number of patients who have discontinued treatment, then Avadel may be able to both take share and grow the overall market. For example, if 40% of patients discontinue treatment within a year, then maybe the true addressable market size is closer to $3B or more for Advadel's single dose product. Though of course, Avadel has work to do to potentially broaden the indication to IH, achieve pediatric approval and create and get approval for a low-sodium dose.

On this basis it appears medium-term revenue for Avadel could fall somewhere in the range of $500M (25% share of the current market) to $2B (66% share of an expanded market). Of course, these are rough parameters and the ultimate results could fall outside of these ranges.

Again looking at Jazz, pre-tax operating margins before R&D expense are around 50%. That would suggest operating profits for Avadel of $250M to $1B on a steady-state basis at scale in a few years before R&D costs or tax.

Then looking at valuation estimates:

Notes: P/S and P/E based on current market multiples for pharmaceutical companies. Assume 95M shares out (implies a small capital raise from current 89M shares outs) for earnings, I assume 50% cash operating margin before R&D which I estimate at $100M (that's maybe a little punitive) and a tax rate of 25%.

The average of those 4 scenarios above is $50/share. Clearly it will take some time for the company to reach scale and there are risks along the way, so if we assume maturity in 2027 and discount back at 12% for the three years between then and now that's a target price of $38/share today, significantly above today's price of $15/share. Of course, if execution goes well that target price would increase over time as time passes with successful execution.

Conclusion

Avadel still have material work to do to get LUMRYZ to scale in terms of distribution and to broaden indications with FDA approval. This won't be fast or easy and bumps along the way are highly likely. Still, as of now, it appears to be a superior offering with sales momentum. It appears that the market may be understating the longer term potential of this company for patient investors and a steady stream of improving quarterly sales data over the coming years may be the catalyst.

Risks

• There's a lot of execution risk now, despite the launch in 2023 the company continues to be loss-making. Sales may ramp slower than expected or not ramp at all.
• Avadel may not obtain indications for IH, low-sodium dosing or use in children, or this may take longer than expected.
• The company might choose to raise capital to support further launch activities and help them scale faster. This and/or management compensation may be dilutive to equity holders.
• Like any drug, there are risks that material issues or further potential side effects are discovered with broader usage.
• The competitive reaction of Jazz Pharmaceuticals, pressure from related generic offerings or others in the market could decrease the overall market size or prevent Avadel from growing share.
• Avadel may be acquired at less than the target prices indicated, which could cap upside for investors.
• Pharmaceutical and market sentiment may weigh on the company's share price, regardless of its own execution.

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