JAZZ - Avadel Pharmaceuticals' Strategic Moves To Conquer The Narcolepsy Market (Rating Upgrade)

2023-05-03 14:00:06 ET

Summary

• Avadel Pharmaceuticals has received full FDA approval for Lumryz, an extended-release formulation of sodium oxybate for the treatment of excessive daytime sleepiness and cataplexy in adults with narcolepsy.
• The drug's once-nightly dosing regimen gives it a competitive edge over Jazz Pharmaceuticals' twice-nightly dosing product, Xyrem.
• Avadel has secured up to $75 million in non-dilutive synthetic royalty financing from RTW, restructured $96.2 million of its convertible notes, and raised approximately $125 million from a public offering.
• Given the recent developments and Lumryz's potential in the oxybate market, the recommendation for Avadel Pharmaceuticals has been upgraded from "Hold" to a "Buy", reflecting the belief that Avadel is well-positioned to capitalize on the opportunities ahead.

Introduction

Avadel Pharmaceuticals ( AVDL ) is a commercial-stage biotechnology company that received full FDA approval on May 1 for its lead product candidate, Lumryz. Lumryz is an extended-release formulation of sodium oxybate and is indicated for the treatment of excessive daytime sleepiness [EDS] and cataplexy (sudden muscle weakness while awake) in adults with narcolepsy.

In my previous update on Avadel, I highlighted that Lumryz's unique drug-delivery technology sets it apart from Xyrem, which requires dosing twice-nightly, and that Lumryz has demonstrated significant improvements in the Phase 3 clinical trial REST-ON for the maintenance of wakefulness test, clinical global impression-improvement, and mean weekly cataplexy attacks. Despite these positive results, I also noted that Lumryz is still awaiting full FDA approval, and Avadel faces various risks, including legal, regulatory, and financial challenges, as well as competition from established players like Jazz Pharmaceuticals. Subsequently, I suggested "Hold" as my recommendation until these concerns were addressed

Recent events: On March 29, Avadel announced that RTW has agreed to provide Avadel with up to $75 million in non-dilutive synthetic royalty financing, while $96.2 million of Avadel's $117.4 million convertible notes that were due in October 2023 will now be due on April 1, 2027. Around $21.2 million in existing notes will remain outstanding with unchanged terms after the exchange. The royalty payments will be based on Lumryz's net sales in the US, subject to certain quarterly sales thresholds, and will become available upon meeting specific regulatory and financial milestones. Soon after, Avadel priced a public offering, generating around $125 million in gross proceeds.

Collectively, Avadel secured approximately $200 million to bolster its commercialization efforts.

The article informs investors about the recent developments concerning Avadel. These include the full FDA approval for Lumryz, the extension of its debt obligations, and the fundraising for the anticipated June commercialization of Lumryz.

Financials

Let's first review Avadel's most recent financial report . Avadel incurred higher research and development expenses of $6.2 million for the quarter ended December 31, 2022, mainly due to purchasing the active pharmaceutical ingredient for Lumryz. On the other hand, the company's selling, general, and administrative expenses decreased to $17.0 million, primarily due to lower marketing and commercial expenses. However, this was partially offset by higher legal costs. The company reported a net loss of $27.5 million, or ($0.44) per diluted share, for the quarter, compared to a net loss of $22.3 million for the same period in 2021. Avadel's cash, cash equivalents, and marketable securities were $96.5 million as of December 31, 2022, and the company extended the maturity of $96.2 million of its convertible notes to April 2027, while $21.2 million will mature in October 2023.

Avadel Pharmaceuticals Takes Crucial Steps Towards Success

Avadel has recently achieved significant milestones that are crucial to its future success. Firstly, the company's lead product candidate, Lumryz, obtained full FDA approval, demonstrating that it met the strict legal, safety, and efficacy standards set by the regulatory agency. This achievement significantly reduces the regulatory risk that had been previously highlighted, paving the way for Lumryz to become a major revenue stream for Avadel.

Secondly, Avadel has taken several steps to secure financing and restructure its debt. One of the most noteworthy developments was the agreement with RTW to provide up to $75 million in non-dilutive synthetic royalty financing. This financing allows the company to access funds without diluting current shareholder equity, which is advantageous for investors. The restructuring of $96.2 million of convertible notes, extending the due date from 2023 to 2027, provides Avadel with more financial flexibility and time to generate revenue from Lumryz before the debt is due. These moves are essential for the company's financial stability and long-term success, as they reduce the risk of default and improve Avadel's ability to invest in its growth.

Lastly, Avadel raised approximately $125 million in gross proceeds via a public offering. This additional capital enables the company to invest in the commercialization of Lumryz, further product development, and meet upcoming financial obligations. The successful public offering demonstrates investor confidence in Avadel's future and validates the company's strategy to become a leader in the narcolepsy market. With these funds, Avadel can accelerate its growth and create more value for its stakeholders.

Lumryz Approval Shakes Up The Oxybate Market Competition With Jazz Pharmaceuticals

The announcement of Lumryz's FDA approval and its grant of seven years of Orphan Drug Exclusivity has significant implications for both Avadel and the broader market, especially in relation to its competition with Jazz Pharmaceuticals ( JAZZ ) and their twice-nightly oxybate products.

Firstly, the fact that Lumryz has been found clinically superior (as evidenced by Orphan Drug Exclusivity) to current twice-nightly oxybate products signals a major advancement in the treatment of narcolepsy. This superiority is grounded in Lumryz's once-nightly dosing regimen, which eliminates the need for patients to wake up during the night to take a second dose. This advancement is likely to enhance patient compliance and improve treatment outcomes, which are significant benefits for both patients and healthcare providers.

The grant of Orphan Drug Exclusivity is also a significant milestone. The Orphan Drug Act was created to encourage the development of drugs for rare diseases that affect fewer than 200,000 people in the U.S. This legislation provides a variety of incentives for companies to develop such treatments, including tax credits for clinical trial costs, user fee waivers, and eligibility for seven years of market exclusivity upon FDA approval.

The seven-year market exclusivity awarded to Lumryz means that no other company can market a generic version of this drug in the U.S. for that time period. This protection can provide a substantial financial advantage for Avadel, allowing it to recover the costs of development and make a profit before facing competition from generic alternatives.

In relation to Jazz Pharmaceuticals, the FDA's approval of Lumryz could present a significant competitive challenge. Jazz Pharmaceuticals is well-known for its product Xyrem (sodium oxybate), which is approved for treating narcolepsy and is dosed twice-nightly. The introduction of Lumryz, a once-nightly alternative, could potentially erode the market share of Xyrem and other twice-nightly oxybate products.

Lumryz's Potential In Oxybate Market Depends On Market Dynamics And Expansion

Jazz Pharmaceuticals' oxybate products generate ~$2 billion in annual revenue and indicate a substantial existing market. Given Lumryz's clinical superiority and the convenience of once-nightly dosing, it stands to reason that it could capture a significant share of this market.

Assuming Lumryz is priced competitively with Jazz's products, capturing just 25% of Jazz's market share would equate to $500 million in annual revenue. If Lumryz could capture half of that market, that would translate to ~$1 billion in annual revenue.

However, there are factors to consider beyond simple market share capture:

1. Market Expansion : If Lumryz's superior clinical profile and convenience of use result in higher treatment rates (i.e., treating more of the existing patient population who may not have been on medication), this could effectively expand the market, leading to potential revenues beyond the current ~$2 billion.

2. Premium Pricing : Given its clinical superiority, Lumryz may command a premium price compared to Jazz's oxybate products, which could further increase potential revenues. However, this depends on various factors including reimbursement policies, patient affordability, and the perceived value of the improved dosing schedule.

3. Market Dynamics : The introduction of Lumryz could also affect the pricing and sales of Jazz's oxybate products. They might respond by lowering their prices or increasing their marketing efforts, which could affect how much of the market Lumryz ultimately captures.

My Analysis & Recommendation

Avadel Pharmaceuticals has recently achieved significant milestones that position it for success. Lumryz, the company's extended-release formulation of sodium oxybate, obtained full FDA approval, with potential to capture a significant share of the oxybate market due to its once-nightly dosing regimen. Avadel has also addressed its financial challenges by securing up to $75 million in non-dilutive synthetic royalty financing and raising around $125 million through a successful public offering. The Orphan Drug Exclusivity granted to Lumryz provides the company with seven years of market exclusivity, potentially creating a significant financial advantage. However, Lumryz's market penetration depends on factors such as market expansion, potential pricing, and competition from Jazz Pharmaceuticals. If Lumryz can leverage its clinical superiority and convenience, it could generate substantial revenue for Avadel.

Based on the aforementioned developments, and considering the potential of Lumryz in the oxybate market, my recommendation for Avadel Pharmaceuticals is now upgraded from "Hold" to a "Buy". This reflects the belief that Avadel is well-positioned to capitalize on the opportunities ahead, and that its recent actions have significantly de-risked its business model. Potential investors should, however, remain cognizant of the competitive dynamics within the pharmaceutical industry and the ongoing financial needs of Avadel.

Risks To Thesis

While Avadel Pharmaceuticals has demonstrated promising progress, there are several risks to consider that could potentially offset my bullish thesis:

1. Market Penetration and Adoption: Lumryz's success heavily depends on its ability to penetrate the market and gain significant adoption among physicians and patients. Despite its clinical superiority and the convenience of once-nightly dosing, there may be challenges in convincing physicians to switch their patients from established therapies to Lumryz.

2. Competitive Response: Jazz Pharmaceuticals, the maker of Xyrem, could potentially respond with aggressive marketing or pricing strategies that could limit Lumryz's market share. It's also possible that Jazz or another company could develop a competitive product that matches or surpasses Lumryz's benefits.

3. Reimbursement Challenges: While Lumryz may offer clinical benefits, its pricing could impact its adoption. If it is priced at a premium, it may face challenges in securing adequate coverage from insurance companies, which could limit patient access and market penetration.

4. Regulatory Risks: While Lumryz has received FDA approval, it could face additional regulatory challenges. For instance, post-marketing studies could reveal unforeseen side effects, or regulators could require additional data or studies.

5. Operational Risks: The successful commercialization of Lumryz will require effective sales, marketing, and distribution operations. If Avadel encounters difficulties in these areas, it could impact Lumryz's market success.

6. Financial Risks: Despite the recent financing, Avadel will need substantial resources to fully commercialize Lumryz and continue its other operations. If the company's financial condition worsens or if it cannot secure additional necessary funding, it could impact the firm's operations and Lumryz's success.

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