AVDL - Jazz Pharmaceuticals: Xywav Debate Continued Drag On Equity Performance

2023-07-21 14:01:24 ET

Summary

• Jazz Pharmaceuticals' share price has languished in FY'22 with a number of pressures on its Xywav label.
• The FDA has supported the competing Lumryz label, stating it is clinically superior to Xywav, chiefly due to its once-nightly dosing regimen.
• JAZZ has sued the FDA in response, hence, the debate continues to roll on, and this could be a drag on equity performance.
• Net-net, reiterate hold.

Investment Briefing

Following my February publication on Jazz Pharmaceuticals plc ( JAZZ ) there have been numerous updates to the investment debate. I'm not going to waste time in the introduction here today—instead, I'm going to get straight into the analysis and the discussion for the benefit of readers. There's lots to unpack, and investor time is money. Plus, with the latest updates, this only adds uncertainty to the picture. Net-net, I continue to rate JAZZ a hold, viewing the fallout of its Xywav vs. Lumryz debacle as a meaningful drag on its equity performance.

Figure 1. JAZZ YTD price evolution

Updates to Investment Facts

1. Background For Context

You might remember JAZZ was/is locked in a battle with narcolepsy competitor Avadel Pharmaceuticals ( AVDL ) over the latter's FDA approval of its Lumyrz label. This all started with a quandary over the active ingredient in both brands, sodium oxybate. JAZZ alleged AVDL infringed on its Xyrem label, having utilized the active compound in Lumryz. For reference, I've covered this issue extensively in the past, and rated AVDL a buy in December last year. AVDL is up 65% since that point.

As mentioned, JAZZ has sued AVDL at every possible step of the way in order to prevent the approval of Lumryz. And it's pretty clear why— it is now at a run-rate of $1Bn in annualized sales for JAZZ, and the company projects $2Bn in sales by FY'25 from the compound. Naturally, you would defend this kind of economic compounder.

Critically, the company made several submissions as to why Lumryz should be blocked, including (in the nature of):

• That Lumryz is, in effect, the "same drug" as Xywav, and thus approval should be blocked until July 2027, when Xywav's ODE expires.
• That Xywav is clinically superior on safety and efficacy grounds.
• That Lumryz does not make a major contribution to patient care ("MCTPC").
• Dosage for Lumryz cannot be adjusted, whereas Xywav (and Xyrem) dosages can be (although we know that Lumryz comes in 4 separate dosage regimes, so this is factually untrue).
• Perhaps most speculatively, that Lumryz may have higher rates of illegally transferring the drug to another person, a process known as diversion.

There were many, many more arguments, some valid, some not so. This, and the several court hearing's that have ensued, and the fact Xywav—now JAZZ's preferred label after rolling patients off its Xyrem compound—has a niche indication in the treatment of idiopathic insomnia ("IH").

Despite all efforts to prevent Lumryz's entrance, the market looks to have seen the wood from the trees. Just take a look at AVDL's equity line vs. JAZZ's since December last year. The divergence in performance is startling. If you believe the market is an accurate judge of fair value, as I do, this is critical information going forward. Remember, a company's stock price is a set of future expectations discounted at a particular rate to the present. Hence, an uptick in share price typically equals an uptick in expectations. The same is also true on the downside. If these trends continue moving forward, this is telling on what the market expects for both companies into the future. Right now, however, AVDL has the lead in my opinion, based on the chart below.

Figure 2. Divergence in JAZZ and AVDL stock price.

2. Updates to Critical Facts

a. FDA granting orphan drug exclusivity

Despite the multiple efforts by JAZZ to silence the competing label, the FDA has chimed in and completely dismantled JAZZ's case against blocking the approval of Lumryz in my opinion. In a 132-page report from May, it determined that "Xywav’s unexpired orphan-drug exclusivity (“ODE”) does not block approval of Lumryz".

The case was clearly presented as to why the FDA believed Lumryz was in fact clinically superior to Xywav, claiming many of JAZZ's arguments were moot. Thinking in first principles, one may or may not side with the FDA, JAZZ, or AVDL. Both compounds are, after all, tangible treatments for narcolepsy.

There is a stark difference between the two competing labels, however— Lumyrz is to be taken once daily, whereas Xywav is a bi-daily regimen. For those living with narcolepsy—a condition that impacts the sleep-wake cycle and has a meaningful impact on patients' lives—it could be argued that Lumryz is a more appealing solution:

• The goals when treating narcolepsy are to achieve a degree of normalcy within the standard sleep architecture. That is, get a good night's sleep. This serves to increase alertness at crucial points throughout the day, especially when driving, or at work for example. Oxybates have been designed to achieve results for sleeping at night, hence their popularity.
• However, put yourself in the patient's shoes for a second. You have a disorder. It affects your sleep, causing you to fall asleep and wake at basically random intervals throughout the day and night. Does it make sense to have to wake up in the middle of the night, to take a second dose of your medicine? Or, is it potentially efficient—and safer—to ingest a single dose during the day?

My informed estimate is the latter, which is precisely why Lumryz is such a potential disruptor in this space. The FDA agreed on this point, and from the wording in its report, this was central to its final decision:

...As explained...waking up to take a second dose of Xyrem and Xywav is antithetical to the goal of improving sleep. This is compounded by the fact that narcolepsy is a chronic condition and patients may need treatment for the remainder of their lives...

...FDA has concluded that Lumryz is clinically superior to Xywav as a MCTPC given the benefit of Lumryz’s once-nightly dosing despite Xywav’s greater safety due to reduced sodium.

And finally:

OOPD finds that Lumryz makes a MCTPC over Xyrem and Xywav by providing a once-nightly dosing regimen that avoids a nocturnal arousal to take a second dose...".

In other words, Lumryz is more effective at getting the job done, regardless of JAZZ's arguments about safety. In fact, the FDA went so far as to say that Lumryz was even "clinically superior" to Xyrav/Xyrem, thus justifying its own ODE.

b. JAZZ's reactions

What did JAZZ [predictably] do in reply? It sued the FDA .

The same arguments were produced— that Lumryz could "compromise patient safety" and "undermine" patient care, that the FDA went beyond its authority, that the decision wasn't consistent with the scientific literature. JAZZ argues that it is the patients who will suffer with this decision, because they will be put at greater risk, without any demonstrable increase in treatment efficacy. It argues this because Lumryz has a higher sodium content, and thus could be a safety concern for patients, especially for those with sodium contraindications (in those with heart disease, or hepatic dysfunction, for example).

I can't help but wonder what the outcome of JAZZ's latest moves will be. To date, all court decisions, and the FDA itself, have been in support of the once-daily regimen of Lumryz. I'm not even quite sure if suing the FDA will prevent the commercialization of Lumryz either—I've been unable to get clarity from my legal colleagues either (perhaps one of my readers can comment in the section with further clarifications).

As to suing the FDA—there have been a handful of companies who've successfully litigated against the administration. In 2019, a consortium of healthcare associations won their case against the FDA claiming it allowed e-cigarettes to remain on the market without authorization, after a 5-year long delay.

Just this year, Vanda Pharmaceuticals ( VNDA ) won its long-running standoff with the FDA over approval of its Hetlioz label, indicated in jet lag disorder. Hetiloz was originally rejected in 2018, and VNDA sought a hearing to appeal. VNDA then sued the FDA, claiming it failed to hear the company within a timely manner, and the Court agreed. Notably, whilst it was successful in this instance, it was unsuccessful in an additional two filings against the FDA in 2020.

There are more examples of wins and failures when siding up against the FDA, but critically, each case has its own individual combinations and permutations. It is therefore impossible to project or predict the outcome of JAZZ's proceedings.

Discussion

The question is what does this all mean for JAZZ moving forward. Naturally, the main 'threat' of the Lumryz decision is that its approval eats into the market share of its Xywav market. And this is a very real risk in my opinion. One simply cannot deny the logical benefits of a once-daily treatment, that prevents having to wake up in the night, for those suffering a sleep disorder. This is fairly clear cut, and the FDA's tremendously extensive review into this found exactly the same principles were beneficial to the most important party in all of this debacle— the patients.

At the end of the day, it is the patients who are set to benefit from the competing label in my opinion. Clinically superior means just that—providing superior outcomes. Patient's deserve only the best standard of care available, and that means when a better alternative arrives, they should have access to it. I am all for patent protection over intangible assets like drug formulations. It is my belief that IP is an integral part of producing innovative research and helping provide breakthroughs in complex disease segments, notwithstanding the economic benefits to the company.

But it appears as if the final word has been spoken on "the oxybate wars", as was so eloquently put by Seeking Alpha author Out of Ignorance in their coverage . Next steps are to see what the outcome of JAZZ's litigation against the FDA produces. Xywav also has its roots grounded in the IH market, and is the only approved compound to treat this condition. But, the FDA is at direct loggerheads with JAZZ over Lumyrz and Xywav, and has "determined that Avadel has demonstrated Lumryz’s clinical superiority to every previously approved oxybate drug for the same use or indication, i.e., both Xywav and Xyrem."

Hard to argue with this, without opening up an entire new subset of court cases, litigation, etc.

In that vein, I continue to rate JAZZ a hold. It has more going on than just narcolepsy, and that must be factored in as well. But we can't discount the potential compressors to the company's market value, being 1) negative sentiment in the stock, 2) the changes to its financials with Lumryz potentially eating market share, and 3) what this does to the company's intrinsic valuation. Not to mention, litigations are expensive, time-consuming affairs that often consume more resources than they should. Collectively, it is of my opinion JAZZ will continue to trade sideways, and reiterate a neutral stance.

The key upside risk to this— if its successfully sues the FDA. That would change the course of the narrative, and in fact put a blockade in the hub and spokes of AVDL. It may also help JAZZ attract investment into its equity stock once more. On the bounce of probabilities, however, my opinion is this sits on the "less than likely" side of the equation. Happy to be pleasantly surprised, however. Net-net, reiterate hold.

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