Avadel Pharmaceuticals: Oxybate War With Activated Jazz Wax (NASDAQ:AVDL)

This is my third Avadel (NASDAQ:AVDL), after the most recent 12/2022 article “Avadel And Jazz: The Oxybate Wars – Duking It Out” (“Wars”). With a lot of water under the bridge from the wars, I can provide a helpful overview of how things are going for Avadel.

From a share price perspective, Avadel shareholders saw nice gains of ~77%. In this article, I will discuss its future outlook as revealed by its Q2, 2024 earnings reported on 07/08/2024 in:

1. Press release regarding financial results and corporate update (the “release”).
2. earnings conference call (the “Call”).
3. 10-Q (“10-Q”).
4. presentation of the winning call (the “Presentation”).

The close of the second quarter 2024 marked the first one-year anniversary of the launch of LUMRYZ

On 01/05/2023, Avadel obtained its first FDA approval for LUMRYZ (sodium oxybate extended-release formulation). Press release to follow informed that LUMRYZ has been granted orphan drug exclusivity until 01/05/2030. The extended-release component was critical, supporting its advantage over previously approved oxybates.

The FDA label introduction of LUMRYZ is shown below:

In itself, there is nothing remarkable about this label. Focus on the dosage and administration section. Compare it to the analog section in its oxybate rival Jazz (JAZZ) XYREM, which was approved in 2002, as excerpted below:

That’s right, XYREM is a sleep medication that requires a second dose “2.5 to 4 hours after bedtime.” This second dose requirement of first-generation oxybates such as XYREM gives LUMRYZ the edge against entrenched competition. With this key exception, the labels are otherwise substantially similar, with similar black box warnings.

During the call, CCO Kim noted that Avadel analyzed patient dynamics around LUMRYZ in three groups:

1. those who switch from oxybate twice a night
2. the new ones to oxybate and
3. those who have previously discontinued oxybate twice a night.

Currently, Category 1 is the largest segment for LUMRYZ. However, it was also gratifying to see that the overall oxybate market is growing with both oxybate-naïve and Category 3 patients.

As described in Wars, in addition to XYREM, Jazz also markets a low sodium oxybate – XYWAV. Avadel is working on a low-sodium version of LUMRYZ; during the Call, he promised an update on this “by the end of 2024”.

At the threshold of positive operating indicators, Avadel has sufficient liquidity

The presentation’s Financial Summary slide below provides a quick overview of the most recent quarterly results, along with a year-ago quarter comparison:

In summary, in “Cash, cash equivalents and marketable securities” it is about $71 million, especially in light of its quarterly operating expenses of > $51 million. During the call, CFO McHugh offered some good news on that front.

Net loss, which narrowed from ~$64 million in Q2 2023 to ~$13 million in Q2 2024, is expected to narrow in Q3 2024 and for the rest of 2024. This should reduce cash burn operationally to zero and give it a cash runway. through the balance of 2024.

A recent court ruling highlights legal challenges besetting Avadel

It should come as no surprise that Jazz, which has enjoyed its preeminence in the oxibate franchise since 2002, did not take kindly to Avadel’s LUMRYZ. 10-Q (pp. 17-20) describes a complex maze of processes and procedures between the parties.

There are so many pleadings, counterclaims, motion rulings, and appeals that they absolutely defy rational scrutiny. I will limit my discussion to a brief discussion of the most recent court ruling for the 8-K filed by Jazz and Avadel on 08/28/2024.

Interestingly, the wording of the two 8-Ks is quite different, the one filed by Jazz being more complete than the one filed by Avadel. Below I have extracted the substantive part of the 8-K filed by Jazz, with the grade differences from the Avadel 8-K in italics:

On August 27, 2024, the Court granted Jazz’s request in part, preventing Avadel from seeking FDA approval to market Lumryz for the treatment of idiopathic hypersomnia (IH) or other indications that are not already part of Lumryz product labeling as of March 4, 2024, and that prohibit Avadel from infringing in any way claim 24 of the Company’s 782 patent by making, using, or selling Lumryz until the February 2036 expiration date including the ‘782 patent, subject to certain exclusions, including but not limited to (i) for the treatment of narcolepsy, (ii) for the treatment of patients who have been prescribed Lumryz since the effective date of the ban. conditional on the payment of an amount to be determined and (iii) in clinical trials and trials ongoing as of the effective date of the order. The Court also granted the Company’s request for an ongoing royalty on any future sales of Lumryz to patients with narcolepsy at a rate to be determined upon further notification of the parties as to the appropriate ongoing rate over 3 .5%. The Company cannot predict the ultimate outcome of this litigation, including with respect to any royalty share. (edited for brevity and clarity)

Regardless of the wording, the court action was a good news/bad news situation for Avadel. The bad news is that the court was dealing with a jury verdict that found the ‘782 Jazz patent enforceable by awarding damages. Impacting the bad news were royalties assessed on LUMRYZ narcolepsy sales and the IH injunction.

The good news was that the order was denied for LUMRYZ’s current off-label uses. Of course, just as Avadel is free to appeal adverse rulings, Jazz is free to do the same. Therefore, the judgment of the lower court is important, but in the sense that it can be reversed on appeal it is only provisional.

The reliance on LUMRYZ and the lack of a conventional pipeline adds significant additional risk

Avadel bullies should check out the “LUMRYZ a pipeline in product” presentation slide below:

For Avadel, LUMRYZ is all it’s cracked up to be from a pipeline standpoint. Not so bad, a bull might protest, when you consider Slide 4’s $5 billion is the estimated future value of the oxybate market. Avadel has managed to carve out a good share of the market, but still lags behind Jazz’s oxidised revenues from:

1. XYREM/XYWAV;
2. IH; and
3. what Jazz refers to as AG, denoting authorized generics.

Jazz guides for 2024 revenue of ~$4 billion, slide 7 (slide 7) of its oxybate franchise.

The only supplement that is remotely close to due date for LUMRYZ is its upcoming pediatric narcolepsy PDUFA. During the call, this was indicated with an impact of ~5%.

Conclusion

Slide 4 of Avadel’s presentation lists LUMRYZ’s top-line sales potential in narcolepsy at $1 billion. Taking this at face value with a 3-5X multiplier, it would support a market cap substantially above the current market cap of $1.5 billion.

That kind of calculation probably supports the 57% upside, which is the average price target of the ten Wall Street analysts referenced on the Seeking Alpha ratings page. Recognizing the risks inherent in investing in a small biotech locked in an open battle with a larger competitor, I still rate LUMRYZ’s earnings potential as supporting a speculative buy rating for Avadel.