Avadel Pharmaceuticals plc (ALKS) Earnings Call Transcript & Summary

Greetings, and welcome to the Alkermes Investor Call. My name is Rob, and I'll be your operator for today's call. [Operator Instructions] Please note that the conference is being recorded. At this time, I'll turn the call over to Sandra Coombs, Senior Vice President of Investor Relations and Corporate Affairs. Sandy, you may now begin.

Thank you. Good morning. Thank you for joining us on the call to discuss our agreement to acquire Avadel Pharmaceuticals. With me today are Richard Pops, our CEO; Joshua Reed, who recently joined us as Chief Financial Officer; and Blair Jackson, our Chief Operating Officer; who will join us for some Q&A at the conclusion of the call. In addition to our press release and Rule 2.7 announcement under Irish law, a slide presentation is available on the Investors section of alkermes.com. Our discussions during this conference call will include forward-looking statements. Actual results could differ materially from these forward-looking statements. Please see Slide 5 of the accompanying presentation, our press release issued this morning and our most recent annual and quarterly reports filed with the SEC for important risk factors that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements. We undertake no obligation to update or revise the information provided on this call or in the accompanying presentation as a result of new information or future results or developments. After our prepared remarks, we'll open the call for Q&A. As you may be aware, in light of our offer for Avadel, interactions with shareholders and others are now governed by the Irish takeover rules. As a result, Alkermes is restricted from what it can disclose beyond what is already disclosed in publicly available documentation relating to its offer. Therefore, we will not be in a position to answer certain questions relating to the proposed transaction, Avadel or our plans for the combined business beyond this. With that, I'll turn the call over to Richard.

Thank you, Sandy. Good morning, everyone. So this morning, we announced that we've entered into a definitive agreement to acquire Avadel Pharmaceuticals, an all-cash transaction, which we expect to be immediately accretive upon closing. This is a very strategic acquisition for Alkermes. It's compelling from multiple perspectives. We gained an attractive new patented FDA-approved product, which will leverage and increase the scale of our profitable commercial business. And we immediately become a key player in the sleep medicine market in anticipation of our progress with alixorexton. Acquiring a business that's so well aligned with our current and long-term priorities has been one of our strategic objectives for some time. We believe that this combination positions Alkermes for enhanced growth, innovation and value creation. So before we dive into the specifics of the transaction, I'd like to take a moment for some additional context for today's announcement. Over the last several years, we've been disciplined in our approach to business development, evaluating a wide range of opportunities in search of one that could complement our therapeutic focus, our core capabilities, our advancing pipeline and our focus on profitability. Avadel, a commercial stage company, marketing a proven and differentiated narcolepsy medicine stood out, meeting all of our criteria strategically, operationally and financially. The timing of the transaction also underscores our confidence in alixorexton. With positive Phase II data for alixorexton in narcolepsy type 1 now in hand, data from Vibrance-2 and NT2 expected in November and plans to initiate a global Phase III program in narcolepsy early next year, we believe alixorexton has the potential to transform the treatment of narcolepsy. The acquisition of Avadel enables us to enter the sleep medicine market now and establish our presence in this space ahead of the potential launch of alixorexton. Avadel is a recognized innovator in sleep medicine. It's focused on addressing meaningful unmet needs for patients living with narcolepsy. Avadel's commercial product called LUMRYZ, is the first and only FDA-approved once-at-bedtime oxybate for the treatment of cataplexy or excessive daytime sleepiness in patients 7 years or older with narcolepsy. This differentiated profile eliminates the need for middle of the night dosing, which has long been a burden for patients and caregivers. Since launching LUMRYZ in 2023, we watched the Avadel team build and scale a high-performing commercial organization driving strong demand. New patient starts of LUMRYZ have outpaced the twice-nightly mixed salts competitor by more than 2:1 since launch, with approximately 3,100 patients on LUMRYZ therapy as of June 30 and an estimated 50,000 oxybate eligible patients in the U.S., LUMRYZ has been on a robust growth trajectory and has significant opportunity ahead. That momentum reflects not only the unmet need in the market, but also the strength of Avadel's commercial strategy, their capabilities and their team, and we look forward to welcoming Avadel employees to our organization and working together to build on their momentum. Our strong financial foundation, our expertise in CNS drug development and our proven ability to scale proprietary commercial products, including our sophisticated understanding of complex regulatory and market access dynamics position us to further support the growth of LUMRYZ. We believe LUMRYZ is an important therapeutic option and a strong addition to our portfolio in its own right. Against the backdrop of our own development programs in sleep disorders, acquiring Avadel aligns our development pipeline with an approved commercial assets and positions Alkermes to be a leader in the sleep medicine market. Avadel's established and proven commercial infrastructure and experience in rare diseases provides a strong foundation for the potential launch of alixorexton. As we integrate Avadel, we jump-start our capabilities and avoid the need to build a new disease-focused commercial infrastructure from the ground up. This not only allows for meaningful operating efficiencies. It also provides the opportunity to accelerate market uptake of alixorexton following the successful completion of the development program and FDA approval. By establishing an immediate commercial presence in the sleep medicine market, we have the opportunity to build critical relationships and deepen our understanding of the patient experience and commercial idiosyncrasies in the space. We expect the financial strength of the combined company will also support a diversified development strategy in sleep disorders. This includes, obviously, the upcoming Phase III program for alixorexton, but also potential label expansion for LUMRYZ, supported by the Phase III study in patients with idiopathic hypersomnia currently underway and the potential advancement of Valiloxybate, Avadel's in-licensed salt-free once-at-bedtime oxybate clinical development candidate. In addition, we'll continue to pursue a broad development strategy for our orexin 2 receptor agonist portfolio, including ALKS 4510 and ALKS 7290, both of which are now in Phase I and expected to enter human proof-of-concept studies next year. The acquisition reinforces our commitment to neuroscience, gives us additional scale and builds on our legacy of innovation in complex psychiatric and neurologic disorders. Now from a financial perspective, the transaction is expected to be immediately accretive upon closing. The LUMRYZ revenues represent an additional growth driver for our commercial portfolio. With expected 2025 net sales in the range of $265 million to $275 million upon closing, LUMRYZ will meaningfully augment our revenue growth profile, and it will further enhance our profitability and cash generation. So in summary, this transaction aligns with our strategic and therapeutic focus. It complements our commercial infrastructure and it adds new capabilities in rare disease. The timing of the acquisition is strategic and we believe it will position Alkermes to drive meaningful growth and deliver long-term value for our shareholders. So now I'd like to take a moment to introduce Joshua Reed, Alkermes' new Chief Financial Officer. Joshua brings a wealth of experience in strategic finance and operational leadership, and we're very happy to have him on board as we continue to execute on this growth strategy. With that, I'll turn the call over to Joshua to walk through the financial terms of the transaction.

Thank you, Richard. I'm excited to have joined Alkermes at such a pivotal and transformational moment for the company. Since coming on board, I spent time getting up to speed on the attributes of this proposed acquisition, and I believe it presents a compelling opportunity. Let me walk you through the key financial highlights. Pursuant to the agreement, Alkermes will acquire all outstanding ordinary shares of Avadel for $18.50 per share, payable in cash at closing. In addition, Alkermes will provide Avadel shareholders a nontransferable contingent value right entitling holders to a potential additional cash payment of $1.50 per share, contingent upon final FDA approval of LUMRYZ for the treatment of idiopathic hypersomnia in adults by the end of 2028. Taken together, this risk-adjusted structure offers a potential per share acquisition price of $20, which represents a premium of 38% to the weighted average trading price of Avadel over the 3 months prior to today's announcement or a premium of 12% to Avadel's closing price yesterday, and a total consideration of approximately $2.1 billion. The transaction has been approved by the Boards of Directors of both Alkermes and Avadel and is expected to close in the first quarter of 2026, subject to the conditions set out in this morning's Rule 2.7 announcement under Irish rules, including certain regulatory approvals and approval by Avadel's shareholders. As Richard outlined, upon closing, the transaction will both augment our revenue growth profile and be immediately accretive to our bottom line. Avadel is on a strong growth trajectory and recently transitioned to a net income and cash flow positive profile. Avadel's capabilities and infrastructure are largely complementary to ours, which is one of the attractive features of the deal. The financial synergies going forward will be largely derived from leveraging a profitable rare disease-focused commercial infrastructure to support the launch of alixorexton and thereby avoiding the costs associated with building those capabilities de novo. Of course, as noted in our Rule 2.7 announcement, we expect there may be certain opportunities for cost efficiencies from leveraging Alkermes' scale, system and processes across various functions. From a balance sheet perspective, we are entering this transaction from a position of strength. We will announce our full third quarter financial results next week, but are pleased to report that we ended the third quarter with $1.14 billion in cash and total investments and no debt, underscoring the financial strength and flexibility of the business. We expect to finance this acquisition in part with cash on hand, supplemented by the issuance of new debt of approximately $1.2 billion. This would represent a comfortable leverage ratio for us. We expect to delever in a reasonable time frame with cash generated by the business. This transaction represents a compelling opportunity to accelerate our growth trajectory and is squarely aligned with our financial and strategic priorities, strengthening our core business, expanding our portfolio and driving long-term value creation. With that, I will turn the call back to Sandy to manage the Q&A.

Thank you, Joshua. Okay. Rob, we'll now open the call for Q&A, please.

[Operator Instructions] The first question today is from the line of Leonid Timashev with RBC Capital Markets.

Maybe only limited things you can say, but can you talk maybe about your confidence in the upcoming data for alixorexton, NT2 and IH and how anything you may be seeing there or feeling about could have impacted the timing of this transaction, your enthusiasm for this transaction, maybe the reasons for this transaction?

It's Rich, I'll take the question. And the IH, NT2 program continues uninterrupted. We've been looking at this Avadel transaction for quite some time. And so as it matured, we moved aggressively. And I think it just underscores our overall confidence in alixorexton in all of its indications right now. Obviously, we have NT1 data in hand now, and we can assess its competitive profile in NT1, which we're quite excited about. We'll get NT2 data in probably in November and the IH next year. But this is all about building the foundation to be able to launch alixorexton as aggressively as possible.

The next question is from the line of Paul Matteis with Stifel.

Can you guys just like help us think about the midterm outlook for Avadel's once-nightly oxybate? How are you guys thinking about the moving parts in the market with increased Xyrem generics pricing pressure. And look, I know it's maybe not a totally fair question, but like how should we think about this asset as -- or this acquisition as like a multiple and what do you think a durable revenue number is going to ultimately look like, say, in the late 2020s as this market continues to change?

Paul, it's Rich. Under Irish takeover, we really can't make forward-looking statements that are outside of what's inside the documentation around the 2.7 announcement, and there's a lot in there. But the general idea from our perspective is that this market is going to continue to grow as new medicines enter. And the -- our view is that the orexins can be transformational in this space, alixorexton in particular. But also within the oxybate market, you've got a very, very strong competitor with LUMRYZ. And the twice-a-day medicines, generic or otherwise are not substitutable with the once-nightly medication. And we've been watching the growth of the once-nightly category, as I'm sure you have, watching it grow and blossom and addressing unmet needs that patients have. So we think that's going to persist.

The next question is from the line of Joseph Thome with TD Cowen.

I guess a little bit to extend on that point. Do you see a specific type of patient that would be more applicable for an oxybate versus an orexin? And maybe second to that, can you talk about the potential competitive dynamics of LUMRYZ in IH given that Xywav once-nightly is a potential option for some patients on label? How can you, I guess, further differentiate against that?

Joe, it's interesting. As we get deeper into the development of alixorexton and we see that the huge benefits that accrue from driving wakefulness at the levels that we are in the NT1 patients so far. We also recognize that the disruptive nighttime sleep is a feature of the disease. And I think it's still an open scientific question about how much the orexin agonist at various doses are going to affect that disruptive nighttime sleep. And it seems to us that there's going to be a place for oxybate on a going-forward basis, no matter what. The orexins will affect that market, but I think there's always going to be an enduring oxybate market, particularly for the once-nightly version of it. So I think our view is that there's increasing optionality for patients with this disease, increasing physician focus on treating it, better and better tools, more and more diagnosis. And so the overall general trend in the marketplace is going to be for the use of better medicines for better outcomes for patients. In IH, we know -- as you mentioned, we've got an approved oxybate in IH already. Avadel study is underway. We'll look and see how those studies complete, and then we'll talk more about the competitive positioning in IH.

Our next question is from the line of Umer Raffat with Evercore ISI.

A couple here, if I may, and not on future forecast, but I just wanted to understand philosophically how you expect genericization and gross to net expansion in this market to affect you guys going forward? And secondly, it looks like the once-nightly version of Avadel technology has taken meaningfully longer than I would have thought. There -- I think there's still some prototypes that were under development. So where exactly are we? And was that a core part of your diligence or not? And then finally, what's your confidence in the revenues -- historic revenue that I'm talking about because they look like they were fairly flat between 3Q and 1Q and there was a spike into 2Q. I guess I'm almost wondering is that when these conversations started?

Yes, it's interesting. A lot of our diligence in the whole category as we got deeper and deeper into the alixorexton development program was trying to understand the role of oxybates and the future role of oxybates. And as I mentioned to Joe in the previous comment, I think that there's going to be an ongoing role for oxybates for certain patients. Remember, of the 80,000 patients are being treated right now for narcolepsy, only about 16,000 are getting oxybates right now. So it's -- there's a particular patient type that benefits and likes being on oxybate. And the once-nightly is a really nice option for these patients. In fact, much of the new patient starts for the once-nightly come from patients who've been on the twice-nightly version. So -- but on the generic gross to net expansion question, right now, and we don't expect it to change, the twice-nightlies are not substitutable for the once nightly. Actually, they had separate orphan status designation by FDA. It serves a different purpose. It has different medical and patient benefits. So we think that the once-nightly are going to continue to have their own niche in the marketplace. I didn't quite understand your second question about the once nightly. That is their product. The first priority [indiscernible] the low sodium. I see, yes. They recently licensed a low-sodium product. And that's not yet in the clinic. We'll be assessing that more carefully through our -- in our scientific diligence, we've done some work on it. We think it's interesting. And we'll be giving a lot more information as we get our hands on that development program. And also on just the basic hydraulics on the revenue side, as I mentioned in the call, the -- as of June 30, they have 3,100 patients on LUMRYZ out of 50,000 or so addressable market, the growth rate in new patient starts is what we've been focusing on over the last few quarters, and it's quite robust. So you're right, there was a little lull in the early part of the year, but that new patient start data has accelerated, and we're confident in their plan going forward.

Our next question is from the line of David Amsellem with Piper Sandler.

So looking out longer term in a narcolepsy space and IH for that matter, where you have both orexin agonist and oxybate products, do you at all worry that the oxybate category could be a declining category in the context of multiple orexin agonist available. And as you think about not just the strategic fit, but sort of the long-term outlook for the market. What's your view regarding the trajectory of LUMRYZ once you have multiple orexins in the marketplace, both in narcolepsy and in IH?

David. So again, under the 2.7 the Irish rules, we won't make a lot of forward projections. But you should just know that as I've said before, I think that the oxybate, particularly once-nightly oxybate can enjoy a privileged position, an enduring position in the narcolepsy marketplace. For a couple of reasons. One is that -- what they do distinctively versus what the orexins are going to do. But number two, as I mentioned, I think to Umer is that right now, the prevalence in the U.S. is estimated to be something like 200,000 patients with narcolepsy, only about 100,000 of which are diagnosed and only about 80,000 of which are being treated. Why is that? It's because there haven't been really great medicines. And what you see in other therapeutic categories, as you get more and more innovative medicines in the category, providing different benefits to patients, overall diagnosis rates and treatment rates can increase as well. So right now, the oxybate market, its dollar volume is driven by a relatively small number of patients. And I think that there's an opportunity for the distinctive properties of a drug like LUMRYZ to continue to endure as the market itself gets more mature.

The next question comes from the line of Jessica Fye with JPMorgan. The next question comes from the line of Marc Goodman with Leerink Partners.

This is Basma on for Marc Goodman. Can you provide more color on what's your take for the value proposition of the low sodium versus high sodium oxybate? And also, we have a question, please, regarding the settlement. Is the fees only applies to LUMRYZ? What about -- we're just confirming, so it doesn't apply to the newly acquired assets from XWPharma? And if that's the case, what is the scenario here?

Yes. On the low sodium, high sodium, I think that, first of all, in the embodiment of LUMRYZ, LUMRYZ's principal clinical attribute is its once-nightly dosing, which obviously has allowed it to carve out a growing presence in the marketplace. If that can be augmented by a low sodium version as well, I think that's all the better. And I think the logic of the license that they took earlier this year for a low-sodium formulation, which we will -- we will develop in the clinic as well. I can't really comment on the settlement at this point. That's -- we're not a party to that settlement. So I'll refer you to both [indiscernible] for the time being on the settlement details.

The next question is from the line of Akash Tewari with Jefferies.

This is Anastasia on for Akash. So just to kind of continue on the OX2 oxybate combo, would you consider using your, if further developed the low sodium once-nightly oxybate for that? And if you -- if you did not do that, would sodium be a concern for you? And maybe just if you consider offering any kind of price discount on any combo treatment given the patient burden?

Yes. It's far too early to be talking about any pricing in this. But I would say this, in our conversations with experts at World Sleep and other sleep conferences, you do hear discussions about the interest in studying both a drug like alixorexton during the day and oxybate at some dose at nighttime. And I think we'll wait to see the full profile of the sleep architecture through our dosing in NT1, NT2 and IH before we really formalized those plans. But I think that there's an opportunity scientifically for investigation of the concomitant use of the two agents.