Avadel Pharmaceuticals plc (AVDL) Earnings Call Transcript & Summary

[Audio Gap] I'm Managing Director in the Healthcare Investment Banking team at Morgan Stanley. We're very pleased to have Greg Divis, CEO; Tom McHugh, CFO; of Avadel with us here today. We're going to conduct this as a fireside chat format. I just have a disclaimer that I need to read first, which is: for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com\researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So with that, we will start the conversation. Gentlemen, great to have you here. Thank you.

Thank you. We appreciate the opportunity to be here.

I'll start out maybe just, Greg, give you a chance to give a high-level overview of Avadel and the key progress that the company has made. Obviously, there's been quite a bit over the last year since the LUMRYZ launch. Maybe start there and then we'll go into some more specifics.

Yes. I think where we sit here today after completing our first full -- 4 full quarters of launch, we're really pleased where we sit in terms of from where we were in approval in May of 2023, launching it in June of 2023, and now, again, a little over a full year in the market, having initiated over 2,400 patients on therapy, having actually 1,900 patients on therapy as we exited Q2 and really building the organization as we've gone, and really proud of what we've accomplished. But I think maybe most importantly when you step back is, what we've seen really emerge over the course of the last 4 quarters has been a lot of the research we did and kind of the insights we had going into launch that helped frame up what we thought was really a $1 billion market opportunity for us with LUMRYZ has really begun to play out actually in the marketplace. We've seen patients come from switches, right, continuously. We've seen our growth in new patient starts grow quarter-over-quarter. We've begun to capture patients in a patient segment of previously treated and have discontinued an oxybate in the past patient segment. And we've seen actually prescribers who have never written an oxybate before begun to write LUMRYZ and all of these help give us a lot of confidence of the potential for LUMRYZ to continue to grow and make a meaningful impact in the marketplace and on our way of achieving our aspiration of being the market leader. So we're really pleased with what we've built, and we acknowledge readily that we've got a lot more work to do.

Great. Maybe talk a little bit more about the recent momentum as you went into the Q2 results and then how that rolls out from here for second half of 2024 and into 2025.

Yes. I think when we think about how our quarter-over-quarter performance has been, we describe it as remarkably consistent. We've continued to add upwards of 600-plus new patient starts every quarter. We're adding net new patients of over 500 from that standpoint a quarter. And as we exited with 1,900 patients on therapy, it really, we believe, puts us in a great place to continue to build from. I'll just juxtapose that against our Q2 results of 500 net patient adds against the twice-nightly products, which added 25. So we think we're seeing a substantial continued growth of new patient adds, net new patient adds for LUMRYZ, which we think gives us a lot of confidence in terms of what holds for us in the future. And again, we're seeing these patients come from all segments, including new patients who have never been in the oxybate market before. So really excited about the trends we have going.

Can you talk a little bit about the discontinuation rates?

Yes. If you look at our cumulative launch to date, patient starts at 2,400. And our net patients on therapy at the end of Q2, that would -- of 1,900, that would equate to a discontinuation rate cumulatively of about 21.7%, right? If you take that and then break it down a little bit differently, what we've said that when you look at new starts, truly naive patients versus switch patients, and we measure that against kind of the historical legacy discontinuation rate, which -- what we know to be for new oxybate patients who have started in the past, you see upwards of 25% discontinuation rates at month 1 and upwards of 50% discontinuation rates at month 12. So here we are at month 13 with a cumulative discontinuation rate of about 21.7%. And numerically, whether you're looking at naive patients or previously treated or switch patients, you see numerically lower discontinuation rates at month 1, month 3, month 6 for LUMRYZ compared to kind of what's in the claims data for the twice-nightly oxybates. But recognize we appreciate the fact that we work really hard to get a patient on therapy, and we'll continue to do all we can as we've learned more and more about these patients, both switches and new patient starts, in terms of when they -- when are discontinuation -- when is a discontinuation a potential risk situation for a patient, how do we intervene earlier, what is the message we need to intervene with, whether that's through our pharmacies or through our nurse educators. So all of that work continues to go. And again, I think it's something we're going to continue to focus on to try to improve. But relative to, I would say, the legacy products, the first generation oxybates, we see better discontinuation rates with a clear focus to try to improve it.

Maybe as it relates to the other products, can you say anything about the patients coming -- switching from other oxybates versus new naive patients?

Yes. When you think about our source of business, right, our source of patient starts, and it's fairly commensurate with those who enroll into our RYZUP program, launch to date, the majority of our patients have come from switch patients, right? Early in the launch, it was a substantial majority, and the numbers have evolved over time. But again, the largest portion of patients we're generating launch to date and within the quarter come from switch patients. Within that switch patient category, we see more patients coming from the mixed-salts product than we do from the original twice-nightly oxybate product. Outside of the switch market, the next largest segment is naive. So truly de novo naive to oxybate patients is, really, I would describe as our fastest-growing segment. We've seen a lot of growth in that segment. And again, as we noted, this group of patients, which is previously on an oxybate but discontinued, is a segment that many people questioned whether it was real and it's been real. We see hundreds of patients come in, and that continues to be a viable source of patients for us as well. And I think most importantly for us, as we think about those segments going forward, how we view the LUMRYZ opportunity and why we're so excited about where we can take LUMRYZ going forward, is we're just not competing for the 3,000 new patient starts every year, right? That's an important segment of it, for which we see our share continue to grow, but there's another upwards of 30,000-plus patients who are either on an oxybate or previously were on an oxybate and discontinued that are also really opportunistic market segments for us that are unique to LUMRYZ, right? We're the only product that really offers that opportunity for them, which is really why we're getting, we feel, a representative patient share from all 3 segments.

Yes. And I'd add to that, what we're also -- this is also in the market research it's proving itself out in the real world -- is over 100 prescribers who have never written an oxybate prescription found us, have enrolled in our branch program and have put patients on LUMRYZ. So it's another opportunity for market expansion. We knew it existed. We know there are probably hundreds of those types of doctors that is an additional opportunity for us to expand the market.

Yes. I think Tom brings up a really important point, that when you look at our source of business since launch, nearly 1 in 5 of our patient enrollments are coming from a doctor or health care professional who we don't actively personally promote to, and they're doing it on their own because of the presence of LUMRYZ. So as the launch has gone on, we've learned more about these physicians. They obviously become physicians we promote to as soon as they sign up to join our REMS program and they have a patient they want to put on therapy. But we've really studied these physicians, and we really believe there's a cohort of physicians and practices out there that really are ripe for some additional expansion and additional personal promotion.

Let's stay on this for a second to the point that, Greg, you and Tom talked about. Can you give us some more specific insights into the differentiation of the product and then what you're hearing, whether it's from patients or prescribers, as to the reasons for switching and how it fits in the overall market and the key benefits to LUMRYZ?

Yes. I mean at its core, LUMRYZ, for those who aren't aware, is an oxybate treatment for patients suffering from narcolepsy, to treat their excessive daytime sleepiness and their cataplexy and/or their cataplexy. The legacy standard of care has been sodium oxybate or an oxybate product that was -- that is an immediate release formulation, meaning that you took one dose at bedtime, recognizing these are patients orphan -- rare orphan disease characterized by a chronic neurological sleep disorder for patients who are taking a treatment option at bedtime and then being required to forcibly awaken precisely in a window between 2.5 and 4 hours post going to bed to take a second dose to get them through the night, right? And although many companies have attempted, it is our proprietary technology that's been able to formulate an extended release formulation of oxybate to enable patients to only take their treatment once at bedtime and giving them the opportunity to have full exposure to a full course of therapy only with 1 treatment and with the opportunity to have a full night's sleep. And so that is at its core its value proposition. All of our data in our pivotal trials were statistically significant. I think we ran an open-label extension where we had an opportunity to add patients in our open-label extension who had switched from the twice-nightly, and 94% of those patients preferred LUMRYZ and LUMRYZ dosing versus what they were on in their twice-nightly. Over 90% would recommend it to another patient. So again, all of our feedback, whether inside of our trials or open-label extensions, the market research we've done that stated that dosing and eliminating the middle of the night dose and having a once at bedtime option was the most important attribute of an oxybate for both patients and physicians. I think we've seen all of that begin to materially play out in the marketplace, recognizing we got a lot more to accomplish and achieve. But again, I think some of the data in the most recent quarterly results and how we're seeing our patient uptake occur in terms of net new patient adds versus the twice-nightly, I think, speaks to itself with 500 in Q2 for us versus 25.

Okay. Can you provide an update on your NDA for pediatric use?

Yes, so we submitted that a while back. Our action date is actually tomorrow with the FDA. So we'll -- we would expect at some point today or over the coming days we'll get some feedback from FDA. There obviously has been back and forth with them along this journey. So we'll see. We'll have something to sit and talk about here in the -- hopefully in the not-too-distant future.

Can you talk about market opportunity and perhaps go-to-market strategy if approved?

Yes. So when you look at the pediatric marketplace for narcolepsy and for oxybates in particular, it's a relatively small percentage of those on oxybates. Depending upon the database you look at, it could be 4% or 5% of the patients. And yet everyone knows narcolepsy is a disease that initiates really in adolescence, right? It is an adolescence disease that starts there. Yet the biggest challenge is that it takes anywhere from 8 to 15 years for someone to get the right diagnosis. And I think a great analog into that is our pivotal trial for REST-ON, where we enrolled over 200 subjects in our trial, all naive to oxybate, and the average age was 31, right? So as a result of that, by the time someone has worked up to go on an oxybate, many are beyond the pediatric age. That's why it's relatively low penetrated. But I will say this, for those who are on an oxybate, we hear and have heard from parents in particular, that the nature of waking up in the middle of the night isn't only disruptive for the child, it's equally disruptive for the household and the caregiver and the parent, right? And clearly, there's a lot of interest from those families to see if LUMRYZ may be the right choice for them if approved. And from a go-to-market standpoint, really, most sleep specialists treat all ages, right? There are a cohort of exclusively pediatric sleep specialists who only do peds. There's a couple of hundred of them that obviously we haven't called on or haven't talked to during the course of our launch, but should we be approved, they will be added into our plans accordingly. And we look forward, like we have with LUMRYZ for adults, is just offering another option for patients who suffer from this debilitating condition and give them a potential opportunity to not have to wake up in the middle of the night and see some of the benefits of LUMRYZ.

Maybe switching topics for a minute. Can you talk about the litigation update that you provided on August 28 and how you view that in the context of future expectations and plans for LUMRYZ? Maybe what are your expectations of next steps related to the outstanding litigation?

Yes. So I'll tell you what I'm able to. Obviously, we're in litigation, so comments will be somewhat limited. But maybe just to level set where we are, probably the next most immediate thing is it was an APA hearing regarding Jazz's challenge to our approval of LUMRYZ for narcolepsy. That hearing occurred back in May; we would expect a decision in the near term. I can't give you an exact timing, but there's nothing left to do on that aside from the judge issuing his opinion. There was an injunction granted last week for IH, that's part of the active ongoing litigation. We think there's a clear grounds and a way to have that injunction overturned. So stay tuned on that. And then there's 2 actions that we've initiated against our competitor. One is a misappropriation of trade secrets. And the second is an antitrust litigation. Both of those trials are set to occur in the fourth quarter of next year. So there is more to follow, but that's about the extent of the update I can provide at this point.

So I think the only thing I'll add, to get to your kind of your last question, is how does it affect our plans going forward, which is, in the order that was issued 1.5 weeks or so ago that Tom referenced on the IH matter, the attempt at enjoining our launch in narcolepsy was denied, right? So from that perspective, we are full business as usual on our launch with narcolepsy. So the company's business priorities, which lead and start with the launch of LUMRYZ, continues on as we have over the last few quarters.

Thank you. And maybe another question for Tom. Avadel is expected to achieve profitability in the near term. How will that shift your priorities or focus for the business?

Yes. Thank you for that question. It's -- I'll start with Q2. We've made really significant rapid progress towards achieving breakeven. We were almost there in Q2. On an adjusted operating income basis or adjusted operating loss basis, we were just fractionally at a loss. As we move forward and the growth we see ahead, we expect to get to adjusted operating income positive in Q3 and cash flow breakeven this year. In terms of capital deployment, we continue to search for and identify ways to invest back in the launch of LUMRYZ. We believe those opportunities exist, and we won't be shy about investing in those. It's a significant opportunity that lies ahead for us. We also -- again, as revenue continues to grow, our infrastructure that we've built, our commercial infrastructure we've built is highly leverageable. So as we move to increasing revenue, it starts to generate significant cash flow on a go-forward basis, which creates great opportunities for us, again, continuing to invest in the launch. We can certainly look at and will evaluate business development opportunities. And our focus will be on finding ways to grow Avadel.

Yes. I would just add, I think from a capital allocation standpoint, the most important thing is to deliver returns to our shareholders and create value from that perspective, and our focus is on our launch and our life cycle efforts and whatnot. And again, to Tom's point, with a leverageable infrastructure and 90-plus percent gross margins as we get over -- as we break into cash flow breakeven, which is going to occur in our first full calendar of launch, we find ourselves in a really, really strong position from both a balance sheet perspective and where we sit on a go-forward basis.

You mentioned business development opportunities. Maybe if you could share some thoughts about where those might be focused? Would they be exclusively in the narcolepsy market, or how do you think about business development strategy?

Well, you wouldn't be doing your job as a banker if you didn't ask that question. So thank you for that. I would -- Daniel, I would say we're clear-eyed in terms of what our focus is from the business perspective, right? Our launch is obviously first and foremost, and executing our life cycle strategies from that standpoint as well. But as Tom noted, we've built a commercial infrastructure. So when we think about like where else could you leverage that infrastructure, where are you going to do a deal, so to speak, I think for us, we owe it to make sure we're as close to anything and everything that's happening in the rare sleep space, right? Whether that's to collaborate with folks or to partner with folks or for potential opportunities. But I would say where the company sits today and the inflection we see continuing to go forward, we need to stay focused on our near-term priorities. And as we look at opportunities to grow the business in the future, I think you'll see us make sure that it aligns perfectly with the businesses today and how we can grow the business in the future and not compromise what our priorities are today. I will say that there's a lot of competition for things out there, and again, our most important observation in terms of capital allocation is how will that return value back to our shareholders from that standpoint.

Just want to maybe -- thank you. So maybe double -- just double back on LUMRYZ and the launch. Is there anything that you can say about net pricing for the product? Any ebbs and flows? Or any comments you want to make about that?

Well, I think in terms of net pricing, maybe to start with, our market access team has done a fantastic job of gaining commercial coverage, and within 9 months of our approval, we had coverage policies in place for over 85% of commercially-covered lives. In terms of net pricing, what we saw in Q2, we expect to be -- I'll characterize it as steady state during Q3 and Q4. I think certainly some opportunities to improve the net pricing on a per patient basis, but I would characterize it as steady state. And then as we move forward into 2025, we'll go through the cycle that every other company goes through. And I would say that's where we are, Daniel, from a pricing standpoint.

Yes. I think the only thing I would add to it is, you saw in Q2, you saw about, what, about a 6% uplift in our net pricing. That really is a byproduct of kind of the Q1 phenomenon of the financial assistance and co-pay programs and support programs that are in place that many in our industry offer to eligible patients who qualify for those services and those programs. So I think as you clear through that, we saw a little bit of that benefit in Q2. And to Tom's point, we think that will hold serve for the balance of the year.

Acknowledging that hyper focus on launch and continued commercialization of LUMRYZ, are there any other big opportunities that you're excited about in the near and perhaps medium-term future for Avadel that is worth talking about?

Well, again, I think our focus, again, launch and continue to reach key milestones in our performance with LUMRYZ in launch, proceeding forward with life cycle opportunities to expand the use or offer different formulation options for LUMRYZ are really important. And really continue to strengthen the financial position of the company from that perspective. Clearly, there's a lot of focus at our meetings here and with other -- with investors, people want to talk about the legal matters. That's an important consideration for us to address. As Tom noted, there's a couple of -- some important decisions that will come forward here in the coming period of time at the discretion of the judge. We -- again, we remain confident in the position we've taken in those matters and look forward to continuing to serving the market accordingly and continuing to build LUMRYZ into the success it can become from that perspective.

Okay. Maybe just a final question from my standpoint, a little bit of a catch-all. But anything that you experience when you're talking to investors that investors are -- perhaps have misunderstood that you want to kind of correct the record on here. And what are the things -- the questions that you get most often that require some further explanations. I'll give you the floor.

Well, listen, I think maybe not misunderstood, but underappreciated, is the significant opportunity for LUMRYZ in narcolepsy, just narcolepsy alone. I'll give you as an example, one of the patient segments that we mentioned, which was patients who had previously tried and discontinued. Quite honestly, there was skepticism about that. If a patient had previously tried an oxybate, why would they come back if they had an adverse event. It is proving out in the marketplace. We literally have hundreds of those patients who are now on LUMRYZ. So I don't think it's necessarily a misunderstanding so much as an under-appreciation for the true opportunity that lies ahead. I will -- without naming names, I will say that we had one investor come in yesterday to a meeting, and he missed it, he admitted it. He goes, "I didn't think it would go as fast as it has and I'm very happy for Avadel," but as a bit of self-regret, he wished he had gotten involved earlier.

Yes. I think there's a couple of places I would point to that -- in some part, it's just us continuing to demonstrate that what we say is going to happen is going to happen. And I think that's the one thing I feel like as a team we've done a really good job of is we say something is going to happen and it happens. But when we think about the potential of LUMRYZ, this is why my opening remarks I wanted to make and I'll end on them, like we did a tremendous amount of research going into our launch to really try to understand where are the patient segments and the opportunities to not just have a good product but to really have a meaningful product for a lot of patients, but that is meaningful from a revenue standpoint given its profile with 90-plus percent gross margins and a fairly leverageable and efficient commercial organization to deliver on it, given the nature of this therapeutic area and the treaters who treat these patients. So when you think about a market that isn't just relegated to 3,000 new starts that you got to compete with with other products having over 30,000. And candidly, as we look at the market, we think the LUMRYZ market opportunity is in excess of 50,000 patients, which creates a significant potential for us. And 1 year into launch, 1,900 patients on therapy, how do we turn this into a blockbuster status and realize its $1 billion potential. And that probably takes 8,000 patients or so on therapy, right? So 1 year in, we've made a lot of inroads. We've got a lot more to go. But even if you just step back and say there's 3,000 new patient starts a year and over the next 4 years, you do the math, what assumptions do you think LUMRYZ is going to get in terms of truly de novo patients, there's a big number just in that segment alone, which is the smallest segment that we're pursuing. The other 2 segments collectively are 90% of the opportunity. So we just feel like there is a great pathway forward here for us and our research is beginning to play out in the marketplace. And I'm super proud of what the team has done, but recognize that there's a lot more wood to chop, and we'll keep swinging the axe accordingly.

Greg, Tom, thanks very much for being here.

Yes. I appreciate it, Daniel. Thank you.