Avadel Pharmaceuticals plc (AVDL) Earnings Call Transcript & Summary

Greetings, and welcome to Avadel's Pharmaceuticals Business Update Conference Call. [Operator Instructions] Accompanying slides for this call can be found on Avadel's Investor Relations website. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Austin Murtagh with Precision AQ. Thank you. You may begin.

Good afternoon, and thank you for joining us on our conference call to discuss Avadel's business update and outlook for 2025. Moving to Slide 2. As a reminder, before we begin, the following presentation includes several matters that constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements regarding the company's expectations on preliminary commercial metrics, unaudited financial results, forward-looking patient metrics, revenue opportunity and revenue estimates and the success of the commercialization of LUMRYZ. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. These risks and uncertainties are described in Avadel's public filings under the Exchange Act included in the Form 10-K for the year ended December 31, 2023, and which was filed on February 29, 2024, and subsequent SEC filings. The forward-looking statements made today are as of the date of this call, and except as required by law, Avadel undertakes no obligation to update or revise any forward-looking statements contained in this presentation to reflect new information, future events or otherwise. In addition, we may refer to certain non-GAAP measures during this call, and these measures should not be considered in isolation or as alternatives to or substitutes for financial measures determined in accordance with generally accepted accounting principles in the United States. On the call today are Greg Divis, Chief Executive Officer; and Tom McHugh, Chief Financial Officer. At this time, I'll turn the call over to Greg.

Welcome, everyone, and thank you for joining us today. As we're now 18 months into the launch of LUMRYZ, we've decided to take a slightly different approach to our January business update and 2025 preannouncement. As such, turning to Slide 3. Today, we will cover the following topics. We'll provide a LUMRYZ launch update and review priorities and actions being taken to accelerate the launch. We'll review our Q4 and full year 2024 preliminary results, and for the first time, provide initial revenue guidance for 2025. We'll review the progress and a path forward toward achieving the $1 billion potential revenue opportunity for LUMRYZ, and lastly, provide an update on our life cycle management programs and our 2025 key milestones. Moving to the next slide. As a company, we've made tremendous progress over the last few years, building our business and capabilities to enable our transformation of the sleep space for patients, for their families and their health care providers, while overcoming a attempts by our competitor, Jazz, to delay LUMRYZ coming to market. Our progress has been brought to life for me recently with a patient story from Texas. A nurse practitioner working in the emergency room was really struggling with the dosing of the first-generation mixed salt product. And as such, in a discussion with her physician, made the decision to switch to LUMRYZ. And according to her sleep specialist, she is functioning better and has also been able to decrease her daily dose of stimulants. Most importantly, she has expressed how happy she is with her now simplified and effective treatment regimen. This is just one of many examples of the feedback we regularly receive from physicians and patients alike. Based on this feedback, the impact we're having and the progress made to date, we remain confident in our belief that LUMRYZ is a best-in-class therapy for people with narcolepsy and is on its way to market leadership. Like other rare disease products at this early stage of launch, we are in a critical period of establishing the initial foundation upon which the continued and future success of LUMRYZ will be built. On Slide 5, as we move into 2025 and our foundation continues to strengthen, our LUMRYZ launch priorities are threefold: first, expanding our physician reach and impact across all patient segments; second, accelerating our investments in activating switch patients; and finally, driving improvements in patient persistency. 2025 will be a year of growth and a year where we can and will go further and faster, so let's review our launch to date results and our key priorities for this year. Moving to Slide 6. Since launch, we have delivered strong and consistent demand in our initial primary targeted audience, resulting in nearly $200 million in net sales, more than 3,700 patient starts and greater than 2,500 patients on therapy today. From a patient perspective, we have generated demand from all patient types, which was initially led by switch patients at approximately 50% of all patient starts. More recently, on Slide 7, we have seen a shift in our patient mix with the rapid growth of new to oxybate patients who, when combined with previously treated patients, in Q4, represented 62% of all starts. Importantly, reimbursed patients now represent nearly 3/4 of all patients on therapy. As stated on Slide 8, these results have been primarily driven by 2 physician segments. First, we have seen successful LUMRYZ uptake with a segment of physicians who have become our early adopters, and are core to the foundation we are building. This group of less than 500 early adopters have delivered nearly 2/3 of all LUMRYZ patient starts. It only represents 1/4 of the total oxybate market opportunity. The second group of physicians are those who have previously never prescribed an oxybate before. This group now represent approximately 15% of our patient starts, further validating the emerging market expansion opportunity LUMRYZ offers. These early successes are the result of focused commercial execution against important segments of prescribers, which validates that we can generate significant LUMRYZ demand. This also demonstrates that we have much more work to do in this highly competitive and concentrated rare disease market. With the same level of focus and consistent execution during 2025, we believe we will achieve significant results with the remaining 75% of the existing oxybate market we have not yet materially penetrated. This group of underpenetrated prescribers is a key pathway to continued growth, and in particular, switch patient growth, a primary focus for us in 2025. Based on our ongoing physician and patient market research, which is supported by our promotional response analysis, these physicians are typically slower adopters and require more consistent and improved commercial execution and impact, which is something we have addressed. In addition, we are deploying programs and initiatives to unlock future switch patients. This is important as some patients based on research can be concerned about reimburse matters such as out-of-pocket costs or even losing access to oxybates if they consider switching, all of which are being actioned. Turning to Slide 9, switch patients are and will remain a critical focus as they typically have an easier path to securing reimbursement and initiating LUMRYZ. They have proven to have meaningfully higher persistency rates, and on average, represent a greater revenue opportunity. As such as stated on Slide 10, our demand-based priorities for this year are focused on accelerating the growth of patients on therapy, and in particular, switch and reimbursed patients. We will do this by expanding and upgrading our sales force and deploying tools and tactics to drive greater switch patient focus and impact on this underpenetrated market opportunity. We're increasing our direct to oxybate patient marketing efforts to accelerate oxybate patient education and activation to ask for LUMRYZ, while continuing our pursuit of market leadership in the new-to-brand oxybate patient segment and capitalizing on the market expansion momentum we are building. And lastly, we'll continue our focus on increasing our reimbursed patient mix towards 80% and beyond with account and channel-specific strategies. If patient demand is priority one, persistency improvements are priority 1A. Moving to Slide 11. The narcolepsy market has had long-standing challenges with successfully keeping patients on oxybate therapy. First-generation oxybates have historically experienced more than 50% of new patients discontinuing therapy each year, with approximately half of that in the first 30 days. More recently, based on data we have reviewed, the 12-month discontinuation rate for new first-generation oxybate patients is now approximately 65%. This is something we believe hasn't received the attention it deserves as there wasn't any competition. But now there is, and for us, it is a priority. Just as we believe LUMRYZ will become the treatment of choice for oxybate-eligible people with narcolepsy, we're equally committed to being the leader in persistency as well, helping ensure patients have their own personal optimal LUMRYZ treatment experience and the associated benefits they deserve. For LUMRYZ, we expect that persistency would be impacted, as our patient mix became more heavily weighted to new to oxybate patients and our cumulative cohort of existing patients grew. This expectation has materialized as our new to oxybate patient cohort is growing, which from a persistency perspective is being addressed with actions we believe will improve this important metric. As it states on Slide 12, specifically what we know, is adverse events are one of the primary reasons for discontinuation. These tend to be common oxybate-specific side effects, such as nausea, dizziness and vomiting that typically occur when starting or increasing a dose, and depending on severity, can lead to potential discontinuations. However, they generally subside within 1 to 2 weeks, providing an opportunity to impact this by ensuring expectations are appropriately set with patients and deploying timely patient-specific interventions. This is important because as patients progress to their steady-state dose and efficacy increases, satisfaction with their treatment increases and the likelihood of discontinuation declines, especially early in a patient's treatment as nearly 2/3 of discontinuations occur in the first 90 days, thus providing a very clear window and opportunity to deploy patient-specific tailored messaging. And even though LUMRYZ' persistency rates are higher than that of the first-generation oxybates, that is neither good enough nor the appropriate standard. This year, we believe there's an opportunity to improve the overall persistency rate, which begins by impacting the first 90 days of treatment and stabilizing the overall discontinuation rate. Transitioning to Slide 13. To address this, we have recently made meaningful changes to both our strategy and our resources, including doubling our nursing team and our patient services center, allowing for more frequent and tailored patient interventions including prior to the start of therapy to better set treatment expectations; increasing our field support to deliver physician-specific interventions in advance of their patient's LUMRYZ refill; expanding our partnership with our specialty pharmacies, deploying custom pharmacy-based compliance and persistency programs; and lastly, progressing additional field-based patient support services that can go beyond the traditional telephonic and digital intervention tools to a more direct personal high-touch intervention at the patient and physician office level. All these investments are designed with the goal of improving persistency, both early in and throughout a LUMRYZ patient's treatment experience by delivering the right message to the right patient at the right time. So wrapping up, we are committed to leading the wafer patients in persistency and beyond, all the while providing the opportunity to free oxybate-eligible people with narcolepsy from forcibly waking up in the middle of the night after night, for a condition that as FDA stated is antithetical to the goal of improving sleep. Now to translate this into our Q4 results and 2025 financial expectations, let me turn it over to Tom.

Thanks, Greg. We'll start with how we currently estimate 2024 will wrap up followed by our expectations for 2025 and beyond. Moving to Slide 14. I'll highlight a few preliminary 2024 fourth quarter results, and we'll provide more detail when we announce full year earnings later this quarter. Starting with Q4, we estimate that net revenue will be approximately $50 million compared to $19.5 million in the fourth quarter of 2023. We also estimate Q4 revenue was impacted by approximately $6 million as there was about 1.5 less weeks of inventory in the channel at the end of Q4 versus the end of Q3. GAAP operating expenses are expected to come in at approximately $50 million, and excluding about $6 million of noncash charges for stock-based compensation and depreciation and amortization, cash operating expenses are estimated approximately $44 million. Importantly, our cash flow metric continues to improve, and cash flow for the quarter was positive, and netting cash will be approximately $73 million at December 31, versus $66 million at September 30. With respect to some key patient metrics, there were over 600 patient starts during the quarter, resulting in an increase of over 200 patients on therapy. We saw a slowdown in the conversion enrollments to patients starting therapy as we entered the holiday season. And after the holiday impact, we believe that patient starts would have been consistent with the 700 per quarter pace of the first 3 quarters of the year. During 2024, there were more than 2,700 patient starts and over 3,700 since launch, and all of which results in 2,500 patients on therapy as of December 31 compared to 900 at the end of last year. I'll turn now to Slide 15 and current expectations for 2025. Earlier, Greg reviewed our key launch priorities, and depending on the execution against those as well as other plans and assumptions, we are projecting the following full year results. Revenue is projected to be in the range of $240 million to $260 million, which represents about a 50% increase at the midpoint of guidance over 2024 full year revenue. We believe that 2025 is forecasted with an appropriate degree of conservatism regarding patient starts and patient mix, which are weighted more heavily to new to oxybate patients, and revenue could be higher with improvements in several key assumptions such as patient demand, patient mix and persistency. And with a highly leverageable cost structure, we also expect that cash flow for 2025 will be positive and in the range of $20 million to $40 million, and that we can fund the ongoing launch in Phase III IH study from cash on hand and cash flow from operations. I'll wrap up my commentary on Slide 16 with what we believe and how we can achieve the $1 billion-plus revenue opportunity for LUMRYZ. We expect that over the next several years, LUMRYZ will become the leading oxybate therapy for the treatment of narcolepsy, and that the oxybate market will continue to expand, just as we have seen since the launch of LUMRYZ. The path towards achieving $1 billion of revenue is straightforward, requiring a constant base of approximately 8,000 reimbursed patients, and 18 months in the launch, we are nearly 25% of the way towards achieving that goal, with over 1,800 reimbursed patients on therapy. And with 3 patient segments totaling over 50,000 patients, there are multiple paths to gain the number of reimbursed patients needed to achieve $1 billion of sales. However, for example, if only 30% of the 50,000 patients initiate treatment with LUMRYZ and factoring in persistency, LUMRYZ will become a $1 billion-plus product, all of which is being built on a highly leverageable operating structure poised for significant cash generation and earnings. At current gross margins, projected GAAP operating expenses and our existing tax and capital structure, we estimate that reaching $1 billion of revenue will yield approximately $6 of diluted earnings per share. And with that, I'll turn the call back to Greg.

Thank you, Tom. Before we wrap up and open it to Q&A, let me provide a brief update on the work we're doing with our life cycle management programs on Slide 17. First and foremost, we have a sustainable high-growth franchise in LUMRYZ that can drive significant long-term value with current patent protection to early 2042, and that value opportunity extends potentially beyond that of LUMRYZ and narcolepsy. As previously stated, we are conducting our Phase III REVITALYZ trial in idiopathic hypersomnia or IH, which is currently enrolling as planned and is expected to be completed in the second half of this year. Of note, we have a legal matter we must resolve around the potential NDA filing and approval of LUMRYZ in IH. Assuming we are successful in this regard, we currently expect to be able to file the NDA approximately 6 months post completion of our pivotal trial. We have become quite bullish on the potential prospects of LUMRYZ in IH, both because of what we've learned and what we hear directly from clinicians and leading key opinion leaders. As stated on Slide 18, there are approximately 42,000 diagnosed IH patients under the care of physicians. Yes, less than 8% are being treated with the only FDA-approved treatment. What we hear from clinicians is that many patients, due to their deep sleep inertia associated with IH, cannot physically wake up in the middle of the night to take a second dose, and therefore are not able to benefit from a full therapeutic treatment. As such, we routinely hear that the LUMRYZ value proposition for patients is potentially even greater in IH than in narcolepsy. In addition, our formulation scientists continue to work with our third-party partners in developing a once-nightly lower/no sodium oxybate formulation having a target product profile bioequivalent to LUMRYZ, and if successful, we intend to pursue FDA approval for this product to treat both narcolepsy and IH. Turning to Slide 19. As we start the new year, key milestones for this year include our quarterly financial and launch-related results, include revenue, patient demand, patient mix and net patients on therapy. This is the successful completion of our pivotal IH trial and progress toward NDA filing readiness, updates on our no/low sodium development programs, and of course, our continued progress in ongoing litigation matters as previously noted, including the November antitrust jury trial against Jazz, as well as the advancement of our recent patent infringement suits we filed against Jazz to protect our once-nightly oxybate innovation. Moving to Slide 20. In closing, we have built a strong demand-based foundation for LUMRYZ, which continues. We're investing in the areas to accelerate the launch and address the challenges in our pursuit of the $1 billion LUMRYZ potential. We're advancing our life cycle management programs that offer, if successful, a significant expanded oxybate market opportunity for LUMRYZ, all of which is supported by robust intellectual property portfolio extending into early 2042, a portfolio we are continually expanding. LUMRYZ represents a meaningful value-creating opportunity built on a highly leverageable cost structure, which should result in significant cash and EPS generation over the coming years and through its patent life. Furthermore, this cash generation foundation creates potential optionality to invest in the growth of Avadel and/or return capital to our shareholders. In 2025, we look forward to many more stories like our ER nurse practitioner from Texas. We're optimistic for the future and look forward to providing additional commercial updates as appropriate. We thank you for your time today, and as always, for your support. We will now open the line for Q&A. Operator?

[Operator Instructions] It comes from the line of François Brisebois with Oppenheimer.

Thanks for the questions and the update. I just wanted to better understand a little bit, maybe, Tom, if you can go into if we just kind of see the patients on therapy and we see the sales, right, there's the net revenue per patient that you kind of look at, that comes in at a certain number. Can you help us understand why -- how to think about that number going forward? Does it change? And maybe the change from that number versus third quarter and where it came in? Because it does seem like your number of patient starts was almost in line. The holidays took it off, but 600 was a solid quarter. So just a little more on the net revenue per patient and how that can get better with reimbursement.

Sure. Thanks, Frank. And maybe a good starting point is the question you asked at the beginning, which is where patients were at 12/31. And as we're thinking about revenue heading into 2025, we have to make an assumption that a percentage of those patients will discontinue during the course of 2025, which, of course, impacts the exit run rate. And then in terms of comparison of Q3 to Q4, we did have net patient adds, perhaps a driver which we anticipated was going to happen was the change in the inventory level in the channel, which impacted revenue by about $6 million.

Okay. Great. And is that $6 million, on that note, is that -- because we -- the inventory play is something to be expected a little bit. Was the $6 million more than expected? Or was that kind of in line with what you guys expected?

Frank, I think from my standpoint, it was in line with what I expected. We signaled this during the Q3 call that we expected to be fewer weeks of inventory in channel 12/31. And it's really a function of capacity constraints and storage constraints in the specialty pharmacies where they had indicated they were at capacity in Q3. So I wouldn't take it -- certainly would not take as an indication of any slowdown in demand. It's just the specialty pharmacies couldn't carry any more than they could at September 30. In a normalized range, I think 2 to 4 weeks is a normalized range to think about. It's tough for me to predict where we will be in the Q1 or subsequent quarters, but I would think about inventory, at least in the channel, in that range of 2 to 4 weeks.

Okay. Great. And then just lastly, going forward, in terms of metrics to be expected for us to understand better the persistency and the new patients versus the switch patients, is this something that you'll give clarity on going forward just to see how these actions are going, or we don't know yet?

Yes. Frank, the way we think about it going forward is patient demand in the form of patient starts, patient mix in terms of source of patients and of course, net patients on therapy. We think all of those metrics will provide the sort of clarity you're looking for.

Our next question comes from the line of Andrew Tsai with Jefferies.

Thank you for sharing the progress and the expectations. So maybe the first question around the 2025 guidance on the patient numbers. If I take the midpoint of patients initiating therapy in 2025, I think that's -- I'm assuming that's on top of the 3,700 you have today. And if that's the case, then taking that resulting number and then working out the math with the patients on LUMRYZ guidance that you have at the midpoint, basically, is it correct to think that the implied discontinuation rate by year-end 2025 could be closer to 50%? I'll start off with that.

Yes. Listen, Andrew, I don't disagree with your math. So that is what it implies. This is one of those areas we think there's really great opportunity for improvement versus our current assumptions, which is why we've made the investments we've made around persistency and driving patient demand. We believe we've taken an appropriate approach towards forecasting 2025 at a conservative level, and what we are thinking about for 2025 is that we're going to be more heavily weighted towards new to oxybate patients, which does impact overall persistency.

And I guess I'd have to think about it more, but you did mention how your current guidance is conservative, but it makes me think how conservative is this ultimately, how much higher could these revenues be ultimately? Do you have actually a little bit more color around that? And then how much is it from the -- in terms of growing patient volume or driving less discontinuations more realistically that can drive higher sales in 2025?

Andrew, I think, first of all, I think most important is if we think about the first 6 quarters of launch, we had a strong start. We clearly have hit some challenges with persistency here in the second part of 2024, and we have taken the actions to address those persistency matters and also ensure our focus on driving switch patients. So your question as to which one is more important, the answer is they're both important. And I'll just again restate that if you look at where we've indexed our efforts early in the launch, in our early adopters, we have actually significantly penetrated that audience, and it's overrepresentative of their potential within the oxybate market. If we can continue to replicate that over time, we should have that sort of success and beyond across all patient segments. So we do think there are opportunities to improve and beat, if you will, how we've guided. I would say at this point, we need to continue to assess the interventions and the impact of those interventions and give us opportunity in subsequent quarters to provide more clarity in that regard.

And then very last quick question. Maybe you did share in the slide and I missed it. How should we think about the overall mix of your LUMRYZ patients going forward by year-end? Would you still expect the same proportion that you're seeing right now, year-end 2024?

Yes. So Andrew, it's Tom. So what we had put on the slides, the mix of patients in the fourth quarter was certainly more heavily weighted towards new to oxybate and previously tried and discontinued. As we're looking into 2025, and again, I would view this as one of those assumptions we made on a more conservative basis, we think we're going to continue to be overweighted in terms of new to oxybate and previously tried and discontinued. An improvement in patient mix will certainly drive an improvement in revenue.

Our next question comes from the line of Marc Goodman with Leerink.

Yes, a couple of things. First, I may have missed this, but the average selling price was what? Like if it was $100,000 in the second quarter and $96,000 in the third quarter, what was it in the fourth quarter?

Marc, it's Tom. So listen, preliminarily, of course, we're still closing the books, but it averaged about $96,000 if you just take the revenue reported and adjust it for the inventory of $6 million. Divide that by the average number of patients out there, it works out to about $96,000 per quarter.

So apples to apples, it's about -- so it's the same as third quarter.

About the same as third quarter, that's right.

Okay. Fine. And then just secondly, historically, when -- I mean, in order to get to $1 billion, are you basically counting on the IH indication? Is that we're counting on? I mean when a product goes to $170 million to $250 million, I mean, obviously, a new indication can change the growth trajectory, but outside of that, we're used to seeing growth rates that kind of slow each after year. So we have to be thinking that this indication slows a little bit over the next couple of years in growth rates. It's not going to come $1 billion in narcolepsy, right? This is narcolepsy and IH.

Marc, the way we think about it, what we've talked about in terms of $1 billion opportunity excludes IH.

So can you talk about -- is there an expectation that 2025 is a growth year of 40-something percent, whatever the number is to get to the midpoint, and then it actually is faster in 2026? I mean because traditionally, that's not normally what we see.

Yes. I think from our perspective is there is a significant amount of patient opportunity to grow LUMRYZ, whether from the 3 different patient segments that Tom described and our penetration of that -- those respective patient segments doesn't have to be significant to be able to realign those sorts of numbers only in narcolepsy alone. And we've seen those levels of penetration in our early adopter audiences already, right? So if we can continue to translate that into the broader audience, then we believe over time and the slope of that curve will progress the way it progresses, we can get to those sorts of numbers on patients given the opportunity and what we hear in our market research, right, from that perspective. I will say it's not a -- it certainly is a therapeutic category where consistent growth continuously quarter after quarter after quarter has been demonstrated, and we believe we can continue to execute and deliver on that over time, and based on the patient source and opportunity we have and what we hear from our research.

And just last question, because I guess this kind of answers when peak sales would be. Peak sales would be the year before you go LOE. When are you assuming the LOE?

Yes. We're not defining when peak sales are. But at this point, as we described in the call, we have patent protection right now through early 2042.

Our next question comes from the line of Ami Fadia with Needham & Company.

Can you talk a little bit about what has been the dynamic with switch patients and why we've seen a reduced mix of switch patients? And what your assumption is in your 2025 outlook for what percent of patients will be switch patients? And what do you think you need to do to really increase that mix? That's my first question.

Yes. Again, I think the data shows what's occurred. We've seen, early in the launch, a much higher percentage of them. And as we've gotten to the last couple of quarters, it has slowed down and stabilized, to a certain extent, in the kind of low to the mid to higher 30% of the total patient population -- of our total patient starts. In part, we've gotten, I would say, for lack of a better word, those who are waiting and looking for LUMRYZ. And now we're -- and in particular, in our early adopters. And now we are in the market, really expanding our reach and investing our efforts to both educate direct to patients through our direct-to-patient activities, to educate them and activate them to go seek LUMRYZ, where, where we've done that to date, we've seen that be successful, and we've expanded our sales force to expand our reach to be able to get wider and get more frequency into this other 75% of the underpenetrated market opportunity. And we think in both those scenarios, we're going to continue to see growth in new to oxybate and previously treated and discontinued. And we're focused on accelerating the switch, which if we do those things, our entire demand will grow.

Got it. Just with regards to your guidance for 2025, you've sort of characterized it as something that has upside. What do you think could be the biggest driver of upside? And when you talk about the persistency rates of 50% that you've assumed in your guidance, what do you believe you need to do to sort of increase that persistency rate? And what could drive the persistency rates to be better than the Jazz products that have been on the market for many years? And then I have one quick last question.