October 30, 2023 - 7:02pm EST by
2023 2024
Price: 10.02 EPS 0 1.17
Shares Out. (in M): 89 P/E 0 8.6x
Market Cap (in $M): 895 P/FCF 0 8.6x
Net Debt (in $M): -138 EBIT 0 0
TEV (in $M): 757 TEV/EBIT 0 0

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AVDL is a commercial stage specialiaty pharmaceutical company that just launched its key product LUMRYZ in early June 2023.  LUMRYZ is a drug to treat a rare sleeping disorder known as Narcolepsy.  LUMRYZ is a new & improved version of an a pair of existing drugs known as Xyrem & Xywav (Xywav is a lower sodium version of Xyrem).  Xyrem & Xywav combined do about $1.9B a year in revenue with about 16K patients on the drug at a per patient per year cost of around $120K.  Xyrem, Xywav, and LUMRYZ all use the same active ingredient -- Oxybate.  Xyrem was first approved by the FDA in 2002 and has been on the market for over 20 years!  Xywav was approved in 2020 as a lower sodium version of Xyrem.

The one key thing you need to know about Xyrem & Xywav is that they have a very unusual dosing profile: they require the patient to take two doses.  The first dose is to be taken at bedtime.  The patient has to set an alarm clock to wake up 2.5 - 4 hours after the first dose to take the second dose.  JAZZ, the manufacturer and marketer of Xyrem & Xywav, was never able to figure out a way to deliver the drug with a more convenient dosing regimen.  The need to wake up in the middle of the night is not only a nusance and a factor that keeps many people from taking the drug but also an issue that causes disrupted sleep in patients who have a sleeping disorder.

This is where Avadel and LUMRYZ come in.  LUMRYZ is a one-nightly version of Xyrem.  It is exactly the same drug as Xyrem, but the drug was able to uses Avadel's drug delivery technology to create a PK profile that allows for once-nightly dosing.  You only have to take LUMRYZ once at bedtime.  With LUMRYZ, you don't have to wake up in the middle of the night to take the second dose.

Unlike many new drug stories where the ultimate market potential is very speculative, the beatuy of the AVDL opportunity is that it is addressing a well defined market opportunity (albeit with some less defined upside potential).  We know for a fact that there are 16K patients on Xyrem & Xywav and the drug generates $1.9B/year of revenue.  To the extent that we can expect a certain percentage of the existing Xyrem & Xywav patients to switch over to LUMRYZ, we have a well defined base case opportunity.

I have followed AVDL for over 4 years and have done extensive research on the company's drug and commercial prospects, including over 30 doctor expert calls and 5 surveys.  Based on my research, I expect about 40% of the 16K patients to switch to Lumryz.  This should generate about $770M/year of revenue.

On top of this, AVDL has presented credible research that suggests that the new 1x nightly option will expand the market.  AVDL's research indicates that about 1/2 of the patients who try Oxybate end up discontinuing the drug, and the issues associated with 2x nightly dosing is a big reason for why.   Either the patients took the drug correctly, but found the benefit not worth the difficulties of getting up in the middle of the night, or patients didn't take the 2nd dose and had suboptimal efficacy that caused them to not find the drug worthwhile.  AVDL has done a rigorous analysis of claims data to estimate that there are about 20K patients who have tried and stopped using Oxybate over the last 5 years.  If even just 15% of those were to give Oxybate another chance with LUMRYZ, that would be another 3K patients generating $360M/year of revenue.  That would take LUMRYZ's revenue over $1B.

Based on various analysis that includes using both surveys and insights from the early launch metrics on how many perscriptions of LUMRYZ are being written each month, I have developed a high degress of conviction that the LUMRYZ revenue trajectory is going to look as folllows (with consensus expectations as comparison):

      Q3 2023 Q4 2023 Q1 2024 Q2 2024 Q3 2024 Q4 2024   2024 2025 2026 2027 2028
    OCM Rev                    5                  23                  46                  72                  94               115                 327               625               821               950            1,034
    Consensus Rev                    5                  14                  18                  27                  35                  44                 140               275               349               406               442
    OCM Rev / Consensus Rev 1.0x 1.6x 2.6x 2.7x 2.7x 2.6x   2.3x 2.3x 2.4x 2.3x 2.3x

My revenue forecast leads to the following NI/FCF and Net Cash positions:

    Q2 2023 Q3 2023 Q4 2023 Q1 2024 Q2 2024 Q3 2024 Q4 2024 Q1 2025 Q2 2025 Q3 2025 Q4 2025
  Rev                      5                  23                  46                  72                  94               115               133               150               165               178
  GM   95% 95% 95% 95% 95% 95% 95% 95% 95% 95%
  GP                      5                  21                  44                  68                  90               109               126               142               156               169
  Cash OpEx                 (38)               (38)               (39)               (39)               (40)               (40)               (41)               (41)               (42)               (42)
  OCF                 (33)               (17)                    5                  29                  50                  69                  86               101               115               127
  Addl CF                   (21)                
  Change in Cash                 (33)               (38)                    5                  29                  50                  69                  86               101               115               127
  PF Cash 191               158               120               125               154               204               273               359               461               575               703

And the following long-term projections and NPV to patient life calculations:


I believe AVDL will generate significant outperformance over the next 12 months due to the following reasons:

1) The revenue beats that I project should prove out a launch trajectory that is close to 2.5x current market expectations.  If consensus starts to converge towards my expectations over time, that alone should generate a significant repricing.

2) As a value-investor, I like to justify an investment in a one-product specialty pharma company using an approach I call "NPV to Patent Life".  That is the analysis shown above.  I project the cash flows that the drug will generate up until its patent expiration, and I discount those cash flows back at a high discount rate of 13%.  I assume no terminal value.  Just a finite set of cash flows (in this case lasting 20 years), but that allows for some erosion after 14 years.  This analysis yields a fair value of $38/share today.  The NPV to patient life analysis usually produces a very conservative valution figure that companies often overshoot.  Keep in mind there are potential upside cases where peak revenue for LUMRYZ could be in the $1.5B - $2.0B range.  

For those of you who don't follow biotech, it should be noted that we are in a big biotech bear market right now.  Valuations are depressed, and it is very hard to raise capital right now with attractive terms.  I believe the key to success in this environment is to find stocks that are in control of their own destiny and that don't need to raise any more capital.  AVDL fits the bill.  I expect AVDL to become profitable in Q1 2024 (well ahead of consensus) and to do so with over $100M of cash on the balance sheet.  Even if I am wrong by a quarter or two in terms of timing, AVDL should get to profitability pretty quickly with ample cash.  This should allow AVDL to plow through a very though biotech market and avoid any dilutive financings that would otherwise detract from value.

In summary, I bleieve that AVDL should be worth 3-4x its current value.  I have a high conviction varient view that within 12 months, LUMRYZ will have launched significantly faster and achieved much higher revenue than consensus currently expects.

A summary of my thinking is as follows:

A quick snapshot of the market opportunity is as follows:

A summary of two proprietary surveys that I have done is as follows:




I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


The key catalyst for AVDL is going to be the revenue and launch metrics (# of patients sent to the RYZUP patient assistance program, # of patients on drug, etc) that get reported on a quartelry basis.  If those metrics start to prove out the launch trajectory I believe will unfold, estimates will go up substantially and the stock will be 2-3x higher.

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