A Seldom Discussed Detail Reignites The Avadel Bullish Case

Summary

• Demand for Avadel's stock from institutional investors has made me think twice about my bearish stance on the company.
• The FDA would not have reduced the number of patients needed for FT-218's clinical trial unless there was a robust response from the drug compared to placebo or Xyrem.
• Even if FT-218 isn't superior against Xyrem, the drug can still serve as a discount branded competitor.

Image Source: Medium

In my November article, I expressed skepticism as to whether Avadel's (NASDAQ:AVDL) FT-218 (once-per-night sodium oxybate) can achieve the same level of efficacy as Xyrem (twice-per-night sodium oxybate) based on its pharmacokinetic parameters in Phase 1.

At the time, I strongly believed the drug would fail its investigation. However, the company's recent closure of a $65M equity offering with multiple biotech hedge funds captured my curiosity.

When institutional investors pull the trigger on battered biotech stocks, I like to rethink my research. After all, if a team of experts working for these funds did their due diligence and concluded the drug works, then I may be missing something in my analysis.

Putting myself in their shoes, I have uncovered a seldom discussed detail which warrants a 180 degree turn to my outlook on AVDL.

I now believe the drug is more than likely to succeed in its investigation to match the efficacy of Xyrem, with just one single dose of sodium oxybate before bed.

The rest of the story is what bulls have already heard before. Here's a summary: If the drug succeeds (and is very likely to), then narcoleptic patients would no longer have to wake up in the middle of the night to administer Xyrem for another 4 hours of sleep. Therefore, patients already on Xyrem should switch en-mass to FT-218. Since Xyrem has an addressable market of $1.6B based on Xyrem's FY2018 revenues, this is likely to cause FT-218's sales to skyrocket and create massive wealth for AVDL's shareholders.

The potential to achieve 9 to 10 figures in sales is quite fruitful for a company with only $480M in enterprise value. Hence, let's take a look as to why the bull case for AVDL has been reignited.

The Problem With FT-218's Fortune Telling

First of all, it is important to note the drug is merely a different formulation of the same active pharmaceutical ingredient as Xyrem. Heck, even the administered doses are kept the same.

Therefore, FT-218 only had to undergo PK and safety testing in Phase I before skipping straight to Phase III. The results were good but not good enough to close potential loopholes. In terms of Cmax; AUCinf (absorption), concentration after 8 hours, and dose-response, the 4.5g FT-218 saw similar but consistently lower responses compared to twice-nightly sodium oxybate when administered to healthy volunteers.

At the effective dose for sodium oxybate (6g), FT-218 again saw consistently lower PK parameters than Xyrem save for total absorption, which was slightly higher. Based on this data, a plausible theory emerged that FT-218 will be able to achieve the same level of response as Xyrem because its Cmax at the first dose is higher and that total exposure remained on par.

While the theory appears to be sound, FT-218 lacked any clinical data to definitively support this hypothesis due to the lack of a Phase II clinical trial. However, I believe a new look at a recent development will point to the trial's success.

Old PR Through A New Magnifying Glass

Back in Sept, AVDL announced it had reached an agreement with the FDA to reduce the sample size needed for FT-218's Phase III from 264 to 205. No modifications were made to the fundamental design of the study, including the primary or secondary endpoints, dosing scheme or duration of the study.

Investors rejoiced at this announcement, because as it placed AVDL 1 year ahead in its investigation goals as to waive any fears of a stock dilution to fund research expenses.

However, I believe investors may have significantly underappreciated the magnitude of this announcement. Here's why.

FT-218's clinical trial started in Dec. 2017, and ran into problems with patient enrollment shortly afterwards. To prove efficacy, the drug must be tested among patients who never took Xyrem, because patients who did would immediately realize if they were taking FT-218 or placebo.

Such subset of patients were very difficult to find.

Patients who were enrolled in the trial were then randomized to either FT-218 or placebo based on trial protocol and were treated respectively and kept in touch with follow-up visits.

Meanwhile, the FDA, with access to the unblinded data, has been monitoring the whole investigation.

Here's the catch, one of the few reasons why the FDA would allow the patient sample size to be reduced, while not changing any other endpoint, is if the drug is working.

How do I know this? Because the new protocol is reflective of what happens when a drug can demonstrate efficacy with a high degree of statistical significance.

Under a Special Assessment Protocol, the FDA allowed FT-218 to be investigated without any Phase II trials and only one Phase III trial. They are very well aware of the context behind the investigation.

If FT-218 was not showing a sizable response in terms of reductions in cataplexy attacks, improvements of CGI sleepiness scores, or Longer MWT sleep latency compared to Xyrem, then the FDA would not have agreed to the company's amendments to its statistical analysis plan. This is because if the response was small or inadequate, then a larger population of patients would need to be enrolled to demonstrate statistical significance.

On the other hand, if, for the sake of argument, nearly 100% of patients who took FT-218 witnessed improvements in their primary endpoint compared to placebo or to the same level as Xyrem, then it is highly unlikely the addition of more patients would swing this result for the better or worse. Hence, the study can be completed much sooner than expected.

Considering FT-218's PK data showed lower concentrations in the bloodstream than Xyrem in Phase I, the reduction in number of patients enrolled could not have been due to the abnormal levels treatment related AEs/SAEs.

Therefore, I now fully agree with the company's findings that FT-218 can indeed match the efficacy of Xyrem with a single nightly-dose, despite having lower maximum concentration; lower dose-response proportionality, and roughly equivalent levels of total absorption.

Perhaps more critically, FT-218 is not being evaluated in a non-inferiority trial, nor is it a generic. In fact, the proportional of patients achieving a satisfying 8 hour sleep isn't even one of the primary or secondary endpoints of the study (But is likely a part of its statistical analysis plan). Hence, even if patients who took FT-218 slept on an average of 8 hours or less, the drug will still be approved due to robust efficacy and statistical significance, and serve as a branded competitor to Xyrem. In such a scenario, there will be several situations to justify its circumstantial use.

I see it as a positive if there is room to fall back on even if the average sleeping time of patients who took FT-218 didn't best 8 hours.

Room To fall Back On

Speaking of a margin of safety, in addition to FT-218, AVDL does have a few other products currently in commercialization. Its legacy generic pipeline is declining, but can still fetch a decent $50M to $100M in the event of a 1x to 2x sales multiple.

More recently, the company's approval of Nouress for newborns requiring total parenteral nutrition should aid in its future sales streams. Tragically, this method of treatment is currently enduring a period of shortage in the U.S., despite the abundance of newborns needing nutritional care post-delivery. Considering the cost for one day of treatment can range from $50 to $120, I believe AVDL can be justly awarded in solving this critical health problem.

Indeed, the company is estimating a $50M total addressable market for Nouress. While there is another patented competitor, there isn't any reason why the two companies can't split the pot.

If I were to estimate, AVDL would be worth up to $150M to $200M in terms of EV if FT-218 completely failed its investigation; $250M to $300M if FT-218 worked but not as well as Xyrem, and $1.0B to $1.5B if patients with narcolepsy could get a satisfying sleep with just one dose of FT-218. I now think the last scenario is more than likely to be true. Even if turned out otherwise in Q22020, the stock won't be going to zero.

The asymmetric risk-reward profile is what I currently like about AVDL. If a physician asked me (I have narcolepsy without cataplexy) whether I would try FT-218 for a full night's satisfying sleep, I'm going to have to change my mind from before and immediately take him/her up on the offer.

Analyst’s Disclosure: I am/we are long AVDL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.