Jazz Pharmaceuticals : The End Of A Monopoly
Long Only, Biotech, Tech
Seeking Alpha Analyst Since 2013
Summary
- Jazz Pharma $ 1.8 B narcolepsy market share at threat.
- Generics in sight.
- Xywav will not compensate market loss.
- Avadel's FT218 a better drug.
Introduction
In the US alone, 200,000 patients suffer from narcolepsy, which is associated with excessive daytime sleepiness and cataplexy.
Jazz Pharmaceutical (JAZZ) has been addressing this market, relying on its flagship compound, Xyrem, for many years now, grasping around 15,000 patients with constant yearly increase and generating around $ 1.8B revenue from it, out of its $2.3B total revenue.
While these figures for JAZZ, regularly beating revenue forecasts and increasing sales guidance, seem rather idyllic, dark clouds can be seen coming to the horizon.
Analysis
Here comes the generic risk as eight compounds so far pre-approved by the FDA are expected to hit the market in 2023. Following a lengthy patent dispute that has helped Jazz keep its monopoly, the first Xyrem generic are expected to hit the market in 2023.
What makes the fortune of Jazz, Xyrem, could signal its demise, as it has not been able to replace it or to improve it significantly so far. Xyrem has been the main contributor of Jazz revenue.It is true that Xywav, a low sodium drug which Jazz expect to replace its Xyrem falling into public domain, does bring additional safety, but this is and will be limited to a small proportion of patients that are facing cardiovascular risks. Sales of Xywav (launched in Q3 2020) have been anecdotal at best, while they might increase in the future. Patients with no cardio-vascular comorbidity and insurance companies will rather go for the generic compounds when they are available, than pay a huge premium for a drug adding no sleep benefit.
It is a certain fact that starting in 2023, the proportion of sales generated by Xyrem will start a steady decline year after year.
But the story does not stop there. Another threat, and very serious, appears to the horizon.
Avadel (AVDL) just announced that the FDA has accepted the NDA filing for its flagship product, FT218.
AVDL web site states that "FT218 is an investigational, once-nightly formulation of sodium oxybate using a proprietary Micropump™ technology for extended-release oral suspension in the treatment of excessive daytime sleepiness (“EDS”) and cataplexy in patients suffering from narcolepsy" and that "Sodium Oxybate is currently the only drug approved " for this disease.
Xyrem's delivery of active ingredient requires patients to take two doses per night: one before bedtime and another in the middle of the night. In the following article we explained why we believe the once nightly FT218 is superior to Xyrem and Xywav. We also explained that, being in many aspects a different drug, it will not have to meet the constraints faced by the Generic compounds (Paragraph IV – 30 Months stay).
Low doses were also proven efficient as “7.5 g, and 6 g doses of FT218 demonstrated highly significant, clinically meaningful improvements on the Maintenance of Wakefulness Test, Clinical Global Impression-Improvement scores, and mean weekly catalepsy attacks”.
A recent commercial assessment completed by Avadel found that "nearly 6 out of every 10 patients identified by treating physicians as candidates for Sodium Oxybate therapy but are not going on treatment, primarily due to dosing related challenges." which means that market share currently held by Sodium Oxybate can be extended with this new compound.
Here is a reported example of patient with narcolepsy and catalepsy:
“Sue” (a 66 year old lady) that used to take Xyrem, had residual daytime sleepiness, and was jeopardizing her ability to drive, and had to take high doses of stimulants as well.
Since Sue has been included in FT218 clinical trial, she finds it very easy to wake up in the morning and also wakefulness in day time is much improved. She felt rested more on FT than Xyrem and she felt much more awake during the day: she was able to drive again.
FT218 is a game changer and it will be proven as such with little doubts. In addition, Sodium Oxybate for Narcolepsy and Catalepsy market has been largely addressed, increased year after year, by JAZZ. Therefore, it shall be easier for a substituable compound that has shown his superiority to address this market than it has been for JAZZ. Additional safety, efficacy and easiness of use should in addition increase the overall market share for nightly products within this disease.
We do not expect JAZZ to stay still without tempting some kinds of litigation as they have done in the past. However, its options are limited and we do not think any action might prevent FT218 to become the de facto standard.
In the latest Q4 earning conference calls, there has been little mention of FT218, which should have been the concern of the moment.
Such confidence was also reflected in BofA Analyst investor bullish analysis on JAZZ which dared not mention the FT218 risk.
However, one Analyst from Barclays did ask a question about AVDL and here is what JAZZ’ CEO, Bruce Cozadd, said:
“We do believe they should need to Paragraph or certify against Orange Book-listed patents on Xyrem that have to do with the safe distribution of the drug, both as regards our distribution system, which ensures safe use of the product and limits abuse, misuse and diversion, as well as helping patients understand an important drug interaction. That Paragraph IV certification can happen on submission, but it can be required at any point during the review process as well. And then of course we have -- what we believe is relevant intellectual property and will defend that in the best way possible for Jazz.”
While Cozadd showed apparently a great deal of confidence, as a matter of fact he could have hardly said less to a group of Analyst and towards his shareholders.
In no way the shareholder basis would have accepted a CEO speech where he would have agreed that his flagship compound was in great trouble. But let us examine what Latitude does JAZZ have.
1-Paragraph IV (PIV) Certification
Avadel had two options to address the potential use-code overlap with Xyrem: PIV certification or Section 8 carveout.
Paragraph IV applies to generic drugs, in particular Paragraph IV prevents companies to go to market 30 Months following approval.
Will this apply to FT218?
Avadel has chosen to file under Section 8, carving out the Xyrem use codes. Therefore, there will be no 30-month stay that would apply if there was a PIV certification.The FDA has accepted the filing under Section 8 within 74 days from the filing. So there is close to none chances that the FDA asks Avadel to change to Paragraph IV certification during the process. In the following article written prior FDA filing acceptance, we highlighted as well that DDI, REMS and Orange Book (OB) use-codes shall not offer JAZZ a sufficient ground for preventing FT218 to go to market.
A very confident AVDL CEO, Greg Divis, confirmed this sentiment in the following conference call, stating FT218 is such a new product that has produced its own data in the clinical trials so that it should be able to avoid Xyrem protection mine field and market as soon as they get approval by the FDA (which should happen by mid-october 2021). In the same conf call Mr. Divis downplayed the impact of an FDA filing acceptance, stating that the real thing would be the PDUFA. Truth is that the acceptance of this filings removes a lot of burden on the stock. Basically this acceptance means that , with 99% chance, FT218 will not qualify for PIV. We can only salute AVDL’s CEO great self-control not to chant victory before it is a sure thing. Probably Mr. Divis is tied with legal constraints as well.
In summary : at this point (filing acceptance), PIV is not an option : there is very little chance for this drug to face PIV and the 30 months stay.
2- Patent infringement and potential legal action
There is no doubt JAZZ will try a legal action. We highlighted in previous article that it had little chance to succeed but we can elaborate further: JAZZ will be able to sue AVDL with better changes after the FDA approves the drug by mid-October when it has access to the drug submission details.
However there will be no way at this point for JAZZ to prevent AVDL from starting to sell the compound.
In order for JAZZ to prevent the marketing of the FT218 it should produce an injunction. In order for an injunction to be granted in this case they are ALSO going to have to show that an injunction is the only remedy for them AND that the merits of the case lean in their favor.
JAZZ will also have to post a bond if they seek a temp restraining order and injunction that will have to be large enough to cover AVDL losses if the case is decided in AVDL favor : this is very unlikely to happen.The body of precedent tilts against JAZZ without even considering the merits since the burden of proof for the plaintiff in an induced infringement case is so high and has been repeatedly affirmed by the courts. The merits of the case, in our opinion, also tilt heavily against jazz.
We believe that, likely after approval, JAZZ will file a suit for induced infringement and also request temporary injunction, because it is the role of its CEO towards its shareholder basis, but it will be denied.
The future of JAZZ valuation
JAZZ $9B + market cap which has witnessed ups and downs since 2015 still holds well so far because most analysts only think the trend of the past will replicate in the future.
Truth is that JAZZ so far has been defending harshly its market and increased sequentially its sales to the benefits of the shareholders, so this strategy mitigated successfully the loss of shareholder value. Truth is also that this trend is likely to fade as newcomers are in sight, with AVDL’s FT218 being the likely middle term winner in this battleground.
We therefore predict a transfer of wealth from JAZZ to AVDL in the incoming years as gradually FT218 replaces Xyrem and creates itself its own share within the unmet medical needs related to Nacolepsy and Cataplexy. In other words, it is JAZZ’s market cap shall deflate while AVLD’s, which is only around $500M, shall inflate starting 2021, while the generic 2023 should accelerate this trend with regards to JAZZ.
While we predict that JAZZ price per share should decrease in the incoming years, we believe that AVDL share price should gradually reach the $13 to $17 levels in the near term.
We believe AVDL will generate at least $400 to $800M of revenue in a few years. A conservative multiple of x4 of this revenue level should allow AVDL to reach between $1.6B and $3.2B market cap and trade at $30-60 within 1 to 3 years. While JAZZ market size shall decrease, it shall not decrease by that extent (at least until Generics come into action in 2023) because of FT218 specificity to address a wider patient base and JAZZ diversification strategy.
In conclusion
JAZZ Future is not so bright in the Narcolepsy and Cataplexy business, signal of the end of a monopoly.
The purchase of GW Pharmaceuticals by JAZZ for $ 7.2B is probably an untold acknowledgement by M. Cozadd that he is looking elsewhere to diversify revenue. The MS business is a very lucrative business as well that made the fortune of Biogen with patients that are never cured and always need to be treated with expensive drugs. So, it is likely a good move, which value will remain to be assessed in the incoming 2 to 5 years.
Therefore, wise investors should think about investing where the value is created so they can shout at some point “The King is dead. God saves the King !”
Analyst's Disclosure: I/we have a beneficial long position in the shares of AVDL either through stock ownership, options, or other derivatives.
Although I am not so bullish about JAZZ future, I believe it is unethical to short Biotech.
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