At present, Avadel Pharmaceuticals PLC (AVDL, Financial) is one of my favorite biotech stocks for a number of reasons:
- The availability of several markets’ products.
- A high-potential asset in the pipeline (FT218), which is currently in a phase three study.
- A newly in-licensed product (Noctiva), which has huge market potential.
My reason for buying Avadel is Noctiva. Why? Because it is already approved, is the only Food and Drug Administration-approved product for nocturia due to nocturnal polyuria (no competition) and has huge potential.
A look at each of these points will determine if Avadel can double.
Marketed products
Avadel’s three marketed sterile injectable products, Akovaz (ephedrine sulfate), Bloxiverz (neostigmine methylsulfate) and Vazculep (phenylephrine hydrochloride), ended 2017 as market share leaders for each of their respective categories. Akovaz and Bloxiverz were both subject to additional generic competitors late in the second half of 2017. In fact, the company expects increased pressure on both market share and price as a result in 2018.
The company expects revenue of about $100 million from its marketed products. This isn’t a significant amount, but it’s better than no revenue at all. It assures me the company is making money rather than just burning cash. With $100 million in sales, the $300 million market cap seems very reasonable. Yet, there is a real opportunity for revenue growth through its other assets and, consequently, share price growth with Noctiva.
Noctiva
The Noctiva acquisition ignited my interest in the company. Last September, Avadel in-licensed Noctiva, the first and only FDA-approved product for nocturia due to nocturnal polyuria.
Nocturnal polyuria is the overproduction of urine at night and leads to the condition of nocturia, which causes patients to wake two or more times per night to void. Estimates show that nocturia affects approximately 40 million people in the U.S. and represents a large unaddressed and unmet medical need.
Noctiva is the first and only formulation of desmopressin acetate, a vasopressin analog approved by the FDA for the treatment of nocturia. It is a proprietary low-dose formulation of desmopressin acetate administered through a patent-protected, preservative-free intranasal delivery system. The treatment is expected to become available to patients in the second quarter of 2018.
Its commercial launch is also scheduled for the second quarter and represents a major catalyst. This is closely tied to the fact the drug has peak sales potential of up to $750 million, per the company's projection.
FT218 for narcolepsy
Narcolepsy with cataplexy is characterized by excessive daytime sleepiness due to inadequate sleep at night. Sodium oxybate, a hypnotic agent, is used to treat this symptom, and patients are to take it in two doses split throughout the night – half before bedtime and the other half at midnight, which is very inconvenient. In spite of the inconvenience, the brand of sodium oxybate, Xyrem, owned by Jazz Pharmaceuticals (JAZZ, Financial), is a blockbuster drug with around $1 billion in sales in 2017. Its performance is due to the fact it is the only drug approved for treating narcolepsy with cataplexy.
Understandably, it will be a lot easier for patients if they only needed to take sodium oxybate before bedtime, as the drug works throughout the night. This is Avadel’s target with their micropump delivery technology. FT218 is Avadel’s formulation of sodium oxybate, which uses this micropump drug delivery system to extend the half-life of sodium oxybate. Ultimately, the drug is taken only once before bedtime and provides seven to eight hours of uninterrupted sleep.
Needless to say, it is a very convenient option for patients as it provides a significant advantage over Xyrem.
Drug candidate FT218 is being studied in a phase three study called REST-ON (conducted under the Special Protocol Assessment). The company hoped to complete the study by the end of 2018, but due to recruitment issues, the completion timeline has been extended, which caused the stock to dip.
On Jan. 10, the company announced FT218 received the Orphan Drug Designation from the FDA for the treatment of narcolepsy. Good news, right?
How about 10-doubling of the stock price?
The company estimates $750 million in sales for Noctiva per year. Being conservative, assume sales reach $500 million in a few years. If FT218 is approved, I think it could get 25% of Xyrem's market share since it is more convenient to use. Thus, we are possibly looking at revenue around $250 million per year for FT218. Therefore, the sales of both drugs could add up to $750 million in four to five years.
If FT218 is approved and both drugs hit their peak sales, the stock has the potential to 10-double.Ă‚ Five times $750 million is $3.8 billion, which is over 10 times the company's current market cap. If the market cap reaches $3.8 billion, it translates to a stock price of around $97. If Noctiva sales hit $750 million and FT218 takes more market share, then the market cap could go even higher. In any case, there is great potential for astronomic share price appreciation for Avadel.
Financials
The company has around $90 million in cash. On Feb. 14, the company announced a $125 million offering of 4.50% exchangeable senior notes by 2023 to strengthen its financial position.
The company expects 2018 revenues to be between $105 million and $125 million. This implies that the stock is trading at a cheap 2.5 to three times sales.
Risks
One major risk involved is the failure of the FT218 phase three study. However, this failure won’t be detrimental since Noctiva is the revenue generator. Another potential risk is the poor commercialization of Noctiva and difficulties in penetrating the market.
Final thoughts
Considering the potential for Noctiva, the company's financial position, the potential for FT218's success and the big pullback in the stock after recent news, it’s a great time to get into Avadel.
If the trial is successful, it will not be surprising if Avadel is acquired. Jazz Pharmaceuticals could be a potential buyer since FT218 is a direct competitor to its drug.
Disclaimer: I am long Avadel.
