Jazz Pharmaceuticals (NASDAQ:JAZZ) has witnessed stellar growth of Xyrem for the treatment of narcolepsy since its launch. Sales of the product have amounted to over $1 billion and are increasing rapidly. The momentum, however, relies solely on the drug's market exclusivity, which may be coming to an end sooner than shareholders think.
Recently, Avadel Pharmaceuticals (NASDAQ:AVDL) has developed a branded formulation of Xyrem's active pharmaceutical ingredient (API) to combat narcolepsy, with a small twist. Does clinical data, released Monday, point to support for FT218 as a potential replacement for Xyrem? Let's find out together.
What is narcolepsy and how does Xyrem treat it?
Narcolepsy is a chronic sleep disorder that causes overwhelming desires to fall asleep during the day. Patients with the condition may also experience sudden, frequent, and uncontrolled loss of muscle control during the day, known as cataplexy. The condition affects more than 200,000 people in the U.S.
Xyrem is the first drug approved by the U.S. Food and Drug Administration to treat the condition. The drug's API is sodium oxybate, which is an orally ingested anesthetic that induces deep sleep in patients. Since its approval, Xyrem now accounts for more than two-thirds of Jazz's $2 billion in revenues and is growing nearly 20% annually. For years, Xyrem has been the standard therapy for narcoleptic patients experiencing cataplexy, until now.
What's so special about FT218?
FT218 is a formulation of sodium oxybate administered via Avadel's Micropump technology and is designed to potentially achieve a satisfying eight-hour sleep with just one dose before bed in narcoleptic patients.
While the difference compared to Xyrem may seem small, it's actually quite significant in context. Currently, patients on Xyrem must take one dose before bed, and wake up in the middle of the night to take another to achieve a full sleep cycle. This can significantly hamper the quality of life for people with narcolepsy, especially for parents who must wake up to administer a dose of Xyrem to their children, say, at two in the morning.
For years, Jazz tried to make its own once-nightly formulation of Xyrem to no avail. Fortunately, Avadel has come to the rescue as recent phase 3 results show FT218 met all coprimary endpoints in its investigation. Patients who took the drug at the 9g dose saw mean weekly cataplexy attacks decrease by 12 and their maintenance of wakefulness increase by 11 minutes. In addition, 72% of patients reported improvement in achieving a satisfying full night's sleep.
These results were highly statistically significant compared to placebo. Furthermore, the response patients witnessed is comparable to Jazz's Xyrem, with only one dose required.
What are the risks?
Skeptics may point out, however, that claims about whether or not FT218 can replace Xyrem cannot be made as the former's clinical trial did not directly evaluate the number of patients achieving a full eight-hour sleep as its primary endpoint. This is a fair point. For the sake of argument, patients who are administered FT218 may sleep an average of 6.5 hours, and then have to wake up for a second dosing.
Is this a deal-breaker?
Luckily, there are rarely any black-or-white scenarios when it comes to investing. Even if FT218 were unable to offer a full night of satisfying sleep after one dose, it still demonstrated outstanding efficacy for treating narcolepsy and can compete with Xyrem in terms of pricing. Should FT218 witness approval and capture 10% market share, that would translate to more than $170 million in annual revenues. This is certainly not bad for a company north of $500 million in terms of market cap.
Meanwhile, Avadel also markets an injection (approved last December) to treat children requiring total parenteral nutrition, which is a specialized form of food administered intravenously. This indication is estimated to have a total addressable market of at least $50 million annually. The company also has a portfolio of legacy generic products generating $59 million per year (albeit declining).
So what should investors do?
In all, I expect the company to file a New Drug Application with the FDA for FT218 by the end of the year and to receive approval by 2021. Biotech enthusiasts may wish to add Avadel into their portfolios in the meantime, as the strength of its catalyst, market potential, interest from institutional investors, and sound financials should lift shares even higher after this week's data release.