Okay, great. Thank you, guys, for joining us. Richard, super excited to have you. I'll let you kick things off. There's a lot going on, so I'll let you start, and I can prioritize accordingly.
First of all, good to see you. Thanks for having us back, Uber. I was just writing the memo to my board for our last board meeting of the year, summarizing just a brief highlight of the year. One of the most consequential years in the history of the company, I think. And I think it will turn out to be a transformational year. And companies say that all the time, but we literally transformed the company this year. Last year, at this time, we didn't have NT1 data. We didn't have NT2 data. We hadn't made the deal to acquire Avadel. We now have a very strong sense that we're moving aggressively into the hypersomnia market with the potential to really be a major force in that. That's a completely new commercial domain for us after many years.
So where we stand right now is that we're actually really pleased with the key milestones of the year. Our commercial portfolio performed beautifully this year. NT1 data were positive. NT2 data were positive. IH study is underway and rolling well. The whole landscape of the orexin receptor agonist class, I think, is coming into focus. And I think that we find ourselves really well positioned in that setting. So I'll let you take it from there.
Excellent, but also on the M&A side, if you could just round out the full picture.
On the Avadel, yeah, that's what I was referring to, the idea that by now that transaction is not closed yet, of course, but we've announced the intention to acquire Avadel, and that fits into this whole thesis that we're moving aggressively into the hypersomnia business. By picking up a company with $275 million of sales this year, profitable already, calling on the very physician audience that we're going to be launching ALKS 2680 into, there's just a beautiful inherent logic to it, and as we valued it, Umer, what we did, we looked at the valuation of that company in two ways. One was the discounted cash flows of the business of their product in the context of orexin's coming to the market, call that column A, and then column B was the positive lift it would give us on the launch of ALKS 2680. So essentially, the rotation of that launch curve up to the left over time. And the sum of those two comprised the valuation methodology that we used. And we're quite happy with where we ended up in the deal.
Can we break those two things down just a little more?
Not quantitatively. I can't.
Yeah, no, no. I'm just asking parameters-wise. First one, you said DCF of the revenues that are coming in, so not getting into DCF itself, obviously, but on the revenues, did you guys take into account there could be a gross-to-net expansion once generic Xyrem's are out in the market?
I think few companies have a better sense of the gross-to-net dynamics than we do.
Okay, fair point.
We sell drugs where the gross-to-net are over 50%. We know these payers. We know all of them. We deal with them all the time. And so I think we have a very good sense of what the gross-to-net dynamics could be.
Did you speak to your counterparts on the payer side during this due diligence process?
I'm not going to comment on who we talked to or how, but just recognize that understanding net economics is foundational to making any type of value assessment for commercial products.
I think this might be the best I've ever felt about the gross-to-net these last few seconds than I have ever in the past on this question.
Well, I hope I haven't wavered on that. But I think [crosstalk]
You said, "Let's make history." So the second thing you said was on the launch curve for your Orexin itself, being able to accelerate that. I guess my question would be, I would have thought that between a lot of the neuropsych sales team that's in place at Alkermes already, you may not necessarily need additional support. But could you just expand on that? I mean, you weren't necessarily maybe just expand on the touchpoints you had versus the touchpoints you would have needed to add versus the incremental SG&A you've taken on. Because SG&A point on Alkermes every three years still comes back up, so.
It's really remarkable because the call points that we have now in addiction, serious mental illness, schizophrenia, bipolar overlap very, very slightly with where we'll be going with ALKS 2680. ALKS 2680 is a neurology product sold by sleep specialists or will be sold by sleep specialists and people with specific expertise as in the subspecialty of diseases of hypersomnia. In the beginning. Now, the whole future of the Orexins, we can talk about where they go from here, but in the beginning, in narcolepsy, effectively a rare disease. I expect the price point to be high. I expect the medical value added to be extremely high. And I think the nature of the call and the target of the call are very different than selling an antipsychotic, for example, at a much lower price point where there are 19 generics and the payers are in control.
Where the leverage comes is actually in the whole commercial infrastructure, what you have in terms of market access, compliance, national accounts, legal, regulatory, all that stuff. So if we didn't do Avadel, what we would do is we would add another sleeve of commercial team targeted on those specific physicians. And it would take some time to burn them in, to find their territories, find their accounts, learn the lay of the land. Contrast that with Avadel in hand. We're in that market on a continuous basis right away, starting next quarter if it closes. Building those relationships, knowing the call points, knowing the prescribers, knowing the nurses, knowing the payers, knowing all the elements of the supply chain that lead from a diagnosis to a prescription of what I expect will be a fairly high-priced medicine.
Makes sense. So Richard, I remember a couple of years ago, there were certain activist investors involved in Alkermes. And at the time, everything around SG&A was being evaluated with a very fine comb back then from your team. I guess my question to you is, Avadel, with its SG&A run rate of about $200 million right now, how much of it is that you need versus how much of it will be called out? Because I think that's going to be very relevant. And I don't know to what extent you can stay on it right now.
Yeah, we won't comment on the "synergies" other than to say that sometimes you see M&A deals in pharma that are driven by synergies. i.e., you put two companies together, you eliminate a lot of expenses, things drop to the bottom line. That wasn't the compelling logic of this deal. This deal was about preparing to launch what we think will be the biggest drug we've ever launched into a very rarefied clinical reimbursement environment and being able to do that in advance with a team of people that have been experienced in that space. A, we don't have to build it. And B, we leverage that experience in the form of something that has a $275 million top line that's already profitable. So you've heard us say for years, we would like to leverage our commercial infrastructure because we've built it so assiduously over many years. This does that right away, right, with additional revenue on the top line. But also the fact that it's already profitable and it's crossed over that profitability is a bonus feature, I think.
Got it. So is it possible that Alkermes pro forma has SG&A approaching $800 million?
I don't want to comment on the numbers right now, but I think that we will have a profitable business and we're going to continue to generate significant amounts of cash, and that's why when we thought about doing the deal...
Okay, so you're not worried about the SG&A number. You're worried about the profitability.
Also, I mean, it's such an unusual company because we're generating a significant amount of cash. We're not using a share of stock in this acquisition. It's going to pay itself down through profits. And we're going to prepare for the launch of our next big drug. This is a rare thing, Umer. You have to really think about it from the strategic point of view. It's rare that you can find something that ticks all those boxes, grows your top line, grows your profitability, expands your business, and prepares for the launch of your next drug.
Great. So let's talk about that, the next drug. We can do any amount of sort of analyses and dissect your data in narcolepsy, et cetera. But I want to start on a topic which probably doesn't get much attention on the street, the cognition data. The cognition data you generated in type one study, is this the only pre-specified randomized analysis of an orexin for an endpoint like that that ever exists? Because Takeda was post-hoc, from my recollection. I don't think that's in the Synthesa study either.
I believe, and you'll have to ask Takeda directly, but I believe that they pre-specified certain exploratory endpoints in their study, but I will say that to my knowledge, we're the only company that's shown in a randomized controlled study the breadth of the effect and the extent of the effect on both cognition and fatigue on a pre-specified basis, and as you know, the effect was not subtle. We saw normalization of both fatigue and cognition in patients whose baselines were extremely impaired, and what's interesting about that is when you talk to patients and caregivers about narcolepsy, one thing that doesn't come up is MWT because it's not used. What they talk about is excessive daytime sleepiness, fatigue, brain fog, and for type I patients, cataplexy. These are the clinical presentations that matter so much to patients. In the phase II study, because we had enough scale and power, the virtue of running a proper phase II program is that we could detect these signals even with endpoints that had previously not been used.
Did you hear any patient feedback from the trial sites on this cognition?
Absolutely.
And what does that sound like in words?
It's typically expressed in the form of this idea of brain fog and being able to focus.
I see. It's not like I'm remembering more. It's like brain fog went away.
It's brain fog, and we chose the scale that we chose, which is called the British Columbia Cognitive Complaints Inventory, because it maps most closely onto. We did patient research for a couple of years before we chose this instrument. It's focusing on those cognitive complaints that patients have and how were they ameliorated or not with the use of the medicine, so as I said before, we didn't have any experience with this. It was just a pretest hypothesis that we might see that, and that was based on the neurocircuitry, what orexins do. Because they don't just keep you awake. They actually drive wakefulness a bit large, which includes attention and fatigue and cognition and all these things, so what we thought was we would do in phase II is we would test the instrument and then perhaps tune it for phase III. But the signal came right through with the instrument as currently configured.
I guess what does this mean for you in terms of R&D allocations into the other Orexin programs for all the indications beyond narcolepsy? And what does the timing and the scope look like?
So there was one more step on that bridge to get to that point. And that was the NT2 data. Because remember, NT1 patients have no Orexin in their brains. So when you introduce Orexin, you would expect to see a certain fairly robust biological response. NT2 patients have a whole range of Orexin baseline tone. So I think the unanswered question before our data was if you superimpose, in some cases, what might be a super physiologic dose of an Orexin agonist in somebody who's got Orexin in their brain, would you still drive wakefulness and cognition and things like that? And it looks like the answer is yes. And with that answer, then you start to move out of narcolepsy. If you take people who have normal brain...
Sorry, can I just make sure I get this right? Are you suggesting cognition was tracked in the NT2 trial as well?
It was as well. We haven't presented the data yet.
Okay. I was going to ask. I was going to be on a question because I didn't see that.
No, that was not part of our top line report, but we'll show that when we get it.
So that actually validates you don't necessarily need sleep-deprived people for other indications [crosstalk]
We don't think so.
-that could be just regular people.
We don't think so. There's always risk as you move out into further concentric shells. But I think each step informs the next step.
So what are the future indications? I can't spell that out.
We haven't told you yet.
Okay.
Yeah, we haven't told you yet.
I'm not smart enough to figure it out, but.
Well, you are. But the problem is that there's so many. And so the question is going to be one of triage. It's going to be about choosing them. And it's an interesting calculus that has to do with the clinical need, the mapping onto the pharmacology, the patient population size, and the price point. Because if you say that the first introduction of a narcolepsy product was going to be a relatively high-priced product, disease-modifying in NT1 and NT2, that's a certain value proposition. There are other indications that are denominated in millions of patients where the price point might be much lower. And there are other indications that are denominated in much smaller patient populations where the clinical benefit could be like an alternate orphan or a rare disease price point. That's why you want multiple molecules with different properties.
We've put two additional into the clinic right now, and I think one of the things that investors haven't quite figured out yet is next year, those two are in the clinic right now, in volunteers. Next year, we're going to put them into disease studies.
They're in healthy volunteers right now?
Correct. In the SAD and the MAD.
Do we still get some wakefulness type data from them in that setting?
No. We'll be looking at quantitative EEG for target engagement. But now that we know some of the on-target side effects, we can actually know when we're engaging target just through the other clinical presentations.
Okay, great. And I guess why do you need two? Just because they have different half-lives for different indications or you want to segment the market further?
Yeah, different indications.
You need two for different indications. Is Alzheimer's a realistic possibility for the indications?
It wouldn't be my first, but it's realistic.
Okay. Excellent. And the path forward then, Richard, what does that look like in terms of you go right to a phase II trial, randomized, presumably three to six months out to gauge the signal for the new indications?
You want to go right into some type of translational study like we did with narcolepsy, where in that first cohort of patients, you can see a signal that you don't have to squint to see.
Right, but in those indications, do you need to go more than six weeks to see that signal?
It depends on the indication.
It depends on the indication. Okay.
And remember, in narcolepsy, you could see its effect on the first dose.
Right. Will you do a master protocol study with multiple indications within the same trial or?
Possibly. We won't really disclose that strategy right now, but there is no shortage, and the more we interact with investigators, the more we're confronted with other clinical ideas that people have for the use of these agents.
Right. So Richard, I guess the one question I have is, as we think about sort of the SG&A plus R&D spend for the company, it's about $1 billion right now. There's Avadel getting put on and new indications. So the company and the board is ready to invest for success and maximize the opportunity. And there's not like a cap that you want to keep it close enough to $1 billion, not let it go to $1.5 billion-$2 billion, if that's the type of investment it takes to pursue all these indications.
We think we can solve this simultaneous equation, which is to fund the Orexin program as aggressively as it needs to be funded while maintaining robust profitability.
You'd want to maintain profitability.
Absolutely. Because there's a certain cost discipline that comes from that ethos. So we're not going to say each year we want to...
But wouldn't that enable Takeda or some other company, which is not profitable at all, to just leapfrog in terms of R&D and the number of indications to pursue?
Like I said, the first bucket we're going to fill is doing everything we want to do on the R&D side. Remember, these early clinical trials are not expensive. SAD, MAD studies, putting new drugs into the clinic. It's the bigger programs. And in the meantime, let's go back to first principles. We haven't really talked about the fact that we have a drug now that is going into pivotal studies based on robust phase II data, where the phase IIs look a lot like phase IIIs. Our internal belief in the viability of ALKS 2680 in narcolepsy is extremely high right now. And that by itself is not in our valuation. And as the valuation begins to expand to accommodate that, I think we're going to have all kinds of financial flexibility to do what we want to do.
Got it. Are you implying on the equity side or are you implying more so in could you use equity to fund some of these trials or enter into partnerships with people to run the trials?
We generate cash and we have a bunch of cash.
Okay. Got it.
So no, I think you're focusing too much on like there's a financial constraint. We don't feel a financial constraint.
I guess my sense is for the types of indications possible, you could envision up to $1 billion of R&D spend across indications.
But you've got to go through phase Ib, the translational studies. And let's say we start opening up.
Oh, so you're saying the Orexin will be out in the market?
Yeah.
I see.
The business evolves, and our investors will say, "Spend every dollar you have to do that." If this turns into a true vertical where it begins with narcolepsy, but we all can see how it expands, then I think you have to be able to be prepared to compete at the highest level.
Excellent. I want to get back to some of the narcolepsy data. I intentionally didn't spend too much time on it because I feel like everyone's gone through it multiple times. But let me just ask you one question, which I've gotten and I don't know if I have an answer to this. The phase II data we saw at World Sleep, as well as the phase II data in narcolepsy type two, was all reported on week six and week eight basis. You wouldn't have any sense on what that would have looked like on a week two basis?
ESS?
Not sure that's relevant, but I'm mostly out of touch.
It's a good question because it highlights an important distinction that most investors aren't aware of. ESS, which is the patient's assessment of their wakefulness, we monitored that beginning in week two consistently through the eight-week or six-week period and the extension, and you've seen those figures. That comes down very quickly and stays low, so we normalize people on ESS. MWT, because it requires coming into the sleep lab and spending the day there, we measure at baseline and at week four and at week eight in the NT2 study and at week six in the NT1 study, so you don't get a continuous MWT profile just because of the invasiveness of the test in an outpatient setting.
Got it. IH study, when do we get that readout?
Mid-year next year was the original plan. But we're thinking about now of adding a split dose into the IH study just to get some clinical experience with the split dose as the phase IIIs light off.
The phase IIIs will kick off when?
Q1.
Okay. You don't want to see some IH data just before you start the phase III?
We won't start IH phase III. We'll start the narcolepsy phase.
But for the split dose, wouldn't that help?
No, we can model that. We're highly confident in our ability to model the split dose right now.
Phase IIIs in NT1 and NT2 both start in one Q?
Yeah. That's the goal. We're sending in our FDA package right now. We expect our end-of-phase-two meeting in January with the agency.
Got it.
So we'll submit all the protocols. We have some. We're really excited about that because now we go into phase III with just a huge data set from phase II. And I think people will begin to figure out there's been so much back and forth about this data and that data as compared. The foundational issue now is that we think we have a really important drug and we've credentialed it through a robust phase II program.
Do you see all the emerging data sets? I know it's often this versus that. Do you see them all as basically validating a category much more broadly for the patients rather than my MWTs at 20 [audiodistortion]?
I think so. I mean, the only data sets we've seen have been Takeda and ours. But those are mutually reinforcing for sure.
Got it. Fantastic. Excellent. Well, I'll leave it right there. We'll come back and discuss. But just in conclusion, if you could just remind us, how many active arms do you envision in phase III trials?
TBD, I think that the most would be four and the modal value would probably be three.
The split only applies to NT2, not NT1, or could it be both?
Yeah. The NT2 data is what informs it. But we're looking at the overall program now. And what's interesting is the way that the NT1 doses and the NT2 doses abut each other. So just think about it in the phase II program without pre-specifying our phase III. So across the narcolepsy program, we tested four, six, eight, ten, fourteen, eighteen. So what we see as a huge competitive advantage if we get there is the drug gets approved with a range of doses. So your differential diagnosis doesn't really matter. There'll be a recommended starting dose for NT1s. There'll be a recommended starting dose for NT2s. And then you can move up and down because there'll be NT2 patients that have more like an NT1 phenotype and possibly vice versa. So the whole idea of our competitive advantage is based on this dosing flexibility.
Fantastic. Excellent. Thank you so much for making time.
Thank you.