Avadel Pharmaceuticals PLC

NASDAQ:AVDL

Earnings Call Analysis

Avadel's Revenue and Profit Surge Amidst Strong Demand for LUMRYZ

Avadel Pharmaceuticals reported a 50% increase in revenue for Q2 2024, driven by strong demand for their narcolepsy drug LUMRYZ. Their net revenue soared to $41.5 million, with a gross profit of $38.7 million. Despite high operating expenses, Avadel is confident in maintaining operating income from Q3 onwards, leading up to an annual revenue of around $168 million. With over 1,900 patients on LUMRYZ and significant payer coverage, the company shows optimism in expanding its market share and meeting FDA's approval for pediatric narcolepsy treatment by September.

Strong Financial Performance and Revenue Growth

In the second quarter of 2024, Avadel Pharmaceuticals reported a remarkable net revenue of $41.5 million and a gross profit of $38.7 million, both up over 50% from the previous quarter. This surge in revenue was largely attributed to robust demand for LUMRYZ, a medication for narcolepsy, with inventory in the distribution channel increasing from three weeks to four weeks by the end of June. The expectations for the full year point towards a consensus revenue estimate of approximately $168 million, which could rise if the number of reimbursed patients and net pricing exceed current analyst assumptions.

Cost Management and Path to Profitability

Operating expenses for the quarter were reported at $51.5 million, which included a one-time charge of $5 million connected to the termination of the American depositary receipt program. Adjusting for non-cash expenses totaling $11.5 million brings the recurring cash operating expenses down to around $40 million. Avadel anticipates that these operating expenses will hold in the range of $40 million to $45 million for the remainder of 2024. The company's goal is to achieve adjusted operating income starting in the third quarter, nearing a breakeven point with a mere $1.2 million operating loss reported, indicating a strong potential for profitability in the upcoming quarter.

Patient Support and Market Demand Dynamics

As of the end of Q2 2024, Avadel has over 1,900 patients actively on LUMRYZ therapy, with approximately 3,800 patients enrolled in their RYZUP patient support program and more than 2,400 having initiated therapy with LUMRYZ. The company showed encouraging traction not only from patients switching from previous therapies but also from new-to-oxybate patients, indicating strong market demand. Notably, nearly 500 healthcare providers (HCPs), who account for 50% of oxybate prescriptions, have prescribed LUMRYZ, highlighting the treatment's growing acceptance among medical professionals.

Upcoming Clinical Trials and Expansion Plans

Avadel recently commenced its Phase III clinical trial, REVITALYZ, to assess LUMRYZ's efficacy for treating idiopathic hypersomnia (IH). This trial involves approximately 150 participants and is a significant progression towards expanding the medication's indications. The FDA’s potential approval for pediatric use is also on the horizon, with a decision expected by September 7, 2024. The pediatric segment represents about 5% of oxybate users, suggesting an incremental yet important market opportunity.

Strategic Focus on Market Growth and Future Aspirations

The company remains committed to maximizing the potential of LUMRYZ, which they believe has a market opportunity exceeding $1 billion. The management team recognizes the proactive demand from physicians and patients for this once-at-bedtime treatment option, emphasizing the goal to expand LUMRYZ’s presence even further by addressing unmet needs in both adult and pediatric markets. Their strategic priorities center around maintaining strong launch momentum, enhancing local prospects, and leveraging growth opportunities as they continue to refine their marketing and distribution strategies.

Earnings Call Transcript 2024-Q2

[Operator]

Greetings, and welcome to Avadel Pharmaceuticals Second Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce Austin Murtagh with Precision AQ. Thank you. You may begin.

[Austin Murtagh]

Good morning, and thank you for joining us on our conference call to discuss Avadel's second quarter 2024 results.

As a reminder, before we begin, the following presentation includes several matters that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. These risks and uncertainties are described in Avadel's public filings under the Exchange Act included in the Form 10-K for the year ended December 31, 2023, which was filed on February 29, 2024, and subsequent SEC filings. Except as required by law, Avadel undertakes no obligation to update or revise any forward-looking statements contained in this presentation to reflect new information, future events or otherwise.

On the call today are Greg Divis, Chief Executive Officer; Richard Kim, Chief Commercial Officer; Dr. Jennifer Gudeman, Senior Vice President of Medical and Clinical Affairs; and Tom McHugh, Chief Financial Officer.

At this time, I'll turn the call over to Greg.

[Gregory Divis, executive]

Thank you, Austin. Good morning, everyone, and thank you for joining us for this quarterly update. Following my opening remarks, Richard will provide an update on our launch progress, Jennifer will walk through our Phase III idiopathic hypersomnia, or IH clinical trial, Tom will then review our second quarter financial results, and we will conclude with a question-and-answer session.

The second quarter marked the 1-year anniversary of introducing LUMRYZ to the market, and I'm immensely proud of the work done by our team and the impact we have made within the narcolepsy community.

From the start, we recognized that oxybate-eligible patients deserve a once-at-bedtime treatment option that address their needs where first-generation oxybate fell short. Our team's relentless determination in serving people with narcolepsy has been the driving force behind our tremendous progress.

Since launch last year, we have seen our pre-approval market insights materialize in real time, which when combined with the strong foundation we have built, only reinforces our confidence in the significant opportunity that LUMRYZ offers in our pursuit of its potential $1 billion-plus opportunity.

Specifically, we point to the following: we have seen consistent strong uptake from patients switching from the twice-nightly first-generation oxybate products, the majority coming from the mixed salt formulation; demand is growing from both naive patients and patients who have previously tried and discontinued twice-nightly oxybate, a patient segment many had discount; and the launch of LUMRYZ has resulted in the expansion of new oxybate prescribers, who have previously never written an oxybate script and additionally, physicians who are now treating more patients with oxybate, specifically with LUMRYZ prior to our launch, resulting in new patients coming into the oxybate market that prior to LUMRYZ were not accessible or potentially interested.

These important data points only confirm what our research informed us, that the oxybate market opportunity for LUMRYZ is both significantly larger than that of the first-generation oxybate and is unique primarily to LUMRYZ alone. With that, we are pleased to report that there were more than 1,900 patients on therapy at June 30, and we generated $41.5 million in net revenue during the second quarter of 2024.

Additionally, as Tom will cover during his review, based upon how we exited Q2, we currently expect that we will generate operating income in Q3, an important financial milestone we will have achieved during the first full calendar year of launch.

As announced last week, we dosed our first patient in our Phase III REVITALYZ trial, evaluating LUMRYZ' potential benefit in the adult IH population. Based on the feedback from physicians and experts in the field, we believe LUMRYZ has strong potential to improve care for those living with IH through its unique, extended release formulation.

In addition, we are expecting a potential approval decision by the FDA for our supplemental new drug application for LUMRYZ' use in the pediatric narcolepsy population. The target action date is set for September 7.

If approved, we believe LUMRYZ has the potential to address the needs of both pediatric narcolepsy patients, who can benefit from a full therapeutic dose of an oxybate given in a once-at-bedtime formulation, and the caregivers, who currently, have to awaken in the middle of the night, night after night, to administer a second dose of a first-generation oxybate to their children.

Lastly, we continue our development work on a potential low-/no-sodium, once-at-bedtime oxybate formulation with a target profile that is bioequivalent to LUMRYZ. As previously stated, we expect to have an update by the end of 2024.

In summary, after 1 year of launch and with an eye on the future, we believe LUMRYZ is well positioned in its pursuit to become the preferred oxybate among patients and providers as we continue to positively impact the multibillion-dollar oxybate market opportunity.

I'll now turn the call over to Richard for details on our commercial developments. Richard?

[Richard Kim, executive]

Thank you, and good morning, everyone. As Greg mentioned, it's hard to believe that we have 1 year of launch behind us, and what a year it has been. It has been amazing to witness LUMRYZ' transformative impact among people with narcolepsy, their families and health care providers.

Let me start with our new key piece of metrics. As of the end of Q2, there were more than 1,900 patients on therapy. Additionally, for our leading indicators that we have provided quarterly since launch through June 30, approximately 3,800 patients were enrolled in our RYZUP patient support program, and more than 2,400 total patients had initiated therapy.

With our second quarter numbers, you can see that we have continued the momentum with our launch, and that there has been no slowdown in quarter-over-quarter patient demand for LUMRYZ.

Now looking at our patient dynamics. We continue to have strong representation across our 3 patient segments, including those switching from or previously discontinued twice-nightly oxybates and those new oxybates.

As expected at this stage, switched patients still make up a significant portion of patients on LUMRYZ. At the same time, it's been especially encouraging to see more new-to-oxybate patients being prescribed LUMRYZ.

Now this, in addition to LUMRYZ' use in previously discontinued twice-nightly oxybate patients, along with new prescribers to LUMRYZ who have previously never prescribed an oxybate. Our important data points, validating our market research that LUMRYZ can grow the oxybate market beyond its size from when it was just first-generation oxybate.

Now our data continues to indicate there are more than 4,500 HCPs who make up the current oxybate-prescribing universe. Importantly, from these HCPs, almost 500 make up 50% of the total oxybate prescription volume. And to date, 85% of that group have written for LUMRYZ. We are pleased with our continued capture of high-volume oxybate prescribers, as they represent a core component of our launch strategy.

Transitioning to product fulfillment. Our overall pull-through process continues to deliver, with over 700 new patient starts in the second quarter. These results are attributable to a number of factors, including robust payer coverage, strong execution for a good reimbursement and RYZUP teams, along with HCP continue to gain clinical experience prescribing LUMRYZ.

Looking to the second half of the year. We have built a strong foundation, we believe, will support LUMRYZ' ongoing uptake in the narcoleptic community. In particular, demand for LUMRYZ continues to be strong, and our fulfillment systems are working to get patients initiated efficiently. Paired with early signs that the oxybate market is growing, we remain highly confident in our belief that LUMRYZ is on track to become the preferred oxybate in the narcolepsy market.

And now I will turn the call over to Jen to discuss the recent dosing of the first patient in our Phase III IH study.

[Jennifer Gudeman, executive]

Thank you, Richard. Since the introduction of LUMRYZ, we have heard from patients and providers repeatedly about the transformative relief LUMRYZ has brought to their lives. LUMRYZ has not only provided patients with the opportunity for an uninterrupted night sleep, but we also often hear about what they characterize as a restorability to live their lives on their own terms.

While we have been serving the narcolepsy community for more than a year with LUMRYZ, people living with IH have been severely constrained in a lack of approved treatment. In April, an externally-led, patient-focused drug development meeting was held with the FDA in SWEET Consortium to inform patient needs for IH treatment. Among more than 800 individuals living with IH, nearly 2/3 of respondents stated that their IH symptoms were not controlled or were poorly controlled. Patient testimonials underscore the need for additional therapeutics.

Physicians and patients have been vocal in their demand to see LUMRYZ evaluated for IH due to the deep sleep inertia associated with IH, and we are now answering their call. We are excited to have recently dosed the first patient in our clinical trial, evaluating LUMRYZ for IH as it is the first step to potentially bringing this important therapy to patients.

Our study, known as REVITALYZ, is a double-blind, placebo-controlled, randomized withdrawal multicenter Phase III study to evaluate the efficacy and safety of LUMRYZ as a once-nightly dose in IH patients. Enrollment of approximately 150 participants will include both those switching from first-generation, immediate-release oxybate as well as those not on oxybate therapy at baseline.

Our primary efficacy endpoint is to demonstrate a change in the Epworth Sleepiness Scale score, which is administered at week 14, after a 2-week, double-blind, randomized withdrawal period. Our key secondary endpoints are the patient global impression of change in the idiopathic hypersomnia severity scale, which is a validated multi-domain assessment of key IH symptoms. The primary efficacy analysis will occur after the 14-week portion of REVITALYZ is completed, and the study will be followed by an open-label extension.

Initiating REVITALYZ is a key milestone for Avadel, and most importantly, for the IH patient and medical community. We have seen the positive impact that we might have had on narcolepsy, and are working diligently toward expansion in IH.

I'll turn the call over to Tom for a review of our financial results.

[Thomas McHugh, executive]

Thank you, Jen. Before I begin, please note that full financial results are available in the press release issued this morning and the 10-Q. I will also be reviewing non-GAAP financial results, which can be found on our Investor Relations website at investors.avadel.com.

I'll start with our top line results. In the quarter ended June 30, 2024, we reported net revenue of $41.5 million and gross profit of $38.7 million, both of which represent a greater than 50% increase from the quarter ended March 31, 2024. The increase in net revenue was driven primarily by continued strong patient demand for LUMRYZ. Additionally, we estimate that there was about 4 weeks of inventory in the channel at the end of June versus approximately 3 weeks at March 31.

Turning to operating expenses. We reported $51.5 million of GAAP operating expenses for the second quarter, which includes a nonrecurring expense of $5 million related to the previously announced mandatory exchange of the company's American depository shares and termination of the American depository receipt program. As a result of the inventory exchange, Avadel was added to the Russell 3000 Index at the beginning of July.

The second quarter also included $6.5 million of noncash charges, comprised of stock-based compensation of $5.5 million and depreciation and amortization of $1 million. After adjusting for these items, which totaled $11.5 million, remaining cash operating expenses were approximately $40 million. We expect that for the remainder of 2024, recurring quarterly cash operating expenses will be in the range of $40 million to $45 million and noncash operating expenses will be in the range of $5 million to $7 million.

With respect to the balance sheet, we had $71.4 million of cash, cash equivalents and marketable securities as of June 30. The use of cash during the second quarter included the $5 million of expense related to the termination of the American depository receipt program.

I'll finish my remarks with a few comments regarding our expectations for the remainder of 2024. We continue to pay close attention to the sell-side estimates. And at this time, we are comfortable with the current revenue consensus of approximately $168 million for the full year, including the possibility that it could be higher if actual results, such as the rate of increase in reimbursed patients, the total number of reimbursed patients were treated with LUMRYZ and net pricing outperformed the assumptions currently used by the sell-side analysts.

Lastly, with respect to our time line to reaching breakeven, we were very close to achieving this during the second quarter when comparing $38.7 million of gross profit to approximately $40 million of recurring cash operating expenses, which resulted in an adjusted operating loss of approximately $1.2 million. Based on our current plans and assumptions, we expect that adjusted operating income will be positive beginning in the third quarter and continue to be positive for the remainder of 2024.

Our expectations regarding adjusted operating income are based on a number of factors, including the number of reimbursed patients on LUMRYZ, net pricing of LUMRYZ and recurring cash operating expenses.

And with that, I will turn the call back to Greg for closing remarks.

[Gregory Divis, executive]

Thank you, Tom. Before we wrap up, I want to take a moment to comment on our publicly-reported launch metrics and what to expect moving forward. This quarter, we added a new metric, the total number of patients on therapy.

For the full year of launch now behind us, going forward, we intend to report only this patient metric and, of course, revenue as we believe these 2 metrics are the most important as our launch matures.

We believe we are well positioned to execute our business priorities, including our ongoing launch of LUMRYZ and our life cycle management opportunities, both of which are focused on our primary business objectives, maximizing the full value of LUMRYZ.

So in conclusion, we're very pleased with our progress and our growth thus far, recognizing that we have much more to accomplish. We thank you for your support and look forward to providing future updates on our progress.

And with that, we will open the call for questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from the line of Andrew Tsai of Jefferies.

[Lin Tsai, analyst]

Congrats on the strong launch and appreciate you sharing the metrics. So the first one is, if we were to take another look data cut as of July or even early August, how does the slope of uptake looks so far? Should we be factoring in some kind of summer seasonality due to holidays/occasions this quarter? Or should we expect slope of patient additions and so forth to remain unchanged or even increase this quarter?

[Gregory Divis, executive]

Thanks, Andrew. I think we would qualitatively characterize it as our trends remain consistent. As we've seen to date, this is our first summer that we've been in the marketplace. So whether there's seasonality or not, we'll have a chance to assess that for LUMRYZ specifically, as we get through the period. But at this point, I think we would describe it as continuing to be consistent as to what we've seen.

[Lin Tsai, analyst]

Great. And then secondly, speaking of just the slope being consistent, pediatric could be approved in the month from now. So that's 5% of the current oxybate users. So is it fair to assume there could be a nice little bolus coming from that approval? Or could the uptake in the subpopulation be slower than what we're thinking?

[Gregory Divis, executive]

Yes. I think as we think about it, it's an important addition to our label because we hear quite a lot from parents who wake up in the middle of night, night after night. Again, it's a relatively small patient population. So I think over time, we have an opportunity to both convert patients as well as potentially even expand the use in the pediatric market over time based upon some of our insights. I think as we think about the balance of 2024, it's modestly or marginally incremental at this point, but longer term, we think it's really important.

[Operator]

Our next question comes from the line of Francois Brisebois of Oppenheimer.

[François Brisebois, analyst]

I was just wondering, in terms of reimbursement, where we stand now? And just the the impact there of if you kind of cut it as a revenue per patient? And obviously, I appreciate the new metric and the look back at the new metric and what it meant. But if we're thinking about revenue per patient, is there any impact expected from reimbursement here in the second half?

[Gregory Divis, executive]

Maybe, Richard, you can cover reimbursement, and Tom kind of value per patient.

[Richard Kim, executive]

Frank, thanks for the question. Yes, we're super pleased with how our market access team has performed. Today, we have about 85% of commercially covered lives, where our LUMRYZ policy exists. So it's been really strong, which has really helped to drive us being able to get patients initiated.

So Tom, do you want to sort of take the revenue per patient?

[Thomas McHugh, executive]

Yes. So thanks, Frank. The revenue per patient, last quarter, we had talked about exiting the quarter at about 120,000 per reimbursed patients. We've seen some improvement in that. Net pricing heading into let's say, it's natural to some extent because Q1 is pretty heavily impacted by gross net adjustments. So we're -- we do see some improvement in Q2.

I think the only other comment I would add regarding reimbursement is that the other segment of our business, which represents 15% to 20% of enrollments, are really noncommercial, predominantly Medicare and Medicaid. And as we get into 2025, where a lot of those decisions will be made for LUMRYZ, which we weren't eligible in 2024, especially for Medicare, we'll get a better sense of how our coverage evolves beyond the commercial coverage as we go closer to the end of this calendar year.

[François Brisebois, analyst]

And then maybe just lastly, in terms of new prescribers to oxybate that weren't prescribers before the 4,000 or greater than 4,500, I know it's concentrated, but did you guys approach these docs? Is it surprising that these docs who never prescribed oxybate for over 20 years have started based on the once-nightly? Is it just more awareness? Where do these docs come from?

[Gregory Divis, executive]

Richard?

[Richard Kim, executive]

Frank, so for the vast majority of those providers, we have not called on them. So I think this really speaks to the really tremendous value proposition that LUMRYZ brings.

And in our relaunch market research, when we tested our profile with high-use narcolepsy prescribers who don't use oxybate, half of them said with the profile of LUMRYZ, they would want to prescribe LUMRYZ compared to what they haven't done with the first-generation oxybate. So we think it's a really positive sign and something for us to build upon going forward.

[Gregory Divis, executive]

Yes, I'll just add to Richard's comments, is that it's really interesting to us that we're getting demand without any really true effort on our part directly in terms of promotion. So it's something we're evaluating to see if it's -- there's some more we can do there, for sure.

[Operator]

Our next question comes from the line of Ami Fadia of Needham & Company.

[Ami Fadia, analyst]

Can you give us a sense of what percent of patients that are currently on LUMRYZ, either came from one of the other oxybate versus previously discontinued as well as never on oxybate before? Any -- and then if you could give us any updates on pull-through at the payer level across the 3 GPOs that you have contracts with. Perhaps any color on Humana or some of the other option plans would be helpful.

[Gregory Divis, executive]

Richard?

[Richard Kim, executive]

Thanks for the question, Ami. So as far as sort of like a percentage of switched versus sort of never on an oxybate before, the biggest drug for our patients that we have right now are still being sourced from switched patients from first-generation oxybate, with the highest percentage of those being from the mix of overall as well.

So what we are seeing at the same time though, is that the new-to-oxybate patients are starting to increase their representation as well. I mean we really see that as a very positive sign really sort of continue to support the value proposition of LUMRYZ.

So the biggest chunk is still switched patients, but we are starting to see a bit of an increase in the representation of new patients trying oxybate. And as far as the GPO representation is concerned, I think traditionally, what we start to see is the zinc, CVS, Emisar and the [indiscernible] or the biggest chunk of Optum being smaller.

And I think what we're seeing in general is the channel is being representative of the size of those GPO contracts with the zinc being the largest, Ascent the second largest, and then the Emisar/Optum business being the smallest of the 3. So pretty consistent with the sizing opportunity of those 3 contracts that we have.

[Gregory Divis, executive]

Yes. I think the only other comment I would add to that is that I think it's fair to say that the significant majority of the lives underneath those GPO umbrellas have established policy coverage decisions now, not all of them with regards to LUMRYZ. So I think getting to your question, we've got policy coverage decisions in place and pulled through those through the GPO contract.

[Ami Fadia, analyst]

Okay. Great. If I may ask one more question. Can you just sort of walk us through or give us an update on the cadence of when you expect decisions from the ongoing IP cases? And specifically on the Jazz versus FDA case, can you walk us through the upside downside? And how we should think about, in a downside scenario, the ability to keep LUMRYZ on the market should a precision go in favor of Jazz?

[Gregory Divis, executive]

Well, in terms of timing, I think it's our view that the next decision will likely come out of the APA case in D.C., followed by the patent case in Delaware. So when that is? We don't know, and they could come in a different order, I guess, but that's ultimately at the discretion of the judge from that perspective.

And we -- again, our position hasn't changed. We're very confident in our views. And even if the decision were unexpectedly go against us in that regard, we're prepared to take whatever steps necessary to ensure that LUMRYZ stays on the market to be able to treat patients accordingly, and we believe that will be the case.

But I'll close out, again, on the litigation matters that we're highly confident in our position. And I'll remind all of our investors that there's other cases that are coming after this as well, including our antitrust case, which has been set for November of next year, for which we're pursuing requisite damages for the unnecessary delay of LUMRYZ' approval due to the inappropriate listed [ ResCap ]. But in terms of timing, it's really at the discretion of the judge, and we're prepared to act accordingly.

[Operator]

Our next question comes from the line of David Amsellem of Piper Sandler.

[David Amsellem, analyst]

Just a couple for me. I know you're going to have more updates on the low sodium product. But can you talk to generally the IP situation on that formulation and your level of confidence that you're not going to run a foul of Jazz' intellectual properties surrounding their low sodium oxybate product? So that's number one.

Then number 2 is, is it fair to say that with the bioequivalence pathway for that, that there's a relatively rapid path to market for that formulation? And then lastly, on IH, are you thinking about that opportunity as something where you can expand the market? Or do you see switching away from Xywav to LUMRYZ in the IH setting? Or is it a little bit of both?

[Gregory Divis, executive]

Thanks, David. I'll try to tick those off one at a time. Again, I think when it comes to our development strategy and our approach to a low-/no-sodium formulation, we have to understand what's in the past landscape for sure. And so we would be pursuing that.

Of course, you should assume that we're pursuing our direction accordingly, with that being considered appropriately in our development plan. If it was as simple as just formulating something similar to what's in the market today, it would have already been done by that, from that standpoint. So again, we're very conscious of what the patent landscape is out there and navigating it appropriately.

Number two, on your question about the development pathway using a bioequivalence, that ultimately is the decision by the FDA to agree with us on that approach. But we do believe that there is a pathway based upon other products that have been approved that a bioequivalent-only pathway is a viable pathway, assuming we can demonstrate bioequivalent and the FDA agrees with that.

And lastly, in terms of IH, I think right now, you've heard Jen talk about the research and the symposium that the FDA held specifically, where 800 patients talked about the need for more therapeutic options. Their symptoms are not controlled with the current available treatments.

So from our perspective, just the narcolepsy, patients may choose due to the nature of this condition to want to switch to LUMRYZ to be approved. Our view is we think it's important to add another treatment option. We think it's the nature of this condition is such that a once-a-bedtime option in the form of LUMRYZ is very, very compelling to patients, and we hear that all the time, in particular from physicians and key opinion leaders who will, as Jen, I think, noted, are very, very bullish on the prospects of what LUMRYZ could to offer for their patients, primarily because these patients struggle with the ability to wake up full stock, right, can take their second dose.

So again, for us, it's an option for all patients, whether they're on therapy today. And what we know today is that there's depending upon what data set you look at, there's anywhere from 30,000 to 40,000 patients with a unique diagnosis code related to idiopathic hypersomnia, and a small percentage of those are actually being treated with the only FDA-approved drug today. We think LUMRYZ offers a really great option for them as well.

[Operator]

Our next question comes from the line of Marc Goodman of Leerink.

[Marc Goodman, analyst]

Tom, I know you talked about kind of cost or anything. Can you just give us a sense of free goods? Just how much -- what percent of free goods, both the second quarter, maybe just the direction you're moving in there and the impact? And just more broadly on the market, what's your sense of the total number of oxybate patients? Like how much did it grow versus before you launched?

[Gregory Divis, executive]

Yes, Marc, you're a little bit breaking up. So I just want to make sure. Your first question is, I believe the patients who are on a free product, right, relative to the total. And the second is just how we're doing the market trending?

[Marc Goodman, analyst]

How the markets changed exactly before you launched [indiscernible]?

[Richard Kim, executive]

Yes. Thanks for the questions, Marc. For us, what we are with LUMRYZ in the launch right now, we think the single most and first thing that can happen is HCPs and patients get experience with LUMRYZ. And the feedback thus far has been terrific. And we really see 3 products as an investment in our launch overall.

What we hear from other specialty sort of chronic product launches is sort of free products being used in about that 20% to 25% range of total patient usage. We think that's a pretty good proxy when you think about things. And for our business, over 80% of our business is commercial today.

I think Brady commented that part of our business, we would anticipate getting more of our CMS, especially Medicare patients being picked up in 2025. So we do believe that things will improve for us. But once again, it really comes down to us doing free product set of investment and getting HP-inpatient experience and ultimately, we are also able to convert some of these patients using our programs, either our bridging program or our temporary [indiscernible] program, our permanent affordability programs on to reimburse patients as well.

So -- and as far as the overall market size is concerned, we've had -- with our claims data provider, it's been a little bit messy in the second quarter for us overall. But what we see overall in the marketplace, Marc, is a few good leading indicators for why we believe the market is growing for oxybate.

The first is the previously discontinued patients twice-nightly oxybates, we believe are uniquely a LUMRYZ opportunity, and we're getting a good portion of those starting an initiative therapy with LUMRYZ. The second is we are getting more new to naive patients initiating LUMRYZ that's consistent with the market research that we've heard, prior to launch, that LUMRYZ would open the doors for more new-to-oxybate patients considering going to oxybate.

The third thing that we talked about earlier was that we are getting unique prescribers who've never prescribed the first-generation oxybates that are now prescribing LUMRYZ as well. So we view these as all early positive signs that the market is growing beyond where the first-generation oxybate market was.

[Gregory Divis, executive]

Yes. I just want to emphasize a couple of points Richard made. Again, I'll just restate it. Number one is that we don't think LUMRYZ is going to dramatically be different in terms of its percentage of free drug versus kind of other products.

But what we've seen, which I think is a really positive, is we've seen patients when a coverage policy decision comes into play, as Richard noted, we've been able to convert them to a, in essence, a paying patient. So that's something that our team is focused on, and we'll continue to do that.

And again, I think the way I think about the notion of what's happening with the market because kind of the secondary data sources are a little choppy right now, is that patients that were getting added to LUMRYZ, sources of business we're getting added to LUMRYZ as new starts, they're not in the denominate of kind of the legacy market, right?

Those patients weren't there before. So from our perspective, that is a great sign in terms of what are the prospects 1 year into launch of what the potential future holds for our ability to really grow this market.

[Operator]

Our next question comes from the line of Ashwani Verma of UBS.

[Unknown Analyst]

It's [indiscernible] on behalf of Ash Verma at UBS. Just very quickly. Can you talk about what you're seeing in terms of discontinuation persistence rates? Any change from what we've seen early in the launch? And just a quick second question. Are you seeing any impact in the second quarter from Xyrem being removed from certain formularies?

[Gregory Divis, executive]

Thank you very much. Richard?

[Richard Kim, executive]

Yes, thanks for the questions. So as far as discontinuation, what we see holistically is LUMRYZ has lower discontinuation rates in the first-generation oxybate, when we compare that at time mesh cohort of patients for the launch.

What we do know historically is discontinuation rates for oxybate tend to be higher earlier in treatment, and they tend to subside over time. And that's also what we see with LUMRYZ. Once again, lower than first-generation oxybate.

And the discontinuation rate is probably driven a little bit more from naive patients and previously discontinued patients that do have a higher discontinuation rate than the switch patients do over time.

But we've also learned a lot like we have in other components of our launch. We're learning a lot of -- from HCPs and [indiscernible]. We're learning how to intervene differently when to intervene, how to intervene, how to specialize things depending on which patient type.

So we know that every product does have dropouts, and that's true of any chronic medication. But we worked really hard to get these patients started and we're going to be working really hard to make sure that the right patients stay on therapy as well.

And as far as your second question about the impact from Xyrem, yes, I mean, clearly, there was some changes in some formularies that happened earlier this year. We did benefit from some of those patients going on to LUMRYZ. But we also know that our value proposition is very strong against all first-generation oxybate. So those switch patients, as we mentioned before, remain an important source of our business, in addition to the other 2 segments as well as we go forward.

[Operator]

Our next question comes from the line of Oren Livnat of H.C. Wainwright.

[Oren Livnat, analyst]

I appreciate it. Clearly, you have plenty of room to grow in narcolepsy, but you're pretty aggressively pushing into IH. And I have just a couple of questions there. First, what's the reasoning behind trying to get in there right away now while the market is maybe not as developed?

Is there any reason to maybe let your competitor with twice-nightly continue to make the investments and do the leg work, probably the tougher lifting to grow that market first and get oxybate established as a therapy versus getting in their ASAP.

And also, do you believe you have the, IP side, freedom to operate there, given I think there's some different labeling on the Xywav side and some of the arguments your competitor is making on that front in court? And I have a follow-up there.

[Gregory Divis, executive]

Oren, whatever the competitor is doing, they're doing right from that perspective. But it's clear to us and our feedback from physicians and patients that there is an unequivocal need for LUMRYZ in this category, in this patient population. And we're not going to wait for someone else to do whatever they're going to do to serve this community and help expand and build our franchise.

And regardless of what's in their label or what arguments they make or don't make, it's -- it doesn't matter to us because we believe we're going to introduce LUMRYZ to this patient population. It will be well received. It will serve and have its rightful place and has the opportunity to make a difference.

And arguably, we're the market leader in this category as well. So we believe we have full rights to operate accordingly. And at the end of the day, the market has spoken to us in the form of patients and physicians who said, "Get us LUMRYZ as fast as you can." That's what we're trying to do.

[Oren Livnat, analyst]

Okay. And it's really impressive that you guys are projecting adjusted breakeven next quarter, and I think OpEx was actually lower than I had modeled excluding that item this quarter. Can you just talk about -- you're growing revenue really rapidly, OpEx, not so much or at all now.

How does that look going forward? Are you rightsized for continued dramatic growth from here, IHS? Or do you think you need to invest more by this product along with revenues? And also, I'm curious about cash conversion going forward to, obviously, and it's not surprising, accounts receivable are accumulating as this product grows rapidly, but do you expect that to reverse in the second half?

[Gregory Divis, executive]

I'll save the second question for Tom. In terms of your comment about do we need to invest more on the launch? Here's how we would describe. Again, we're constantly evaluating our source of business and where opportunities are to try to accelerate the launch of LUMRYZ.

I would say that we are generally well deployed and well resourced to maximize the primary opportunity in LUMRYZ. So we are not at least bit shy of deploying more capital or investing in opportunities if we believe it has an opportunity to really grow both the speed and the peak of what LUMRYZ can achieve from that standpoint.

So it's something we're always looking at. I will point to the comment that we made earlier today that we're seeing patients go on LUMRYZ from physicians who we are not actively calling. So we've been trying to understand that and what are the profile of those physicians.

And is there an opportunity to to pursue that more aggressively and accelerate that segment? We believe -- we've always believed longer term, that was going to be something we were going to pursue over time, but it has moved faster maybe than what we had assumed, which we think is positive, and it's something we're looking at.

So I think at the end of the day, it doesn't change our outlook in terms of our view on profitability and generating operating income in the second half of this year and going forward. But it does -- it is something we're always looking at because at the end of the day, maximizing LUMRYZ is our primary objective.

[Thomas McHugh, executive]

Yes. Oren, thanks for the question. Listen, we believe we're going to hit cash flow breakeven this year. You picked up on a key point, and it's not surprising that as we grow our working capital increase, primarily in the form of accounts receivable. But when you see sitting on the balance sheet at June 30, we'll convert to cash in Q3.

[Operator]

Our next question comes from the line of Myriam Belghitti of LifeSci Capital.

[Myriam Belghiti, analyst]

Congrats on the quarter launch progress. Just a quick question for me. For the Phase III IH study should we be thinking about success here? And how do you think LUMRY's performance will compare compared to data shared from the RD-approved product?

[Gregory Divis, executive]

Well, again, and I'll make some comments. And Jen, if you feel free to weigh in. I think at the end of the day, we have an excellent proxy in terms of narcolepsy, in terms of how LUMRYZ performed in our pivotal trial, relative to the first-generation oxybate, right?

We believe that gives us high confidence that LUMRYZ will be successful in our IH trial that we've initiated. So we're highly confident that we'll demonstrate a highly statistically significant benefit to patients. And from that standpoint, we remain highly confident.

Anything you want to add to that?

[Jennifer Gudeman, executive]

The only thing I will add is that the enthusiasm from the investigators who are participating in this trial certainly underscores everything that Greg has said. There is a long overdue unmet need to be able to provide an extended release form of sodium oxybate for IH, which only LUMRYZ will provide if it's approved.

[Operator]

Our next question comes from the line of Matt Kaplan of Ladenburg Thalmann.

[Matthew Kaplan, analyst]

Congrats on the strong quarter results. Just to stay on the IH theme a little bit, can you talk about -- maybe it's a little bit early since you just started the trial, but the time line for the Phase III? And then also the regulatory pathway, do you think you'll need 2 studies? Or will 1 be sufficient for an NDA filing?

[Gregory Divis, executive]

I'll take the first part of that, and Jen, feel free to weigh in on the second point.

Matt, I think you made a good point, which is that it's early in the trial. We're just getting our sites initiated -- our early sites initiated. We haven't reached our -- our full run rate or steady state. We're very pleased with the fact that in a very short order, from a site initiation, we've seen patients move into prescreening and patients go on treatment.

So we're -- by the early data points, we're excited about that, but we haven't reached our -- if you will, it's going to take a while before at our full capacity. So I think it's difficult to project how long we think it's going to take.

We've always said that we believe the best proxy right now is kind of how long it's taken the other products, the other oxybate products can get through their Phase III. And that was, let's just call it, 15 to 18 months. We think that's the right proxy for us now.

And to be clear, our assessment, our assumptions around that changes. We'll be sure to communicate accordingly as and when we're up and running more at kind of full steam and steady state. So in terms of regulatory pathway, Jen?

[Jennifer Gudeman, executive]

Sure. Happy to comment to that. We're very pleased with the engagement that we've had with the FDA. This will be a supplemental new drug application. And of course, there's the prior precedent where there was only one pivotal trial to achieve approval in idiopathic hypersomnia. So we very much believe that's our pathway as well.

[Operator]

[Operator Instructions[ Our next question comes from the line of Brandon Folkes of Rodman & Renshaw.

[Unknown Analyst]

Congratulations on a very good quarter. Maybe just 2 follow-ups from earlier questions from me. Just coming back to the pediatric population, how does the educational awareness compare in this population to get a patient or to get a caregiver to switch and convince them to move a pediatric patient or a therapy that may not be as good as LUMRYZ, but in their minds may be adequate perhaps compared to what they've tried in the past? And then similarly, just given the way base dosing there, some sort of focus will the pediatric population be for the sales force given the runway in the added population?

[Gregory Divis, executive]

Thanks, Brandon. Richard, do you want to comment on the pediatric opportunities?

[Richard Kim, executive]

Yes. As Greg said earlier, the opportunity is about 5% of the overall box marketplace today. For us right now, when we think about sales force coverage, the vast majority of the pediatric patients are seen by physicians that we call that both adults and pediatric patients today.

So incrementally, we're only adding a few physicians who are specifically focused on pediatric sleep disorders. So I think we're very clear about the ability to switch patients as it is for adults today as well. And we've just heard consistent feedback from providers and families about how this could really be a changer for their families.

Because remember, it's not only the patients who have to wake up, but it's generally the entire family that's disrupted during the middle of the night. So it's a modest opportunity as far as numbers or percentage is concerned, but we think it's a very important opportunity for us to sort of execute against going forward as well. So we're super excited about the opportunity that lays ahead.

[Gregory Divis, executive]

Yes. I think the only thing I would add is that I don't think today where we think it's going -- the market for pediatric patients is going to perform any different than how we see adults today, and that physicians see patients in the ordinary course when they come in for their follow-up, whether it's 3x a year or 2x a year or whatever it may be, that the opportunity to discuss LUMRYZ will come up.

And of course, it's imperative for us, which we'll be doing is doing our related investment in marketing and awareness campaigns to the pediatric population to try to spur patient activation accordingly from a parent's perspective. But again, that's no different than, I think, how we see the adult population today.

[Unknown Analyst]

Great. And then maybe just a follow-up on the discontinuation rate. If I look at the metrics you gave, and thanks for all the additional metrics, it looks like we had an additional 700 patients in the shade therapy during the quarter and an additional 500 patients on therapy at the end of the quarter.

Is that a fair way to kind of think about? Obviously, there's a lot of moving pieces around that, but just at a higher level, do you think that, at this stage, for every 700 patients starting therapy, 500 will stay on LUMRYZ?

[Gregory Divis, executive]

Richard?

[Richard Kim, executive]

Yes. Thanks, Brad. Right now, we're still relatively early to [indiscernible]. And as we know historically, more discontinuations tend to happen earlier or after initiation. So we haven't really sort of got our full base of sort of steady-state, longer-term usage.

So we think discontinuations earlier are launched, maybe high represented than they are going to be later on the launch. So I don't think we've quite got to our city state, so it's a bit dynamic right now. And it's hard to sort of say exactly what's happened in the past will reflect the rates going forward. We know that there will be more discontinuation rates over time, but the rates may be different going forward.

[Unknown Analyst]

Very helpful. And then last one, if I may, just on IH. Xywav does have the potential to dose once nightly. Do you believe LUMRYZ will take market share from both the twice-nightly patients and once-nightly IH patients? And so do you have any sense of what percentage of patients -- of IH patients are currently making use of that once-nightly dosing on Xywav? And that's it for me.

[Gregory Divis, executive]

Thanks. Richard?

[Richard Kim, executive]

Yes. No. What we know right now from the Xywav label is 23% of patients were -- did take a single dose. Keep in mind, those are patients from being a study who are unable to take the 2 doses that the study started off with. And also keep in mind that the maximum dose of those patients is 6 grams that they can take.

We know that oxybate use for adult tends to migrate more towards 7.5 grams to 9 grams of total usage. So it's really one of the predominant things that we hear about our opportunity in IH is that a lot of patients are incapable of waking up to take that second dose.

And we believe that the opportunity for LUMRYZ. It is quite substantial from both those patients who are taking 2 doses, and those patients who may be taking a single dose to potentially have a higher therapeutic option in LUMRYZ as well. So we really sort of see the opportunity within the existing oxybate patients today. And as Greg mentioned before, they grow beyond that as well.

[Operator]

I'm showing no further questions at this time. I would now like to turn it back to Greg Davis for closing comments.

[Gregory Divis, executive]

Thank you, and thank you, everyone, for your time and joining us today on our second quarter 2024 earnings call. We wish you all a great day and look forward to providing updates in the future.

[Operator]

This does conclude the program. You may now disconnect.