LAIDLAW & COMPANY Est. 1842

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1 LAIDLAW & COMPANY London New York San Francisco Boston EQUITY RESEARCH Company Report November 6, 2018 Avadel Pharmaceuticals (AVDL - $3.06) Noctiva Launch Faces Obstacles and Little Clarity in FT218 Enrollment AVDL recently reported their 3Q18 with a topline miss of $19.8M vs. our estimated $21.1M and Street consensus of $22.6M as their hospital products dealt with lower net selling prices and unit volumes due to increased market competition. Bottom line of adjusted EPS of ($0.65) also missed our estimated ($0.40) as SG&A expenses related to the May 2018 launch of Noctiva exceeded our expectations. The Noctiva launch has shown improvements in key metrics such as prescriber base (~8,000 dispensed prescriptions from over 1,800 prescribers) and brand awareness (up to 80% from 60% in August). However, reimbursement weighed on sales as Noctiva only posted $1.05M in revenues. AVDL has now reduced their FY18 Noctiva topline guidance to < $5M, which represents their second topline pull back from their original $10M-$20M forecast. We view the two keys to a successful Noctiva launch as 1) recognition by patients and physicians of Nocturia as a disease of its own and 2) understanding that Noctiva isn t your father s desmopressin. We view FT-218 (sodium oxybate, Xyremlike formulation), as the main value driver at AVDL and were disappointed by the lack of a timing update for their REST-ON Phase 3 trial. While we are encouraged that AVDL completed 10 new clinical site initiations, hosted 2 patient events and launched a patient referral program in tandem with a new ad campaign, we were hoping for more clarity on enrollment status aside from > 50% enrolled. With their hospital business cash production declining, Noctiva launch facing its fair share of obstacles, and limited clarity of FT-218 timing; we are downgrading to a Hold rating and decreasing our price target from $11 to $5.50. Top and bottom line miss, growing hospital product competition and cost related to Noctiva launch. With lower net selling prices and unit volumes, Akovaz sales of $6M came in $1.5M below expectations. Adj. EPS ($0.65) also missed our anticipated ($0.40) due in part to higher than expected SG&A cost related to Noctiva launch. FT218 initiatives, still not much guidance. While encouraged by AVDL s additional sites for FT218, we were hoping to get more granularity regarding the number of patients enrolled and final timing expectations. Downgrade to Hold rating and decreasing PT from $11 to $5.50. Our PT is based on a sum-of-the-parts analysis with the FT-218 at $1/share, Eclat at $2/share, Noctiva at $1.50/share and cash (end 19) and tech value at $1/share. Earnings Estimates: (per share) (Dec) 1Q 2Q 3Q 4Q FY P/E FY-18E (0.34)A (0.55)A (0.65)A (0.52) (2.05) NA FY-17A (0.28) x FY-16A 0.03 (0.02) (0.08) 0.02 (0.06) NA FY-15A x Healthcare/Biotechnology Ticker: AVDL Rating: lower Hold Price Target: lower $5.50 Trading Data: Last Price (11/05/2018) $ Week High (01/25/2018) $ Week Low (11/05/2018) $2.80 Market Cap. (MM) $112.5 Shares Out. (MM) 36.8 Analyst Francois Brisebois, MSc (857) Source: Company data and estimates FOR ANALYST CERTIFICATION AND DISCLOSURES, PLEASE SEE DISCLOSURES SECTION AT THE END OF THIS REPORT. This report has been prepared by Laidlaw & Co (UK), Ltd. Investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. All prices are those current at the end of the previous trading session unless otherwise indicated. Prices and consensus estimates are sourced from a reliable market source

2 Figure 1: Variance Analysis: Avadel Pharmaceuticals Quarterly variance analysis ($000 except per share) 3Q17A 3Q18A 3Q18E Variance % Y/Y Bloxiverz (neostigmine) $9,920 $3,656 $4,471 ($815) -63.1% Vazculep 8,759 8, NM Akovaz 5,991 7,500 (1,509) NM FSC products NM Total Revenue $39,675 $19,826 $21,062 ($1,236) -50.0% COGS 3,790 3,120 2, % Gross Profit 35,885 16,706 18,819 (2,113) -53.4% SG&A Expense 11,563 24,829 16,750 8, % R&D Expense 8,095 11,402 12,500 (1,098) 40.9% Operating Inc (loss) 16,227 (19,525) (10,431) (9,094) -220% Interest inc (exp) 847 (1,455) (1,750) % Other inc (exp) (963) (484) 100 (584) -49.7% Pretax Income 8,847 (24,646) (16,192) (8,454) % Income Taxes/(benefit) 5,100 (677) (1,500) % Adj Net income/(loss) 3,747 (23,969) (14,692) (9,277) NM 1x & non cash exp 17,932 8, , % NI/(loss) as reported (14,185) (32,167) 0 (32,167) NM Shares out (000) 41,339 36,904 37,072 (168) -10.7% Fully diluted shares (000) 47,839 43,654 43,822 (168) -8.7% Adj EPS ex-1x & non cash $0.08 ($0.65) ($0.40) ($0.25) NM EPS as reported ($0.34) ($0.87) Source: estimates Figure 2: Valuation Sum-of-the-parts valuation Segment Valuation Per share (000's) value Sodium Oxybate (FT 218) $53,879 $1.00 Eclat products $104,542 $2.00 Noctiva $63,337 $1.50 Cash (end of '18E) & tech value $56,424 $1.00 $278,183 $ fully diluted shares out 48,642 Source: estimates. Avadel Pharmaceuticals Page 2 of 9 Francois Brisebois

3 Figure 3: Clinical trials timeline Avadel Pharmaceuticals Potential clinical trial timeline estimates 2015A 2016A 2017A 2018E 2019E 2020E 1QA 2QA 3QA 4QA 1QA 2QA 3QA 4QA 1QA 2QA 3QA 4QA 1QA 2QA 3QA 4QE 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE Akovaz (Eclat #3) - ephedrine sulfate injection for hypotenstion in surgery Submitted NDA 2Q15 NDA FDA approved, 4/30/16 Launch AV001 (Eclat #4) Submit NDA FDA approval, 10-month review Launch FDA LAUNCH NDA FDA FT218 - Micropump oral controlled release sodium oxybate (eliminate middle of the night dosing) Additional PK studies FDA meeting 2Q15, SPA granted 3Q16 met SPA REST-ON, p3 registration trial, SPA 3Q16; enroll to complete yr end 2017 phase 3 data NDA 505(b)2 filing FDA approval & self-launch F LiquiTime - oral controlled delivery formulations in pain & respiratory Guaifenesin cough/cold compound data Partnered with Perrigo 10/5/15 Pivitol trial pivitol data prtnr NDA filing NDA FDA NDA Ibuprofen suspension - DROPPED 3Q16 Partnered with Perrigo 10/5/15 Drop compound prtnr drop Trigger Lock abuse resistant opioids - hydromorphone & 1 other compound (FT227) FDA meeting Phase 1 trials, compound #1 - data 6/29/15 p1 data FDA meeting Alcohol interaction study alc. Study data 12-month stability trial NDA 505(b)2 filing, FDA approval & launch Medusa - Exenatide GLP-1 agonist for Type 2 diabetes (FT228) Preclinical trials Phase 1b trials phase 1b data No additional spend on Medusa - to partner meet stability seek to partner out seek to partner out Source: Company reports; estimates. Avadel Pharmaceuticals Page 3 of 9 Francois Brisebois

4 Figure 4: Quarterly Income Statement Avadel Pharmaceuticals Quarterly income statement 2017A 2017A 2018E 2018E ($000's except per share) 1QA 2QA 3QA 4QA Year 1QA 2QA 3QA 4QE Year Revenues Bloxiverz (neostigmine) $13,902 $13,719 $9,920 $7,763 $45,304 $7,491 $5,544 $3,656 $3,577 $20,268 Vazculep (phenylephrine hci) 10,179 10,154 9,573 8,140 38,046 12,961 11,377 8,759 7,000 40,097 FSC products 2,038 2,320 1,093 2,989 8,441 1, ,230 Akovaz & Eclat #4 25,638 20,912 18,561 15,436 80,547 10,217 11,875 5,991 5,000 33,083 Sodium oxybate (Xyrem) Noctiva ,047 1,455 3,457 License & research Product sales & service 1x, other, (licenses deals) , Total Revenues $52,507 $47,411 $39,675 $34,590 $173,434 $33,293 $29,230 $19,826 $17,032 $99,249 Expenses Cost of Goods Sold 3,856 4,561 3,790 4,048 16,301 6,592 3,512 3,120 1,974 15,198 Gross Margin 48,651 42,850 35,885 30, ,133 26,701 25,718 16,706 15,057 84,182 R&D 7,206 6,792 8,095 12,125 34,218 9,951 11,890 11,402 14,000 47,243 SG&A 11,812 12,429 11,563 23,058 58,862 24,487 27,843 24,829 17,750 94,909 Total Operating Expenses 19,018 19,221 19,658 35,183 93,080 34,438 39,733 36,231 31, ,152 Income (loss) from Ops 29,633 23,629 16,227 (4,641) 64,848 (7,737) (14,015) (19,525) (16,693) (57,970) Royalty payments - Eclat (9,616) (8,516) (7,264) (5,966) (31,362) (5,790) (5,060) (3,182) (3,206) (17,238) Interest income/(exp) (102) 1,798 (756) (1,139) (1,455) (1,750) (5,100) FOREX gain/(loss) 0 0 1x milestones Other income/(loss) (1,299) (1,166) (963) (818) (4,246) (797) (751) (484) 100 (1,932) Pretax Income (Loss) 18,984 14,211 8,847 (11,527) 30,515 (15,080) (20,965) (24,646) (21,549) (82,240) Income tax exp/(benefit) 7,692 6,046 5,100 (556) 18,296 (2,082) (704) (677) (2,250) (5,713) Adj Net income/(loss) 11,292 8,165 3,747 (10,971) 12,233 (12,998) (20,261) (23,969) (19,299) (76,527) EPS - adjusted $0.24 $0.17 $0.08 ($0.28) $0.26 ($0.34) ($0.55) ($0.65) ($0.52) ($2.05) EPS as reported ($0.07) ($0.30) ($0.34) ($0.32) ($1.01) ($0.36) ($1.01) ($0.87) Shares out (000) 42,810 42,487 41,339 39,350 41,765 38,559 36,772 36,904 37,204 37,360 Fully diluted shares (000) 47,709 48,987 47,839 45,850 47,596 45,309 43,522 43,654 43,954 44,110 Source: Bloomberg LP; Company reports; estimates. Avadel Pharmaceuticals Page 4 of 9 Francois Brisebois

5 Figure 5: Annual Income Statement Avadel Pharmaceuticals Annual income statement ($000's except per share) 2016A 2017A 2018E 2019E 2020E Comments Revenues Bloxiverz (neostigmine) $82,896 $45,304 $20,268 $12,042 $11,523 WestWard entry 1Q16 Vazculep (phenylephrine hci) 39,796 38,046 40,097 25,000 22,500 Generics 2H16 FSC products 7,699 8,441 2, FSC underperforming Akovaz & Eclat #4 16,831 80,547 33,083 25,000 55,000 AKRX & ENDP in market 1Q17 LiquiTime royalty Licensed to Perrigo Noctiva 3,457 12,107 31,491 Noctiva launch 2Q guide <$5M from $5M-$10M from $10M-$20M Sodium Oxybate (Xyrem-like) 0 Eliminates middle night dosing 1x milestones (license deals) 2,161 1, Total Revenues $150,246 $173,434 $99,249 $74,150 $121, Guide: $165M-$175M Expenses 2018 Guide: $90M-$105M from $105M-$125M Cost of Goods Sold 12,742 16,301 15,198 10,064 14,783 Gross Margin 137, ,133 84,182 64, , RD Guide: $40M-$50M R&D 34,611 34,218 47,243 50,000 55, Guide: $30M-$35M SG&A 44,179 58,862 94,909 80,000 85, Guide: $60M-$65M Total Operating Expenses 78,790 93, , , , SG&A Guide: $85M-$95M from $80M-$90M Income (loss) from Ops 58,714 64,848 (57,970) (65,914) (33,519) Royalty payments - Eclat (26,966) (31,362) (17,238) (12,771) (18,324) Deerfield & Broadfin payments Interest income 672 1,798 (5,100) (6,000) (6,000) Other income/(loss) (3,636) (4,246) (1,932) Pretax Income (Loss) 28,784 30,515 (82,240) (84,285) (57,443) Domicile structure drives tax rate Taxes 31, ,2960 (5,713) 0 (10,000) 0 29, Guide: 55%-65% tax rate Adj Net income/(loss) (2,589) 12,233 (76,527) (74,285) (86,940) Non cash & 1x-items 38,687 Net inc/(loss) as reported (41,276) EPS - adjusted ($0.06) $0.26 ($2.05) ($1.77) ($2.28) 2017 Guide: $0.25-$0.35 EPS as reported ($1.00) +15% CAGR Shares out (000) 41,248 41,765 37,360 41,892 38,108 Fully diluted shares (000) 48,181 47,596 44,110 48,642 44,858 Source: Bloomberg LP; Company reports; estimates. Avadel Pharmaceuticals Page 5 of 9 Francois Brisebois

6 Major risks Exogenous events could impact our outlook. We believe pharmaceutical companies have the least control over competitive, political, and regulatory risks. Although we have incorporated competitive assumptions into our forecasts, there may be other risks beyond the scope of our analysis. Changes in the drug reimbursement system, as well as any political or regulatory amendments, may significantly influence the earnings power of these companies. Actual clinical results and the FDA s conclusions may deviate from expectations. Many of our assumptions are based on a review of incomplete clinical trial data available in the public domain. Often, our conclusions are drawn from early stage data, which may not be reflected by pivotal studies. Furthermore, the FDA s conclusions may not coincide with our own, materially changing our revenue and earnings assumptions. Compliance issues, product recalls, and other mandates by regulatory authorities could materially change our expectations. Regulatory compliance issues, ranging from accounting irregularities to defective manufacturing practices, could materially change our assumptions and earnings outlook. Unanticipated product recalls and labeling changes could also have adverse consequences on our earnings assumptions. Legal risks could lead to additional liabilities and revenue loss. In addition to the expenses incurred by patent challenges, product liability and other legal suits could occur and lead to additional liabilities and revenue loss, which could substantially change our financial assumptions. Avadel Pharmaceuticals Page 6 of 9 Francois Brisebois

7 DISCLOSURES: ANALYST CERTIFICATION The analyst responsible for the content of this report hereby certifies that the views expressed regarding the company or companies and their securities accurately represent his personal views and that no direct or indirect compensation is to be received by the analyst for any specific recommendation or views contained in this report. Neither the author of this report nor any member of his immediate family or household maintains a position in the securities mentioned in this report. EQUITY DISCLOSURES For the purpose of ratings distributions, regulatory rules require the firm to assign ratings to one of three rating categories (i.e. Strong Buy/Buy-Overweight, Hold, or Underweight/Sell) regardless of a firm's own rating categories. Although the firm s ratings of Buy/Overweight, Hold, or Underweight/Sell most closely correspond to Buy, Hold and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis against the analyst sector universe of stocks. An analyst's coverage sector is comprised of companies that are engaged in similar business or share similar operating characteristics as the subject company. The analysis sector universe is a sub-sector to the analyst's coverage sector, and is compiled to assist the analyst in determining relative valuations of subject companies. The composition of an analyst's sector universe is subject to change over time as various factors, including changing market conditions occur. Accordingly, the rating assigned to a particular stock represents solely the analyst's view of how that stock will perform over the next 12- months relative to the analyst's sector universe. Additional information available upon request. # Laidlaw & Co (UK) Ltd. has not provided any investment banking services for the company (ies) mentioned in this report over the last 12 months. RATINGS INFORMATION Rating and Price Target Change History 3 Year Rating Change History 3 Year Price Change History * Previous Close11/5/2018 Source: Rating System* Strong Buy (SB) Expected to significantly outperform the sector over 12 months. Created by: Blue-Compass.net % of Companies Under Coverage With This Rating % of Companies for which Laidlaw & Company has performed services for in the last 12 months Investment Banking Brokerage 0.00% 0.00% 0.00% Buy (B) Expected to outperform the sector average over 12 months % 22.81% 3.51% Hold (H) Sell (S) Expected returns to be in line with the sector average over 12 months. Returns expected to significantly underperform the sector average over 12 months. 5.26% 1.75% 0.00% 0.00% 0.00% 0.00% ADDITIONAL COMPANIES MENTIONED ADDITIONAL DISCLOSURES As of the date of this report, neither the author of this report nor any member of his immediate family or household maintains an ownership position in the securities of the company (ies) mentioned in this report. This report does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Laidlaw & Co (UK), Ltd. recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. The securities, instruments, or strategies discussed in this report may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. This report is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. Avadel Pharmaceuticals Page 7 of 9 Francois Brisebois

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9 NOTES: Avadel Pharmaceuticals Page 9 of 9 Francois Brisebois