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Avanir Pharmaceuticals (NASDAQ:AVNR)

Piper Jaffray Healthcare Conference

December 4, 2013 8:30 a.m. ET

Executives

Keith Katkin – President and CEO

Analysts

Charles Duncan – Piper Jaffray

Ian Clements – IR

Charles Duncan – Piper Jaffray

All right. Well good morning. I think we will get started. I am sure there will be a few people who have joined. Thank you very much for joining us this early hour. So it’s day two of the 25th Annual Piper Jaffray Health Care Conference. My name is Charles Duncan. I am a senior analyst and managing director for the firm covering biotech. And it’s a pleasure to introduce the next presenting company Avanir Pharmaceuticals. Avanir is a company that has been around for a long time but has really entered a very new phase of its growth in the last couple of years, and they are doing an excellent job of marketing a drug called NUEDEXTA for pseudobulbar affect. So it’s a pleasure to introduce Mr. Keith Katkin who is company CEO and Ian --

Ian Clements – IR

Hello.

Charles Duncan – Piper Jaffray

Thank you. Who heads up investor relations and I need to drink more special [ph]. So we are going to make this interactive. Hopefully you guys have questions. If you don’t, I will ask more. So tell me a little bit – I was feeling emotional this morning Keith – what is PBA?

Keith Katkin

Well, first I should probably start with a forward-looking statement as I will be making statements that are forward-looking in nature, are related to revenues, outcomes of litigation, clinical trials and the likes, I would encourage everyone to look at our SEC documents that are on the SEC website or on the Avanir website including our quarterly Qs and annual 10-K. So with that, please – have I to give a quick overview or if you want to jump right into question – Charles?

Charles Duncan – Piper Jaffray

No, I think it’s good to do the forward looking statements and we prefer the forward-looking statements certainly, like for example, how is the tone of business and what’s guidance and all that stuff. But first let’s start with just kind of the basic concept of NUEDEXTA because I think that there is a market inefficiency around understanding what NUEDEXTA is not only for PBA but maybe perhaps more broadly for other indications?

Keith Katkin

I have been talking about NUEDEXTA. So NUEDEXTA is a first-in-class product, it’s the FDA approved for the treatment of pseudobulbar affect. But I think when you talk about NUEDEXTA, you really have to talk about the pharmacology of NUEDEXTA. That means the pharmacology of dextromethorphan, and when you think about dextromethorphan discovered decades ago tried to be applied to multiple CNS indications but never really with any fantastic results, and the reason for that is dextromethorphan itself is rapidly metabolized by the human body. So when you take dextromethorphan, it’s metabolized into its metabolized dextrorphan. And so what we discovered is that if you add a metabolic inhibitor called quinidine, you can dramatically increase the bioavailability of dextromethorphan. And when you do that you allow dextromethorphan to pass the blood brain barrier and confer the therapeutic benefits that we have seen in PBA.

Now if you break dextromethorphan down a little bit further and you look at the pharmacology of that dextromethorphan, it’s got a very interesting profile. So it’s modulate glutamate through sigma-1 and through NMDA which are two receptors that we’ve talked a lot about. But if you pull the layer – if you look a little bit further you will also see that NUEDEXTA [indiscernible] serotonin and also with norepinephrine which are two receptors which play a significant role in a number of CNS products, many of which are approved for very large indications. And so as we think about the therapeutic potential of dextromethorphan and we think about the pharmacology we see tremendous amounts of potential use for dextromethorphan. So I would say we are FDA approved for pseudobulbar affect but we really think given the pharmacology we can be effective in mood and behavior disorders and various types of pain and also in movement disorders. And so as we have thought about our clinical development program we really focus in those three different areas, in the mood and behavior disorders. We’ve got pseudobulbar affect plus we have an ongoing phase 2 studies in agitations, secondary Alzheimer’s disease and we announced just a couple of weeks ago that we are going to start a phase 2 study in treatment resistant depression in the second half of 2014.

In the pain space, we’ve done a number of studies, both in diabetic peripheral neuropathic pain and in pain secondary to multiple sclerosis. We will have data from our most recent trial in pain and multiple sclerosis by the end of this year and then in movement disorders we’ve got a Levodopa Induced Dyskinesia in Parkinson's patient study that’s ongoing, expanded by The Michael J. Fox Foundation. So really we are – we design our development program for c with all of those potential applications in mind and we look forward to getting – in the next few weeks and then up to about 2014 as well.

Charles Duncan – Piper Jaffray

So I do too, look forward to that and we will dive into some of the details. But I will make a comment. I am a neuropharmacologist by training and frankly the pharmacology of NUEDEXTA or dextromethorphan is very rich and even surprising to me and probably people who know a lot more about this and me, but that’s said the principle of metabolic inhibition kind of goes back to basic pharmacology and I guess my question is for you – adding quinidine, is it a surprise that you would get better efficacy, is it a peak effect, is it a long term effect? I mean what is it that’s surprising about quinidine?

Keith Katkin

Well, I think what’s surprising about quinidine is what a strong metabolic inhibitor it is. And so dextromethorphan is primarily metabolized through one particular pathway and that’s the 2D6 pathway. And quinidine happens to be a potent inhibitor of the 2D6 pathway. So if you look – if you take dextromethorphan by itself, you get almost no dextromethorphan in a plasma, very, very small amount. If you take even just a small amount of quinidine in our case with NUEDEXTA, just 10 milligrams of quinidine, you see a 25-fold increase in dextromethorphan in the blood. I think what’s very surprising about quinidine is at a very small you can see a very large increase in dextromethorphan because quinidine’s ability to inhibit 2D6.

Charles Duncan – Piper Jaffray

And then not only blood levels but efficacy as well?

Keith Katkin

Exactly. And we certainly have seen in our studies a correlation between dextromethorphan and outcomes in our clinical studies.

Charles Duncan – Piper Jaffray

Okay. So I am a biotech analyst. I am going to focus more on some of the pipeline, the opportunities for NUEDEXTA. But if anyone has any questions at this point, we will get to a commercial part of the story and that will be in a couple of minutes. But let’s talk about some of the data that you anticipate. Are you still on track for MS pain by the end of this year?

Keith Katkin

We are and expect that we will announce the data by the end of this year.

Charles Duncan – Piper Jaffray

And what is it in that data set, not what the data is and you may not know what it is, but what is it that you would like to take away as the primary steward of your capital to decide whether or not to continue to invest in that program or NUEDEXTA broadly?

Keith Katkin

So I think for us – you really described the key decision point. The decision point from the data is will we advance this program and do phase 3 studies? And if we do, we’ll likely advance it into phase 3 studies in diabetic peripheral neuropathic pain. And so the question is what do we need to see in order to make that decision to advance dextromethorphan or in our case we’ll then start second generation compound due to [ph] dextromethorphan into phase 3 clinical development in diabetic peripheral neuropathic pain. And so what we really need to see there is twofold. First we need to see efficacy on the primary endpoint and the primary endpoint is a PK/PD endpoint in which we are looking after relationship between dextromethorphan levels and improvements in pain scores. And so as we deliver more dextromethorphan, we would expect that we will see a greater reduction in pain scores. But that’s only one part of the equation.

Arguably more important is we’ve got to see a treatment effect between one of the individual arms and placebo. And so we are not talking about a statistically significant treatment effect. We are talking just about a treatment effect which will allow us to appropriately develop EMPOWER, a phase 3 clinical study. And so typically in pain studies one point differential is considered to be clinically meaningful. And so if we see that, that treatment effect in between any of the arms of placebo, that will give us the information we need in order to be able to correctly power a phase 3 clinical study.

Charles Duncan – Piper Jaffray

So just to be clear. This is a phase 2, it’s not really designed or tolerant to demonstrate statistical significance. You want a clear signal of activity and then you are going to use it to inform you on the design of the next steps. So PK/PD endpoint, you’ve shown some pain data before. Haven’t you –

Keith Katkin

We have. We actually have a pretty extensive database of pain data for dextromethorphan and quinidine. We’ve got a phase 3 study actually that was completed a number of years ago using the different dose formulations than that which is currently approved with NUEDEXTA with higher amounts of dextromethorphan and higher amounts of quinidine. But that was a phase 3 study under special protocol assessment with the FDA, 379 patients in three arms, so about 120-130 patient per arm and that’s really had great outcomes. We achieved the primary endpoint as well as most all of the secondary endpoints in that study. So in our mind, there is no doubt that, that dextromethorphan works as effective in pain. We are designing the right studies to demonstrate dextromethorphan and its effectiveness.

Charles Duncan – Piper Jaffray

Yes, pain studies can be a pain. So diabetic peripheral neuropathy, why that versus MS pain?

Keith Katkin

So if you think about the evolution of the clinical program, we started in diabetic peripheral neuropathic pain and then when we first got NUEDEXTA approved for pseudobulbar affect, we thought that focusing the pain program on pain secondary multiple sclerosis would be a good idea. We thought that would be a good idea for two reasons. One, because our intellectual property in pain was not as long as our intellectual property for PBA. But in pain secondary multiple sclerosis, there is a possibility to get orphan drug status. And so we made a decision to move down that path. In addition, there were no approved therapies for treatment of central neuropathic pain, secondary multiple sclerosis. So for all of those reasons, MS pain made a lot of sense for the company.

Since initiating that program, we’ve in-licensed deuterated dextromethorphan and deuterated dextromethorphan, a great change of how we can think about the overall development program. It’s got very long intellectual property life through 2030, and it also – the way that deuteration works is it actually allows us to significantly reduce the amount of quinidine in the second generation compound. So what we decided is that going forward we will definitely proceed diabetic peripheral neuropathic pain assuming we see a signal in the phase 2 MS pain study. And the reason for that is the refreshed [ph] intellectual property reduced the amount of quinidine and also we’ve changed our focus a little bit, not on primary diabetic peripheral neuropathic pain but the treatment resistant. So we are going after the failures of which is a very large market in failures out there. One, it can generate significant value and that has a very high unmet medical need for patients.

Question-and-Answer Session

Unidentified Analyst

[Question Inaudible]

Keith Katkin

So the quinidine reduction – it’s important because patients with diabetic peripheral neuropathic pain, for example, are number of common medications. And so by reducing quinidine, although we don’t have significant drug-drug interactions right now with our existing product, we can further reduce the potential for any drug-drug interactions with the reduction in quinidine.

Charles Duncan – Piper Jaffray

That spoke into our concern with – so I think that it’s better to have less. But you mentioned significant reduction of quinidine. In my mind, significant is like 50% or more. What’s your definition?

Keith Katkin

Our definition is greater than 50%.

Charles Duncan – Piper Jaffray

That said, you are talking about treatment resistant diabetic neuropathic pain and that makes sense to me. But it seems like that doesn’t obviates the need in MS pain. Is there some other reason to not do that? Is it possible that you could see some use in that area?

Keith Katkin

Yes, it is certainly possible and so for us using our resources for the greatest return for our shareholders and also for the greatest number of patients that we can help is a primary important for us. And if you look at the population size of patients that have treatment resistant diabetic peripheral neuropathic pain, it’s a much larger population. And so there is more patients that we can help and there is greater revenue opportunity there. That doesn’t mean we won’t pursue MS pain on a going forward basis. We will certainly look to see if we can get grants to fund that program and likely we will have a conversation with the FDA to see if there is a way we can do studies in multiple types of neuropathic pain and then get a broad label for the treatment of neuropathic pain which would be fantastic for patients.

Charles Duncan – Piper Jaffray

So you mentioned 786 and the deuterated compound and I find that to be an intensely interesting compound because of what you said about the ability to lower quinidine but also because of IP and other considerations. But what are the key questions that you have in your mind as to whether or not you will move it forward to phase 3, is it simply this data that you are looking for soon out of 986, or is there some other step? And then secondarily, why do you think the FDA allowed you a pass to go from phase 1 to phase 3 with it?

Keith Katkin

So maybe I will take the second part first, and I think that the FDA has obviously seen a lot of different deuterated products and they’ve got a fair bit of experience with deuterated products coming through. And we have developed an extensive amount of data with 923, with NUEDEXTA over its 15-year development history. So we’ve got an enormous amount of safety data plus it’s dextromethorphan. Dextromethorphan, how many patients actually take dextromethorphan, we are talking tens of millions if not more patients take dextromethorphan on an annual basis.

So the fact that the FDA was very willing to work with us isn’t surprising and we are relying on all of that data that we have created throughout the clinical development program. FDA did ask for two additional studies before we could file our IND. They asked for a month tox study and they asked for tissue distribution study to make certain that the deuterated dextromethorphan is absorbed in the brain similarly to dextromethorphan. So I think that’s the reason that the FDA would be quite cooperative. For us for the actual molecule of deuterated dextromethorphan to continue to invest that, we looked at the pharmacology. Pharmacology is almost identical to dextromethorphan and we looked at the PK of deuterated dextromethorphan relative to our product NUEDEXTA. And what we found is the PK is almost identical.

And so for us really the benchmark is seeing success in our ongoing phase 2 programs and assuming we see success we are setting ourselves up in a position where all future studies can be done with deuterated compound, which we refer to as 786.

Charles Duncan – Piper Jaffray

So you would move into a phase 3 with this compound.

Keith Katkin

That is our plan.

Unidentified Analyst

[Question Inaudible]

Keith Katkin

It’s a good question. That remains to be seen as we move forward. Certainly we would want to position as a new chemical entity. But we will be relying on a lot of the data from our existing program. So that’s a question that will be answered as we continue to advance the clinical development program.

Charles Duncan – Piper Jaffray

Any other questions in pipeline at this point? I was going to hop into, call it, the commercial part of the Avanir’s story. How is it going current tone of business? I never get to ask that question.

Keith Katkin

Business is going great. So if you look our last report quarter, for the quarter ending September 30 which happens to be our fiscal year end as well, so as we look back and we look at what we’ve accomplished in fiscal 2013 was really a tremendous year for the company. Over a 100% growth in NUEDEXTA gross revenue and it was $92.1 million in gross revenue and if you just look at the business metrics, our unit growth over the last quarter, quarter and a half, are still strong. So you look at the quarter ending September 30, the sequential quarter-over-quarter growth in unit demand with 12%. If you look at this quarter, the first seven weeks of this quarter over the first seven weeks of last quarter, and we are up to a shy of 10%. So we are incredibly pleased with where the business is at and looking forward to a great 2014.

Charles Duncan – Piper Jaffray

And is that growth coming from broader or deeper within physician’s practice?

Keith Katkin

It’s really both. And so you may recall that in the third quarter we did a sales force expansion and realignment. And that expansion was really focused on bringing more interactions with the retail physicians. So we felt that we were calling on the appropriate number of physicians and nursing homes within the long term care segment, but we weren’t fully optimized within the retail physicians, neurologists, or psychiatrists, geriatricians. So with that sales force expansion and realignment we created two separate sales forces; one just calling on nursing homes, the other just calling on physician offices.

And so since we have done that we have seen some real efficiencies in the overall business, looking at just in this quarter to date, for the first seven weeks of this year, I said the overall business was growing at just under 10%. The retail portion of the business is growing at 12%. And so we expect to see that nice robust growth in the retail business and in the long term care setting, we expect to continue to see growth as well. But our team also kicked off the JANUVIA co-promote with Merck on October 1. So they are right now calling on their customers, understanding how they treat diabetes, what approach they are taking so that they can appropriately insert JANUVIA into their protocols.

Charles Duncan – Piper Jaffray

Yes, why don’t we talk about JANUVIA because that’s something we ever talk at [indiscernible]? How does that really help you with NUEDEXTA? Is it just capacity utilization or are there some synergies?

Keith Katkin

I think it’s two fold. One is leveraging our existing commercial infrastructure. So we have one of the largest and most well respected in long term care sales forces in the nation. And so most sales representatives can obviously detail more than one product. So we had extra capacity, and so we decided to speak to a number of firms about how we could best utilize our excess capacity recognizing that we are a leader in the LTC space. So this seems like a great fit and so we think the advantages are twofold. One, leveraging our excess capacity and will allow us to therefore potentially earn significant economics from Merck. We said it’s a three-year deal with a total of $60 million over the three years. And so even if we are at half that, that’s a significant contribution to our overall business.

The second is physician access. And we are seeing it already that physicians that we’ve had trouble accessing in more than the long term care setting, now we are getting access to because they want to hear about JANUVIA, they want to hear about diabetes and so when we get in, we have a conversation about that, so we can also educate them on pseudobulbar affect and the benefits of NUEDEXTA as well.

Charles Duncan – Piper Jaffray

So Merck seems to be a big company, obviously lot to lose probably concerned about compliance and things like that. A few months ago there was some noise in the blog sphere about NUEDEXTA and its use in the long term care setting. And I guess I am wondering if you could just kind of review your compliance policies with regard to how you long term care setting sales guys are out there talking about NUEDEXTA and was that something that Merck conducted diligently?

Keith Katkin

Absolutely and we take compliance very seriously at Avanir. We’ve invested significantly in compliance. We have a chief compliance officer and an entire compliance function. And so in all of our conversations obviously with Merck and even before Merck, we’ve developed all of the appropriate systems to attempt to detect anything that’s inappropriate that’s going on with the business, and that we are committed to compliance as an organization.

Charles Duncan – Piper Jaffray

Are there any questions right now? I was going to ask him about the patent litigation, just some issues – any other things on the current business. So I am sure you will give me a pretty good detailed answer to this. But how are things going with the patent litigation, when would you anticipate that to be behind us either with the settlement or with a statement from the judge?

Keith Katkin

So we continue to feel incredibly confident about the outcome of the patent litigation. So the quick update is we actually went to court. We had one week in September, then October in court, final briefs were filed on November 15, and if you look at the judge’s most recent decision, two months to render his decision. If you look historically of the judge, he does take three months or even longer in some instances. So we would expect that the decision could come as early as January 15, it could go into February. Sorry to predict exactly what timeline the judge will meet. That said, our 30-month stay does end on December 30. So for any reason the judge couldn’t rule by December 30, we will petition the court for an injunction to not allow the drugs [ph] to launch the rest.

Charles Duncan – Piper Jaffray

And has he granted those injunctions in the past?

Keith Katkin

In the past, yes. Actually quite often he does it on his own accord without even having to have the company’s going and requesting.

Charles Duncan – Piper Jaffray

So let’s talk about scenarios in upside, downside. What would happen in terms of your development plan if, for example, you’ve got a settlement for, I don’t know, 2020, or a settlement or a judgement 2020 generic competition, what would change?

Keith Katkin

I don’t think anything would change. Right now we are fully committed to developing 786 for all future indications. And we are committed to developing 786 as quickly and as efficiently as possible. So we continue on that path, continue to move our programs forward in agitation and Alzheimer’s in neuropathic pain and in movement disorders as well.

Charles Duncan – Piper Jaffray

So 2020 no business change, no business risk?

Keith Katkin

No.

Charles Duncan – Piper Jaffray

Are there any other questions from the audience? Unfortunately we are almost out of time. But please, we can run over. Okay, well thank you very much. We have special [ph] coffee up there and Keith and Ian – Ian Clements, thanks for joining me this morning.

Keith Katkin

Thanks, Charles. Appreciate the time. Thank you everyone.

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