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Introduction

There was a 30% price drop in Avanir Pharmaceuticals (AVNR) following the release of a Seeking Alpha article published by Gravity Research on September 11th, 2013. The Gravity Research article begins by providing "selected comments" from Avanir reps that are extreme and intended to implicate Avanir. The article then suggests that Avanir might be fined up to $100M by the FDA.

My article provides a rebuttal to the Gravity Research off-label marketing argument based on recent judicial review that affects FDA guidance. I also analyze some market factors that influence Avanir's future potential.

If off-label promotion for agitation is true, the FDA will likely not prosecute

The quotes provided by the Gravity Research article cannot be substantiated. Whether true or not, I would like to highlight a very recent "landmark" court case pertaining to off-label marketing, the United States v. Caronia. To summarize briefly, Mr. Caronia was a sales rep working for Orphan Pharmaceuticals and selling a drug approved to treat narcolepsy. While selling, Caronia verbally discussed using the drug for other non-approved indications. The court presiding over the case was the federal Second Circuit. The Second Circuit court concluded that the FDA violated Caronia's first amendment rights protecting the freedom of speech. The FDA decided not to appeal the Second Circuit's ruling to the Supreme Court. Some believe that the FDA did not appeal in order to avoid losing in the nation's highest court, which would have had broad implications for the interpretation of off-label marketing. In other words, a Supreme Court loss would have weakened the FDA's control over off-label marketing. Therefore, the Second Circuit's ruling stands. It has become a central case debated in the legal field, and it has set new legal precedent.

Importantly, the new legal precedent established by U.S. v. Caronia actually helps clarify the laws that give regulatory authority to the FDA. Primarily, one can now consider it unlikely that the FDA will prosecute off-label marketing when strong scientific evidence exists supporting the potential off-label use of a drug. Regarding Avanir, there is scientific evidence that can be considered peripheral but relevant that supports Nuedexta as a potential treatment for agitation. Physicians are obviously aware that the neurological disorders involved in the lability of PBA might overlap with agitation. Although you and I do not know the details of Avanir marketing, if Avanir is providing truthful information pertaining to the use of Nuedexta to treat agitation in Alzheimer's disease, it is highly unlikely that the FDA will pursue Avanir for verbal "marketing" for this indication. Additionally, a central cause for FDA prosecution is if companies market off-label for an intended use that the FDA already denied. Although the FDA has not granted the right, clearly, the FDA has not denied Avanir the right to market for agitation.

Overall, scientific evidence exists that supports the use of Nuedexta to treat agitation. It is well known that Avanir is testing next generation Nuedexta products in clinical trials to treat agitation. The FDA is obviously aware of these trials. Therefore, as long as Avanir's sales reps were truthful in their discussions to physicians, which no one can confirm or deny (outside of hearsay quotes provided in the Gravity Research article), it is unlikely that the FDA will prosecute Avanir for off-label marketing of Nuedexta. Based on this rationale, a concern about $100M in civil and criminal fines is unwarranted.

Safety insight pertaining to off-label use of Nuedexta for agitation

Nuedexta is comprised of dextromethorphan (DM) at 20mg and quinidine (Q) at 10mg. Avanir is currently in Phase II testing of AVP-923 for treating agitation. AVP-923 consists of the same active ingredients that comprise Nuedexta. Although we cannot determine the exact dosages that physicians are prescribing to Alzheimer's patients, the Avanir website states that AVP-923 was tested in over 1,635 patients at doses up to 60mg DM and 60mg Q in 19 different clinical trials. The most common adverse events observed in these clinical trials were dizziness, headache and nausea, which tended to improve within a few weeks of continued dosing. This suggests that if Avanir is indeed selling off-label prescriptions of Nuedexta to treat Alzheimer's, physicians have clear dosing parameters that they can follow to prescribe the drug safely.

Avanir's market traction and growth strategy

I will explore a few mitigating factors regarding the market risks that Avanir faces. Avanir has 10% and 1% market penetration in the long-term care market and retail market, respectively. These numbers seem small but are in line with analyst projections and in line with my previous general estimation of market traction for a new pharma product in the 2nd to 3rd year. My rule of thumb estimation predicts 25% market penetration in the long-term care market and 5% penetration in the retail market in the next two years. Clearly, there is opportunity for growth in the retail market.

On October 29th, Avanir announced its total revenues and operating expenses for the year. From my estimation, without the one-time expense this quarter ($20M upfront payment to OptiNose), Avanir will beat the analysts' earnings consensus ($-0.07) by about a penny when earnings are released on December 10th. Moreover, analysts have predicted steady growth in revenue of Nuedexta in the next two years, and Avanir has met expectations for Nuedexta thus far.

Avanir has marketed Nuedexta for PBA since 2011 and has ten ongoing clinical trials for different indications in their pipeline, which are largely Phase 2 and beyond. They have an internal salesforce, which will be expanding from 72 sales reps to 150 in order to gain traction for Nuedexta within the retail market. This salesforce expansion will facilitate sales of other drugs in their pipeline that are geared toward the retail market if/when they are approved. For instance, their sales force already calls on 90% of neurologists that generate 90% of total migraine scripts, according to the company CEO.

Conclusion

All in all, there are regulatory and market risks that Avanir must confront that are similar to most growing pharma companies. By understanding Nuedexta safety and efficacy in the context of recent legal precedent, my argument mitigates the off-label marketing risk. Additionally, I have highlighted some market factors that will promote future sustainability of Avanir's core business. I believe that Avanir is in a dynamic but strong position. Meanwhile, investors should pay attention to upcoming clinical trial results for use of AVP-923 to treat agitation and MS pain indications, which will likely be released in the next few weeks.

Source: An Analysis Into Avanir Pharmaceuticals Neutralizes Concern And Reveals Potential