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Summary

  • AVNR gained 46% after a positive court ruling.
  • However, its lead product Nuedexta has fundamental issues that remain in place.
  • Therefore, the spike seems to be a short term knee jerk reaction.

Avanir Pharmaceuticals (NASDAQ:AVNR) surprised the market and gained more than 46% on April 30, 2014. The upsurge is attributed to the favorable ruling by the U.S. District Court of Delaware in a patent infringement case. Two companies, Par Pharmaceuticals and Impax Laboratories, had Abbreviated New Drug Applications for generic versions of Nuedexta, Avanir's lead product. After a six-day bench trial, the court ruled in favor of Avanir.

Investors would, however, want to look beyond the reaction to the catalyst and at evaluation of the fundamentals of AVNR as an investment.

Nuedexta - lead product marred by controversy

Nuedexta is an innovative combination of two time-tested generic drugs, dextromethorphan hydrobromide (20 mg), an ingredient active in the central nervous system, and quinidine sulfate (10 mg), a metabolic inhibitor that enables dextromethorphan to reach therapeutic concentrations. It is the only FDA approved drug for treatment of pseudobulbar affect (PBA), a neurologic disorder marked by involuntary bouts of uncontrollable emotion, primarily laughing and crying displays - sometimes mood-incongruent.

Approved in 2010, Nuedexta has been marked by controversy; first by allegations of off-label marketing and then by the patent infringement lawsuit, the primary factors responsible for the volatility seen in the company's share price. In the last 52 weeks, the stock has traded in a wide range: between $2.62 and $6.00 a share.

A report by Gravity Research Group predicted an 80% fall in quarterly revenue by the end of 2014, by which time it said that generic versions would have appeared on the shelves of medical stores. It even predicted a debt default, which would allow the creditor to force liquidation.

The report, published on September 11, 2013 did make an impact - AVNR dropped slowly but steadily - from $6.00 a share to below $3.00 a share by December 2013. Now that the Court has ruled in Avanir's favor and grants Nuedexta market exclusivity for more than 12 years, it is highly unlikely that its revenues will drop or the creditors file for liquidation.

In the most recent quarter ended December 2013, the company reported net product sales of $23.30 million against $14.88 million in the same quarter in 2012. Total revenue for the quarter stood at $26.75 million against $21.65 million in the previous quarter ended September 30, 2013.

PBA

PBA is a debilitating condition whose specific pathophysiology is still being investigated. However, it is commonly observed in people with neurological injuries such as brain injury and stroke. A 2011 study concluded that although the U.S. population of PBA is estimated to be anything between 1.8 million and 7.1 million, it is an under-recognized condition. However, these figures are challenged by analysts because they rely on a "CNS scale."

CNS refers to Center for Neurological Studies, an organization with whom Avanir has a license agreement. Under the terms, Avanir paid $75,000 as milestone on FDA approval in fiscal 2011 and is committed to a 5%- 8% royalty on net U.S. GAAP revenue from Nuedexta.

Still, at a price of $600 per month or $7,000 a year, the potential of Nuedexta looks impressive - $3.15 billion -even if we take the pool of marketable PBA patients at 25% of the estimated 1.8 million patients or 450,000.

But that's not all

Even at the time of FDA approval, lawmakers had an issue with Nuedexta pricing, particularly because the components of the combination drug were inexpensive - $20 a month. The company however justifies the cost as it says it had spent $200 million on development of Nuedexta. Recent developments in the case of Gilead's Sovaldi show that the lawmakers are becoming proactively involved in drug pricing and pay-for-delay deals with generic manufacturers.

A bigger problem is that no head-to-head studies have been conducted to show that Nuedexta is more effective than antidepressants for PBA. A self-made version of Nuedexta is possible with generic dextromethorphan and generic quinidine but for that one would need a lower dose of quinidine, which is not available - the lowest available is ten times the required dose. Some doctors suggest saving Nuedexta as a third line treatment for PBA after SSRIs and tricyclics.

The final word

The recent upsurge in stock price appears to be a knee jerk market reaction. There are too many issues involved. Of prime importance is that despite being the only approved PBA treatment, Nuedexta runs the risk of being relegated to third line use. The Court ruling can only have a temporary effect on market sentiment but not on the fundamentals of Avanir, which remain unchanged.

Source: Avanir Pharmaceuticals: Riding On A Non-Fundamental Catalyst