Are Analysts Underestimating Sales for Avanir’s Nuedexta?

| About: Avanir Pharmaceuticals, (AVNR)

After first receiving a “complete response” letter from the FDA for its Pseudobulbar affect (PBA) treatment, Nuedexta, Avanir (NASDAQ:AVNR) has finally won approval with a modified drug formulation and new clinical trial.

Nuedexta, also known as AVP-923, is a combination of two approved medicines, dextromethorphan, and quinidine. Dextromethorphan is unclear, but may act through antagonism of the NMDA receptor, modulating the excitatory effect of glutamate, a neurotransmitter. Quinidine inhibits a liver enzyme that would otherwise quickly degrade dextromethorphan.

PBA affects approximately 1.8 to 1.9 million individuals in the US and is often a secondary effect of stroke, traumatic brain injury, multiple sclerosis, ALS, Parkinson’s disease, and Alzheimer’s disease. It is neurologic disorder characterized by involuntary crying or uncontrollable episodes of crying and/or laughing, or other emotional displays.

There are no other approved treatments for the disorder. Current therapies often consist of off-label tricyclic antidepressants (TCA) and selective serotonin reuptake inhibitor (SSRI). Large numbers of patients remain untreated and are often undiagnosed.

In a study of stroke victims with PBA, 50% found their condition burdensome, but only 38% sought treatment. Of those, half were satisfied. I admit, these numbers are unlikely to apply to all PBA patients, but they do provide some important insights. It would appear the market is underserved in large part due to a lack of good treatment options. Nuedexta has the potential to expand the market due to its efficacy. As awareness of both the disease and treatment increases, the number of patients seeking treatment will increase as well.

Analysts estimate peak US revenue of between $350 and $500 million for Nuedexta. This is a very good number for a small biotech with only $4 million in annual license revenue. I believe this figure is too low. Management has said they expect to price the product between $3000 to $5000- likely on the high side. This amounts to total penetration of approximately 5% of the 1.8 to 1.9 million individuals suffering from PBA. As the only approved treatment for PBA, Nuedexta should certainly be able to achieve 10% penetration. Using managements given price range, 1.85 million patients, and 10% penetration, peaks sales should fall in the range of between $555 and $925 million. I’d tack toward the higher end.

In a way, PBA has similarities to the Fibromyalgia market. Fibromyalgia has a high prevalence but is under diagnosed and underserved. In recent years, two drugs, Lyrica and Cymbalta, became available that improved disease symptoms. It is now a fast growing market with sales in 2018 expected to be close to $3 billion.

Avanir stock has dropped about 10% since it announced its secondary offering to raise $88 million through the sale of $20 million shares. This will provide the firm over $100 million in cash as it ramps up its launch for Q1 2011 and hires a 75 person sales force.

The only possible hiccup is the likelihood of a patent challenge when the drug loses market exclusivity. Although the company has just been issued patents extending into 2025 in the US for Nuedexta, the first ones expire in 2010. Under the Hatch-Waxman Patent Act, it may receive at most an additional five years in patent term restoration.

Disclosure: No position