In an industry ripe for consolidation, Avanir Pharmaceuticals (NASDAQ:AVNR) - a small cap, debt free, NOL heavy, biopharmaceutical company with plenty of cash on hand to go along with its clean labeled, FDA approved drug for the treatment of an arguably common and debilitating condition (PBA) - certainly looks to me as though it should be considered an attractive acquisition target.
While Avanir has publicly stated that they fully intend to "go it alone" in the US market and has never demonstrated intent to put itself on the bidding block, one may still ask the question: What if the right price were to come along?
The average analyst one year price target is $12.00. Yes, most of the companies with analysts covering Avanir participated in the recent secondary offering; however, one in particular offered a better detailed and more conservative rationale behind their lofty price target than the rest.
Prior to Nuedexta’s approval, Canaccord Genuity arrived at a one year price target of $9.00 using a net present value analysis. They predicted sales of $29.5M, $85.1M, $236.2M, and $304.6 for the years 2011-2014 with projected peak US sales of $351M in 2015.
What would it take for Avanir to reach $351M in peak US sales?
Not as much as you may think. An associate of mine has reviewed multiple wholesale and retail Nuedexta price quotes and has estimated that revenues to Avanir per patient (after an assumed 8% royalty is paid to CNS) would be approximately $4,000/year. That means it would take just 88,000 patients, or less than 6% of the total assumed 1.5M moderate-to-severe US PBA population by the end of 2015. This is an extremely rough and rudimentary calculation, but it is only meant to show how little market penetration is necessary to support one analyst’s conservative price target.
To complicate the valuation a bit:
The company has stated intent to dramatically expand its exposure to the PBA patient universe by applying for EMEA approval for the marketing and sales of Nuedexta in Europe (it is still not clear if Avanir intends to enter into a European partnership agreement prior to applying).
Additionally, the above does not take into consideration any potential for off-label prescribing (Avanir has completed a phase III trial of AVP-923 for the treatment of DPN pain). The company has also stated that one of its goals for 2011 is to decide on another indication to pursue. Some have speculated that they will take on central neuropathic pain, another disorder of high unmet medical need with a sizable patient population.
So why is the stock currently hovering just above its three month lows while the short interest has increased to three month highs just before Nuedexta’s February launch?
There is concern as to whether Nuedexta’s demand has been overstated. Also, there remains some speculation as to whether the company can pull off a timely and successful US launch and/or land a European partner. Some still argue that PBA isn’t a real medical condition. Lastly, you have the possibility of generic competition.
It’s time for the rubber to hit the pavement.
Weekly prescription data and Avanir’s FY Q2 & Q3 earnings reports will soon enough provide investors some much anticipated data from which meaningful conclusions about the success of Nuedexta and the future of Avanir may be drawn. Until such time, the battle of the bulls and bears will rage on and potential partners and/or acquirers are sure to keep a watchful eye.
Disclosure: I am long AVNR.