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Avanir Pharmaceuticals (NASDAQ:AVNR) is a pharmaceutical company that is focused on developing and commercializing drugs for the treatment of central nervous system disorders. It is known already for its over-the-counter drug, Abreva, for the treatment of cold sores. However, the excitement in the company is its newly FDA approved drug, Nuedexta, which treats the pseudobulbar affect or emotional liability seen in neurodegenerative diseases such as amyotrophic lateral sclerosis, multiple sclerosis, and Alzheimer's. It has tremendous potential. Experts think it could easily be a $500M/year drug.

There is the risk that management will not be able to execute the plan. However, the doctors that have prescribed Nuedexta so far are reporting excellent results. These results indicate the drug may be even more successful than originally thought. AVNR has hired William Sibold as a senior vice president and chief commercial officer. His experience bringing out blockbuster drugs will be invaluable. The company has $117.66M in cash and zero debt. The company is set up well for success.

AVNR is a potential short squeeze candidate with a short interest of 31.40% of the float (as of April 15, 2011). This is probably largely a hangover from before the FDA approval, which occurred Oct. 29, 2010. With the good initial results, I would expect this short interest to decrease considerably soon. With continued initial success, this could start to happen over the summer (a good time for healthcare stocks). Plus AVNR recently filed an IND for AVP-923 -- a combination of dextromethorphan hydrobromide and quinidine sulfate for the treatment of pseudobulbar affect and neuropathic pain. This should help near term price performance. The average analysts' recommendation on AVNR is 1.0.

Sunesis Pharmaceuticals (NASDAQ:SNSS) is developing vosaroxin, a leukemia drug in late stage trials. SNSS received FDA fast track designation for vosaroxin on Feb. 23, 2011. The stock is up considerably on that news, but it could go up significantly from its present value if it releases positive mid-Phase 3 trial data. The Data Safety Monitoring Board will do an interim assessment of the Phase 3 test data in mid-2012. However, the company may present interim data before then. For instance, the 30-day and 60-day results showed very low mortality in the Phase 2 trial with all cause mortality at 3% and 9% respectively. A repeat in Phase3 results would be great. Any substantial complete recession results in Phase 3 tests would make this drug a big winner. The short interest on this stock is only 3.00% of the float, so don't expect a short squeeze on this one in the near term. Still, this does indicate that most believe vosaroxin has a good chance of success. SNSS successfully raised $70M in 2010 to pay for the Phase3 trials, which started in Dec. 2010 with 450 patients. Yahoo Finance shows SNSS has $53.40M in cash on its books . The average analysts' recommendation on SNSS is 1.3.

Ardea Biosciences, Inc. (NASDAQ:RDEA) develops drugs for "the treatment of gout, human immunodeficiency virus (HIV), and cancer. The products include: RDEA594, a Phase IIb clinical trial product for the gout; RDEA684, a preclinical trial product for gout with hyperuricemia; RDEA806, a non-nucleoside reverse transcriptase inhibitor, which completed Phase II clinical trial for the treatment of patients with HIV; and RDEA427, which is in first-in-human micro-dose pharmacokinetic study for the treatment of HIV infection. RDEA is evaluating RDEA119, an inhibitor of Mitogen-activated ERK kinase (MEK), which is in Phase I/II study in combination with sorafenib and as a single agent in a Phase I study, both in advanced cancer patients. The company has a license agreement with Bayer to develop and commercialize MEK inhibitors for various indications." (Yahoo Finance) RDEA has short interest of 18.10% as a percentage of the float. It could get short squeezed, but this could also push RDEA downward in the near term, if there is no positive news. The recent PJ downgrade of RDEA to neutral is not a positive sign. The company has a good cash position with $80.61M, while it carries only $3.56M in debt. Plus insiders have bought 495,549 shares of RDEA in the last 6 months. This is approx. $12.88M at a price of $26 (the current price is $28.35). This indicates a strong belief in the company's prospects longer term by people who should know the most. This company is worth a good look. The average analysts' recommendation is 1.3.

All of these stocks are worth watching closely. The first two would seem to have better chances of near term upside. They both have high Betas though, which means they could go down quickly in an overall market downturn. Watch carefully for this. RDEA's Beta is only 1.1. It should move down less quickly in a market downturn, but it will move up more slowly too. I note the market looked suspiciously weak today (Monday).

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AVNR over the next 72 hours.

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