It has been nearly a year since the FDA approved Avanir Pharmaceutical's (NASDAQ:AVNR) Nuedexta for Pseudobulbar Affect (PBA). Since Nuedexta's approval, Avanir's shareholders have suffered through massive beneficial-owner selling, a painful round of dilution, one of the slowest initial drug launches in history, a surprise Congressional inquiry into the drug's pricing, four ANDA filings, and downward short-term price target revisions.
Shareholders have also watched in wonder as short interest in the company has grown to an astounding 33 million shares, nearly matching the total number of shares held by non-institutional investors.
In light of the above, it should be no wonder that, since Nuedexta's approval, the stock's price has dropped from its 52-week high of $5.80 to its recent low of $2.46, and that month after month, options players have seen their out-of-the-money calls expire worthless.
So what went wrong? Some would say nothing at all. PBA is a disease that has been observed and documented by doctors spanning the globe for many decades. It has gone by several different names and has negatively impacted the lives of millions of patients and caregivers. Unfortunately, the disease and its only FDA-approved treatment option, Nuedexta, are still relatively unknown in the medical world, and it seems as though doctors that are familiar with PBA and Nuedexta have been somewhat reluctant to prescribe Nuedexta for PBA in the place of SSRIs, which (for now, at least) remain the top treatment option among prescribing physicians. There is evidence, however, which seems to show that the tides may be turning, as PBA/Nuedexta awareness and physician prescribing confidence continue to grow.
Below is a script growth vs. cash burn graph, along with some corresponding commentary that has been provided by an investor known as OFP:
We’ve all seen a lot of projections of future TRx trends based on the reported TRx values. This graph uses an Excel spreadsheet’s trendlines for linear, power, and polynomial forward-looking projections. A 3% week over week pattern is also included. I wanted to know what AVNR’s cash position would look like over time based on each pattern. Thus, each TRx trend has its own associated cash position status because revenues are coming in at different rates. Thus each week I take the prior week’s cash balance - subtract $100M/52 + net revenues based on the specific TRx for that week predicted by each trend.
The following assumptions were used:
OpEx of $100M/year (R. Baral predicted $93M so maybe $100M is too conservative)
End of FY11 cash balance of $75.4M
Average discount of 20%
Stocking fees of 7%
COGS 9% (gross margin =91%)
Pill counts start at 4.3 weeks (60.2 pills) in FY12 and increase to 4.8 weeks slowly over time (may be too conservative)
Those trends with higher levels of TRx (3%, poly, power) all have associated cash levels that nadir and then rise without hitting the $0 bottom. The linear pattern (and Ritu Baral's projection which seems to use something very close to linear) go to zero around week 100 (end of CY 2012).
While the graph projects multiple break-even scenarios, it also shows that the possibility exists that Avanir may have to raise additional capital if sales growth fails to break above its current linear trend. Avanir has many things working in its favor that may prevent the need for dilutive financing, most of which involve creating greater PBA awareness and screening.
The company is currently in the process of enrolling 10,000 patients in the PRISM registry, a patient registry which aims to establish the prevalence and quality-of-life impact of PBA on its sufferers. This process will no doubt enhance overall PBA awareness while encouraging greater physician screening.
As was noted by Avanir at a recent investor conference, roughly 25% Nuedexta prescriptions are coming out of long-term-care facilities. Accordingly, the company announced plans to initiate a pilot program in which it will expand its sales force by approximately 30 reps for the purposes of increasing awareness in that market.
Additionally, Avanir plans to begin a direct-to-consumer marketing campaign in the near future. DTC advertising should lead to greater awareness among patient populations, which will ultimately lead to greater physician awareness.
Perhaps more inspiring than the above referenced company-sponsored cash-burning efforts at PBA market building, and Nuedexta awareness creation, is a secret weapon that Avanir has no control over whatsoever: Patient testimony via social media.
Nuedexta works for PBA. It has been proven to be safe. Awareness is growing. Sales are increasing. Improved formulary coverage is on the horizon. EU approval for PBA seems imminent for 2012.
All of these things are great, but most investors realize that the true power of the Avanir name is hiding in an indication for which it has yet to be approved: neuropathic pain. An approval for a pain indication would give Avanir instant access to a multibillion-dollar market. Enrollment for a large Phase II MS pain trial is set to begin later this year.
While there are no guarantees that Avanir will hit new a 52-week high and break away from its penny-stock status anytime soon, I remain confident in the company's long-term prospects and hold on to hope that sales from the PBA indication will lead to self-sustainability, profitability, and ultimately fund the future of Avanir Pharmaceuticals.
Disclosure: I am long AVNR.