The challenges that small biotechnology companies face to develop new drugs, gain FDA approval for those new drugs, and ultimately to commercialize new drug therapies without partnering are immense. I have been following one such company called Avanir Pharmaceuticals, Inc.(AVNR) since October of 2010. This article will be focused on the first year challenges Avanir and its shareholders have faced launching Nuedexta and potential longer term rewards moving forward.
First, some brief background information. Avanir has spent the better part of 10 years developing their flagship drug called Nuedexta. Nuedexta is a combination of dextromethorphan hydrobromide(20mg) and quinidine sulfate(10mg). These are two well known generic drugs that have been around for decades that, when combined in the FDA approved amounts, give relief to patients with pseudobulbar affect known by the acronym PBA. PBA is a condition that is characterized by involuntary and often inappropriate laughing and crying by its sufferers and depending on its severity and frequency can be socially debilitating.
Avanir received FDA approval for Nuedexta for PBA at the end of October, 2010. Moving from a development/research company to a commercial drug company is challenging and requires a skillful management team and money. Avanir proceded with a dilutive $88M - 20M share public offering in November of 2010 to help fund the commercialization of Nuedexta - this financing grew the company's cash on hand to approximately $125M. Avanir hired and trained approximately 75 sales people and launched Nuedexta in the U.S. in early February of 2011.
Let's look at the last four quarters of reported net revenues for Nuedexta and total operating expenses which starts with the first quarter reported after launch (this was a partial quarter for Nuedexta revenues).
Net Nuedexta Revenue - $462,000
Total Operating Expenses - $15.8M
Net Nuedexta Revenue - $1.9M
Total Operating Expenses - $18.4M
Net Nuedexta Revenue - $3.7M
Total Operating Expenses - $22.5M
Net Nuedexta Revenue - $5.5M
Total Operating Expenses - $22.8M
Over the last four quarters Avanir has reported $11.56M of net Nuedexta revenues against $79.5M of total expenses - As one can plainly see it hasn't exactly sprinted out of the gates - revenues need to ramp significantly to reach cashflow break-even.
With that brief bit of background information let's reveiw several challenges Avanir and its shareholders faced over the last year as Nuedexta launched - most that are likely to continue through calender 2012.
Intellectual Property Challenges
Avanir has patented Nuedexta with "method of use" patents since it is comprised of two well known generic drugs that have been in use separately for decades - Quinidine Sulfate as an antiarrhythmic and dextromethorphan hydrobromide as a cough suppressant. "Method of Use" patents are generally regarded as harder to defend than "composition of matter" patents and are often attacked quickly by generic manufacturers. Avanir is currently defending its patents against four separate generic manufacturers - litigation is costly and there is never a "sure" thing. If Avanir were to lose patent protection for Nuedexta it would be a "going concern" type of set-back as the only other meaningful product revenue that Avanir currently generates are small royalties from the sales of Abreva, a cold sore cream, which is marketed by GlaxoSmithKline. Last quarter Abreva royalties contributed approximately $900,000 in gross revenues for the quarter ending December 2011.
Insiders have sold hundreds of thousands of shares over the last 6 months at rather depressed share prices and there has not been one insider purchase of shares since prior to FDA approval in October of 2010. This certainly can make retail shareholders uneasy. Why, if the prospects are bright for Avanir, are the insiders selling hundreds of thousands of shares and not purchasing any - especially at relatively depressed share prices? Of course there are many excuses for insider selling such as tax related selling, compensation weighted with stock options, 10b5 autosales, etc... I believe when insiders are purchasing shares on the open market in the companies they are managing, it shows they have enough confidence in the future prospects of the company to put their own money at risk - just like retail shareholders. Take a look at Ligand Pharmaceuticals (LGND) if you want a textbook example of insider buying and share price appreciation.
Alternative Off-Label Therapies for PBA
There have been anecdotal reports, small studies, and medical opinions published over several years that show where select serotonin reuptake inhibitors (SSRIs) and Tricyclic Anti-Depressants (TCAs) have been used off-label with success in treating PBA/Emotional Lability. Many of these medications are available as generics at a fraction of the cost of Nuedexta. These medications have been used for many years treating depression, various mood disorders, neuropathic pain, and other afflictions including PBA - their safety profile is well known and physicians are comfortable using them. There have never been comparative clinical trials between Nuedexta and SSRIs or TCAs - Nuedexta was compared to a placebo in its clinical trials.
Physicians appear to be conservative in prescribing new medications and this seems to be the case with Nuedexta as well …
From the February 7, 2012 conference call Q&A:
Christopher James - MLV & Company:
"What sort of push back again are you getting from physicians and institutions that have not written prescriptions for NUEDEXTA?"
Keith Katkin - CEO Avanir:
"On this call, we'll say that neurologists are generally conservative, they'd like to see a lot of use many very often before jumping in and writing prescriptions and they've gotten a little bit apprehensive due to some other products in the past. That has seen - they have seen - untoward safety issues arrive after sometime on the market."
Chief Commercial Officer resigns after 7 months
William Sibold was announced as the Chief Commercial Officer for Avanir in April of 2011 with much anticipation and commercial pharma experience - he resigned effective November 25, 2011 for personal reasons and ended up taking a job at Genzyme (GENZ). This left some shareholders with an uneasy feeling about what was happening within the company and how the roll-out of Nuedexta was progressing. I have no reason to believe Sibold's departure was for any reason other than what Avanir publicly stated - however, any time a senior officer of a company resigns after 7 months on the job and only 9 months after the company's flagship product launches it is certain to raise questions. This is especially concerning if one considers a slower than expected uptake of Nuedexta coupled with downward revenue revisions from wall street analysts covering AVNR in May 2011 and reaffirmed in October 2011.
As with many small unproven biotech launches the launch of Nuedexta was heavily shorted. At FDA approval on October 31, 2010 there were approximately 12M shares sold short and on February 15, 2011(approximately 1 week after launch) there were 20.98M shares sold short. The short interest has remained entrenched reaching 35.3M shares sold short on 7/29/2011. As of 1/31/2012 AVNR still shows 26.3M shares sold short. The share price as of 2/10/2012 hovers around $2.93 per share. The price shortly after FDA approval rose to an intraday high of $5.80 per share. While a high short interest is not necessarily indicative of a company's prospects - the fact remains that there is a significant confident short position that is hovering around 20% of the float and paying high interest rates to stay short the stock.
There are many other factors that have presented challenges to Avanir and its shareholders this past year and will need to improve moving forward such as:
- Continued need for physician and patient education and disease recognition.
- PBA market size estimates that vary greatly and may or may not be accurate make it difficult to predict sales potential - Here is an excellent unbiased article that does a good job of analyzing the treatable PBA market size.
- Overcoming insurer/medicare reimbursement restrictions
- The need to substantially increase revenues and decrease expenses to avoid dilutive financing or some other form of financing or partnering negotiated from a position of weakness.
Along with the aforementioned risks, headwinds, and challenges there are also potential rewards for Avanir and its long-term shareholders not the least of which is selling a variation of AVP-923 in the neuropathic pain market for MS and possibly Diabetes or other forms of neuropathic pain. Enrollment is currently underway for the PRIME study - a MS Neuropathic Pain clinical trial. The neuropathic pain market is estimated to be in the billions of dollars and if Avanir could get even a small percentage of it - it would generate significant revenues. There is also the potential for approval and sales in Europe and the rest of the world for Nuedexta and of course there always looms the potential of a large pharma being interested in buying out or partnering up with Avanir.
As with any stock AVNR offers plenty of risks and potential rewards if one chooses to invest longer term. It is also a higher beta stock that can offer many trading opportunities to the astute trader.
Before investing in any equity you should do your own due diligence this article is not a recommendation to buy or sell AVNR shares or any other security.