Avanir: Addressing The Strength Of Nuedexta's Patents; Imminent Short Squeeze

Mar. 1.12 | About: Avanir Pharmaceuticals, (AVNR)

Shortly after launching Nuedexta-- Avanir's (NASDAQ:AVNR) flagship product for the treatment of pseudobulbar affect (NYSE:PBA) (on-label) and many other neurological conditions off-label-- as it is common and typical, Avanir faced Paragraph IV challenge under the Drug Price Competition and Patent Term Restoration Act.

This regularly abused Hatch-Waxman Act encourages generic companies to race to file an Abbreviated New Drug Application (NASDAQ:ANDA) with a Paragraph IV certification for every new drug that hits the market, because it could mean market exclusivity for about six months before other generics are around. For drugs with weak patents, this poses a real threat. But Avanir's patents for Nuedexta are solid and I believe will withstand the legal challenge.

Many shareholders were not surprised at the ANDA filing as it was expected, but short sellers took the occasion to bash the company. Martin Shkreli of MSMB Capital Management (which has recently been renamed "MSMB Healthcare"), a self-admitted short seller who claimed he has made money shorting Avanir, recently covered his short position (and promised "to donate 50% of my personal AVNR-related profits to charity. I agree to be held accountable to this." Eight weeks ago his assistant told me that he will be making an announcement about his charity donations, but nothing has been announced yet).

In announcing his short position, the hedge fund manager characterized Nuedexta's IP as weak, which is not surprising for a person who wants to make money by shorting a stock. The rationale he used to justify his conclusion heavily contradicted with those of several analysts (including 2 PhD's), who concluded that Avanir's IP position is strong and the patent challenge pose no real risk to the company.

In a note to investors, Canaccord Genuity analyst, Ritu Baral, echoed her positive attitude towards Nuedexta's patents. She wrote:

"We remain confident of Nuedexta IP to 2026. '282 is a composition of matter patent on the dextromethorphan /quinidine combination dose used in Phase 3 and commercial Nuedexta. We think the surprising findings claims (based on higher than anticipated efficacy in PBA for lower disease) in the patent further strengthen Nuedexta's IP position... We do not think the filing represents real risk and remain focused on the velocity of the Nuedexta launch."

JMP Securities' Dr. Charles Duncan, expressed his confidence about Nuedexta's patents in a note to clients:

We remain confident that Avanir's patent portfolio is strong and will be successfully defended ... (Avanir is successful in defending the 7,659,282 patent and Nuedexta retains market exclusivity though 2026).

Wedbush's Dr. Gregory R. Wade, maintained an aggressive price target for Avanir's shares following the ANDA filing with a note to clients:

We are confident the USPTO was fully apprised of existingprior art referenced in NUEDEXTA patents. AVNR holds patents for NUEDEXTA in the US and EU, expiring in 2026 and 2023, respectively.

Even Jefferies' analyst, who has been the only bearish analyst about Avanir, expressed his confidence with Nuedexta's patents:

We Still Expect Nuedexta Will Retain Patent ProtectionThrough 2026... based on the 7,959,282 patent. A generic filer would have todisprove three surprising findings and three declarations about low dose Q to overturn the7,959,282 patent: 1) a lower dose quinidine was shown to maximally inhibit CYP2D6 than wouldhave been predicted by prior art; 2) partial inhibition of CYP2D6 is effective toboost levels of dextromethorphan, whereas prior art said complete inhibition is needed; 3) lowdose dextromethorphan provides equivalent benefit to higher doses used in priorart.

In an article titled "Exploiting Newly Discovered Indications of Known Therapeutics", Dr. Melissa Hunter-Ensor et. al indicated:

"Patentability can be achieved by effectively claiming features that are surprising or unexpected in view of the prior art disclosure. Such features can include a new use of the therapeutic agent for a particular indication or patient sub-population, or use of a particular dosage range or formulation that has not been previously disclosed."

This further strengthens Avanir's argument for Nuedexta's patents on the basis of Nuedexta being a new formulation, a new composition of matter, as well as a new method of use.

I am not a patent attorney, but when I read a hedge fund manager's view of the patents, the case of Plaintiffs, and then look at Avanir's argument, patent law, precedence, and commentary of well respected analysts who have unanimously concluded in favor of Nuedexta's patents, I gain a lot of confidence that Avanir will prevail in this frivolous case.

Imminent Short Squeeze

According to the latest report from Nasdaq, there are still around 26 Million shorted shares outstanding. With

  • sales increasing
  • new trials on the way
  • no warrants outstanding
  • no call options of any significant size open
  • company's insistence that it will not dilute
  • EU approval
  • partnership
  • off-label use
  • increasing appetite of institutional investors for AVNR (currently over 70% of the float)

it seems logical that the short position will have to be covered. At the current volume level short interest needs over 60 days of buys-only to cover. What that can do to the stock price is unimaginable. Buying in the open market, which seems to be the only option for shorts (see argument about warrants and options above), will drive the stock price up. We may well witness a classic short squeeze. Just because it has not happened yet doesn't mean it will not. To everything there is a season.

Avanir is well on its way to become a leading CNS specialty biopharmaceutical company.

Disclosure: I am long AVNR.