Sell Avanir: Stellar Quarterly Growth, But A Small Revenue Stream

| About: Avanir Pharmaceuticals, (AVNR)

Avanir Pharmaceuticals (NASDAQ:AVNR) has two approved products, docosanol for treating Herpes Simplex Virus outbreaks and Nuedexta, which is approved for treating pseudobulbar. This occurs in patients with a variety of conditions, from multiple sclerosis to stroke and traumatic brain injury. Patients have inappropriate and uncontrollable emotions, such as laughter or crying. Avanir has estimated the market to be as large as 2 million patients, and Nuedexta is the only approved drug.

Nuedexta is a combination drug containing dextromethorphan and low-dose quinidine. Dextromethorphan is an NMDA receptor antagonist and Sigma-1 receptor agonist. Dextromethorphan is also used as a cough suppressant (antitussive) in over the counter medications. Quinidine inhibits metabolism of Dextromethorphan, increasing its availability in the central nervous system. Notably, Avanir is also developing deuterated dextromethorphan, which is less susceptible to enzymatic degradation. Although the drugs are approved independently for other indications, I'll defer to another well-researched article on Seeking Alpha that makes a case that Avanir has solid intellectual property rights for Nuedexta.

The drug, also referred to as AVP-923, is also in clinical trial for the treatment of central neuropathic pain in patients with multiple sclerosis. There was promising data in AVP-923 for the treatment of pain in diabetic peripheral neuropathy published in Pain Medicine, but the overall conclusion seemed to be that the drug should be studied further at different dosages. Development for the diabetic peripheral neuropathy indication, which is a large market, is on hold according to Keith A. Katkin of Avanir. "And then our Diabetic Peripheral Neuropathic Pain program is on hold pending the outcome of our central neuropathic pain in multiple sclerosis." The central neuropathic pain in patients with multiple sclerosis trial is underway, but it is only a phase 2 trial entitled "Safety and Efficacy of AVP-923 in the Treatment of Central Neuropathic Pain in Multiple Sclerosis (PRIME)," from

At first glance, the Avanir Income Statement on Yahoo Finance appears stellar, revenue growth upwards of 30% per quarter.

Income Statement

Get Income Statement for:

View: Annual Data | Quarterly Data

All numbers in thousands

Period Ending

Mar 30, 2012

Dec 30, 2011

Sep 29, 2011

Jun 29, 2011

Total Revenue





Cost of Revenue





Gross Profit





Operating Expenses

Research Development





Selling General and Administrative





Non Recurring










Total Operating Expenses





Operating Income or Loss





*Table is from Yahoo Finance

However, they are not even close to covering the operating expenses and this growth rate, from Nuedexta sales, would need to continue at this rate for at least couple of years to approach profitability. A brighter note, the company estimates it can meet cash needs for two years. For a company with actual sales, and that is a spectacular accomplishment for a Biotech company, it is nice to start use traditional metrics such as Price Earnings or Prices sales ratios. The PE is of course non-applicable and the price to sales remains high (about 21 according to Yahoo Finance). Until more solid evidence becomes available that Nuedexta will indeed be used for other indications, Avanir remains at best a long-term "speculative" investment.

There are other biotech companies with upcoming events that affect their growth prospects, such as the obesity drug developers like Arena (NASDAQ:ARNA). Lorcaserin, its obesity drug was just approved. Orexigen (NASDAQ:OREX) is developing an obesity drug, Contrave, and Vivus (NASDAQ:VVUS) has an expected approval date in July of 2012 for its obesity drug, Qnexa. In the diabetes drug area, Amylin (AMLN) is expecting buyout offers shortly. However, if you want to investigate the contrary argument that Avanir's sales growth does justify the current stock price valuation, there is a good discussion of the sales growth in the Earnings Call transcript for F2Q2012.

Disclosure: I am long ARNA.