Are Investors Overreacting to Market Rumors about Avanir (AVNR)?

In the biotech industry, rumors often make or break companies. Avanir Pharmaceutical (AVNR), which has had trouble fending off generic competitors over the past year, was recently crushed by an allegation that it had engaged in illegal off-label marketing of its flagship product, Nuedexta. Was Avanirâ s 18% plunge on September 13 to a three-year low justified, or should investors take these allegations with a grain of salt? Daily Chart Avanir only has two sources of revenue -- sales of Nuedexta and royalty revenue from Abreva.

Nuedexta was approved in October 2010 by the FDA to treat pseudobulbar affect (PBA), a disorder that causes uncontrollable crying, laughing, or other emotional responses, sometimes at inappropriate times. It is caused by either neurological disease or brain injury. Abreva is the only over-the-counter treatment of cold sores approved by the FDA, and is sold by its marketing partner GlaxoSmithKline (GSK). Last quarter, Avanirâ s revenue rose 87% year-on-year to $19.8 million, with Nuedexta accounting for 96% of total sales. Nuedexta sales rose 15.2% from the previous quarter to $19 million. Although the companyâ s growth looks solid on the surface, it faces a major problem -- generic competitors -- a decade before its main patent expires in 2023. Avanir recently settled Nuedexta patent litigation with Novartisâ NVS generic division, Sandoz, and generics maker Actavis ACT. Both Sandoz and Actavis are now allowed to sell generic Nuedexta on July 30, 2026, or earlier in certain circumstances. Indian pharmaceutical Wockhardt recently signed a similar agreement with Avanir earlier this month. Impax Laboratories (IPXL) and privately held Par Pharmaceutical have also filed ANDAs (abbreviated new drug applications) for generic versions of Nuedexta. Avanir is currently engaged in patent litigation against both companies in an attempt to convince them to accept a similar offer. Impax, which focuses exclusively on generics, has been performing poorly compared to generic market leaders Actavis and Teva Pharmaceutical (TEVA), and is therefore hungrier for new streams of revenue growth. Sandoz and Actavis have backed off, but itâ s still unknown if Impax and Par will stand down so easily. Although it appears that Avanir is holding these generic competitors off well enough, it has been a huge waste of legal expenses for a company whose SG&A (selling, general, and administrative) expenses rose 28.5% year-on-year to $23 million last quarter. Just when Avanir investors thought they could breathe a sigh of relief, however, a blog article from Gravity Research claimed that the company had engaged in illegal off-label marketing of Nuedexta to boost sales. Among the allegations are that Nuedexta was being marketed to treat â
Published on Sep 27, 2013
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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