Avanir Pharmaceuticals (AVNR) is a marketing stage biotechnology company whose flagship product I believe is likely to fail spectacularly on its introduction this year.
The company's single significant product is Nuedexta(TM), a combination of two generic drugs which was recently approved for treating symptoms of pseudobulbar affect (episodes of inappropriate laughter or crying) occurring in some patients with ALS (Lou Gehrig's disease) or multiple sclerosis. Following approval, AVNR's market cap has more than doubled to nearly $500 million; the company sold $80 million of stock in a secondary offering and is beginning to aggressively ramp up spending on marketing Nuedexta, for which it lacks a pharmaceutical industry partner. Apart from a wildly overestimated target market, Nuedexta has multiple serious issues relating to patent protection, efficacy, safety, competitive position, and cost that I believe will create an almost unsurmountable headwind to achieving any significant market penetration.
Nuedexta: Packaging a pill
Nuedexta is in fact a combination of two existing generic drugs which have been around for decades. The active ingredient is dextromethorphan, which readers may recognize as also being the active ingredient in over-the-counter cough syrups such as NyQuil or Robitussin DM. According to the company, this generic substance "acts to control symptoms of pseudobulbar affect through an unknown mechanism".
The other ingredient is quinidine, a generic drug historically used in the management of heart arrythmias, but included here for its role as an inhibitor of a liver enzyme called CYP2D6, thereby decreasing metabolization of dextromethorphan by the liver and making its circulating levels somewhat higher than if that drug were taken alone. Although effective in treating certain types of abnormal heart rhythms, quinidine is no longer widely used as it can cause various complications including a cardiac problem known as long QT syndrome, potentially leading in turn to a rapidly fatal ventricular arrythmia if not treated promptly. In fact, the FDA rejected Avanir's original application in 2006, citing concerns that its use of quinidine could cause serious arrythmias, and forcing Avanir to begin a new clinical trial with a reformulated version using only one third of the previous dose of quinidine. After discontinuing most of its other research programs to fund this study, AVNR spent millions to complete a revised Phase 3 trial which eventually led to approval in late 2010. The results as provided by the company itself can be seen below.
At the end of the 12-week trial period, patients treated with Nuedexta had an average of 4 fewer episodes of laughing or crying per day -- a number which suddenly becomes much more underwhelming when compared with the average of 3 fewer episodes for patients treated with placebo alone. Less prominently mentioned is the fact that a total of six ALS patients in the groups treated with Nuedexta died during the study, compared to only one in the placebo group. Because of the number of patients enrolled in the trial the treatment did manage to reach the statistical significance needed for approval, but the actual clinical and human relevance of this kind of an impact is a different matter entirely. I seriously question the benefit of administering a sedating, exorbitantly priced, and potentially risky drug in order to obtain on average one fewer temporary episode of inappropriate laughter or crying. I think many physicians, patients, and families will question it as well.
Interestingly, there were no significant differences whatsoever seen between the 30/10mg and 20/10mg treatment arms. The lack of any dose-response relationship over this dose range could suggest the possibility of similar effects at even lower drug levels, such as those achievable through use of generic dextromethorphan alone. Of course, no sane pharmaceutical company would fund that kind of trial. Because each of its ingredients have been available generically for decades, Avanir has no composition of matter patents pertaining to either one, relying on use and formulation patents covering its combination capsule. Doctors and pharmacists could easily provide the two ingredients separately at far lower cost. (Or indeed, patients could simply purchase cough syrup themselves.) The situation has strong parallels with the recent failure of NitroMed, a company which recieved FDA approval of its BiDil capsule for congestive heart failure, which was also composed of two already available generic drugs. After struggling to gain acceptance from physicians, patients, and insurers, NitroMed ceased marketing efforts for BiDil and laid off most of its staff in January 2008, and was later sold for $0.80 per share.
Unlike NitroMed, which had a plausible marketing plan emphasizing the importance of a single pill in improving patient compliance for a widespread, well-recognized, and serious medical condition, and research showing synergies between its two component ingredients in the African-American population, Avanir faces an uphill battle in marketing for a rare, controversial, and nonlethal symptomatic complaint for which numerous safe generic treatments are already available. All this is particularly interesting given that Nuedexta's proposed cost per patient comes to $5,868 per year.That'll buy a lot of cough syrup. Or a lot of amitriptyline. desipramine, fluoxetine, citalopram, fluvoxamine, sertraline, lamotrigine, or any of the other FDA-approved generic medications that have been used for decades in a wide variety of mood disorders, including pseudobulbar affect. Psychiatrists and neurologists are familiar with a wide range of existing medication options for emotional lability, each of which have more favorable cost and side effect profiles than Avanir's proposed alternative. In a PubMed search, I easily uncovered over 2 dozen published peer-reviewed studies showing safety and efficacy for numerous existing generic medications in the SSRI, tricyclic antidepressant, and mood stabilizer categories in treating symptoms of pseudobulbar affect:
To put costs in perspective, many of the above reasonable alternatives to Nuedexta are on the low-cost generic formulary at Walmart, costing just four dollars for one month's supply, a price which is matched by many retail pharmacies). Adding yet a further barrier to market acceptance, the quinidine contained in Nuedexta can create serious interactions with multiple widely-used classes of drugs, including tricyclic antidepressants and SSRIs. Patients dealing with issues of unstable mood may already be on one of these very medications, making their doctors even less likely to add a potentially risky and expensive drug like Nuedexta.
The marketing of pseudobulbar affect: "making a diagnosis"
Several months before approval, Avanir initiated a marketing effort intended to "raise awareness" among doctors and patients regarding pseudobulbar affect, the symptom Nuedexta is said to treat. In this excerpt from a New York Times article covering the approval, Avanir CEO Keith Katkin, an accountant, shares his professional opinion regarding the disorder:
Keith Katkin, chief executive of Avanir, said the company estimates that two million Americans suffer from the condition. ''We like to refer to PBA as one of the most common diseases that people have never heard of,'' he said in an interview earlier this week. Estimates are somewhat imprecise, however. Only five years ago the company was estimating that there were fewer than a million people with the condition. The company faces a marketing challenge. Many patients and doctors do not know the condition exists. And there is skepticism that PBA warrants treatment, given that people with the condition have more serious underlying diseases.
My estimates of the realistically addressable target market are sharply lower than the company's figures. It is more accurate to say that pseudobulbar affect is a symptom rather than a disease category. A minority of patients with certain neurological disorders can develop episodes of inappropriate laughter or crying; although some persons with particularly severe or prominent problems may seek treatment for that symptom and potentially be helped, for the most part pseudobulbar affect is generally far from the most serious issue that patients with these disorders confront. Particularly given the higher death rates and modest effect size relative to placebo in Avanir's study, more significant to patients and their families is that this incurable disease causes progressive generalized paralysis, eventually leading to death by respiratory failure. ALS is a rare disorder with approximately 30,000 patients in the US, each having an expected lifespan of 3 to 5 years. Although there are approximately 300,000 multiple sclerosis patients in the US, the prevalence of similar symptoms in MS patients is much less frequent. The number of patients with severe enough symptoms to warrant specific treatment, and whose symptoms are unable to be managed by any of the available generic alternatives, and who believe that the effect size relative to placebo justifies the astronomical costs, may be dramatically smaller than the company and AVNR bulls currently expect.
Analysts associated with AVNR's multiple stock offerings have speculated about potential use of Nuedexta in various other populations such as stroke or Alzheimer's patients, while the company itself has avoided making clear statements in this regard (wisely, in view of the steep fines handed out by the FDA for attempted off-label marketing). Apart from its potential cardiac risks, quinidine has anticholinergic effects (effectively opposite to many Alzheimer's drugs) making it particularly difficult to recommend for an older population such as dementia or stroke patients. Far from spontaneously attracting widespread enthusiasm for multiple off-label uses as AVNR bulls seem to anticipate, I think Nuedexta will likely struggle to gain significant acceptance even within its approved indication for pseudobulbar affect in ALS and MS.
Although not an accountant, I am currently completing neurology residency at a large university medical center, and I have not observed any significant enthusiasm for Nuedexta among academic neurologists specializing in MS, neuromuscular disorders, dementia, and stroke. I think it is possibly one of the most absurd drug candidates I have ever encountered. In looking over the above data, I'm left somewhat astonished that this combination of two generic substances (one of which is available over the counter at convenience stores) is being perceived as a major new breakthrough product worth nearly $500 million in market capitalization.
Other assets and outlook
Avanir has one other marketable product, a topical cold sore remedy known as Abreva. Its sales appear far from sufficient to sustain the company. AVNR generated a total of $2.9 million in revenues in fiscal 2010, down from $4.1 and $7 million in the last two years.
The AVNR pipeline appears to be entirely devoid of any other credible development candidates. Following the initial FDA rejection of Zenvia (now Nuedexta) in 2006, Avanir terminated its other research programs including the macrophage migration inhibitor AVP-28225. Avanir does retain a right to earn unspecified milestone payments if further advancements with AVP-28225 are made by Novartis. Since 2006, no further announcements that I could find have been made concerning this compound.
Lacking any other compounds in its pipeline, Avanir has hinted at plans to market Nuedexta for other indications, including as a pain medication. (The compound "AVP-923" listed in its promotional materials is in fact Nuedexta, presumably to be remarketed under yet another brand name.) Any attempt to win approval for pain could be particularly problematic, as dextromethophan has known potential for abuse, causing pharmacists in some states to move DM-containing cold preparations behind the counter. Even more worrisome, patients taking increasing amounts of Nuedexta in an attempt to relieve pain could ingest a potentially dangerous dose of quinidine. I think Avanir may announce plans to file for European approval or an IND for an alternate indication within the next several months, potentially providing a good entry point on the short side. In my view, attempts to market or approve Nuedexta in any other indication or jurisdiction will face the same overwhelming hurdles I have outlined above, and rapidly hasten consumption of the remaining cash.
On the heels of the FDA approval, AVNR promptly pushed through a secondary offering of 20 million shares at $4.40. Prior to this, stock sales to the public over the past 3 years exceed $78 million. Analysts associated with the offerings have come out with generous sales and market size predictions for Nuedexta which the company should now prove extremely hard pressed to meet. Similarly to Nitromed, due to the lack of any pharmaceutical industry partners Avanir has been faced with the need to create a nationwide sales and marketing organization out of whole cloth in order to manage the introduction of a single product with substantial generic competition. Particularly given the controversial and relatively unknown nature of the approved indication, I think they have seriously underestimated the difficulty of this task.
Although cash from stock sales could last about two more years at the recent burn rate of $14.1 million per quarter, the company has been rapidly hiring sales personnel and is ramping up spending on marketing efforts in what I believe will almost certainly prove to be a futile attempt to build a sustainable market. After purchasing $19 thousand worth of stock at 43 cents in 2009, insiders have now sold hundreds of thousands of shares in the past 12 months, many at much lower prices. In a recent note, the company's Canaccord analyst appears to be hastily trying to manage expectations downward, while reiterating a buy "based on a sum-of-the-parts valuation". The company has been closed-lipped regarding the prescription count to date, but will need to release sales data with the next 4Q in May. As the multiple barriers to market acceptance of Nuedexta become increasingly clear, AVNR appears likely to underperform the market significantly over the next six to twelve months.
Nuedexta likely results in a dramatic sales disappointment this year
|Subject||google docs link|
|Entry||03/17/2011 12:13 PM|
Figure from the trial's primary endpoint:
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|Entry||03/17/2011 01:19 PM|
I am sympathetic to the argument that Nuedexta should not have been approved, but I would disagree that the current valuation makes for a compelling short. 1) Market expectations are low (not to be confused with sell side estimates, which are reliably high) 2) Nuedexta has a favorable label.
Why is the label favorable? First, I disagree that use in PBA associated with stroke or Alzheimers is an "off-label" use. The company has not taken that position to my knowledge. Here is the label indication:
NUEDEXTA is a combination product containing dextromethorphan
hydrobromide (an uncompetitive NMDA receptor antagonist and sigma-1 agonist) and quinidine sulfate (a CYP450 2D6 inhibitor) indicated for the treatment of pseudobulbar affect (PBA). Studies to support the effectiveness of NUEDEXTA were performed in patients with underlying amyotrophic lateral sclerosis (ALS) or multiple sclerosis (MS). NUEDEXTA has not been shown to be safe or effective in other types of emotional lability that can commonly occur, for example, in Alzheimer?s disease and other dementias.
Notice that Nuedexta is indicated for the treatment of PBA without any qualifications. The label goes on to say that it has only been studied in ALS and MS, which may limit adoption but should not limit marketing.
Apart from being indicated for all types of PBA, the drug has no black box warning and no emphasis of the higher death rates in trials.
The final point I'd make is that DXM is a popular recreational drug. It is likely that patients suffering from these painful, debilitating diseases may enjoy being on the drug and that the docs may receive positive feedback to that effect.
This launch could go either way.
|Subject||covering below $3|
|Entry||08/09/2011 09:58 AM|
Despite the CEO being "thrilled with the progress we are making" on $2.2 million in revenue for the quarter; the launch has been a disaster and sales have sharply underperformed analysts forecasts. Refills have been particularly poor. Also due to its weak intellectual property position, the company has received a Paragraph 4 filing challenging its patents for Nuedexta.
The stock has become very heavily shorted and expensive to borrow; with the decline to $2.75 this morning I am covering but could still look to reenter on any bounce.