Avanir Inroads in Alzheimer’s Justify Offers: Real M&A

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Avanir Pharmaceuticals Inc. is giving suitors two reasons to bid.

The $2.35 billion maker of a drug that controls abnormal emotional outbursts won a patent case in April that will stave off generic competition for 12 years. Then, phase 2 study data last month put the medicine on the road to approval for treating another condition with far greater revenue potential: agitation in Alzheimer’s patients. All the good news has more than tripled Avanir’s stock price this year and may get buyers’ attention.

Eli Lilly & Co., H. Lundbeck A/S, Mallinckrodt Plc and Shire Plc would be logical acquirers, according to JMP Group Inc. Those drugmakers either have an Alzheimer’s-related medicine or other treatments for conditions affecting the body’s central nervous system. Shire’s chief executive officer said that he will continue seeking deal opportunities after AbbVie Inc. dropped plans to buy the company last week.

“There’s been two important events this year that could arguably make Avanir much more attractive from an acquisition perspective,” Jason Butler, a New York-based analyst at JMP, said in a phone interview. “Central nervous system assets that are approved and have this kind of growth potential are pretty scarce.”

Recent Talks

Avanir had been in talks last month about a merger or sale to another specialty drug company, according to a person with knowledge of the matter. When the company released the positive results of the phase 2 study Sept. 15, that spurred an 85 percent surge in the stock and put the deal out of range for Avanir’s potential partners, the person said. It also showed that the drug is a lower-risk investment, possibly making Avanir a target for larger drug companies, said the person, asking not to be named because the matter is private.

Avanir is the top-performing stock in the 118-member Nasdaq Biotechnology Index this year. Analysts predict the price will climb an additional 44 percent in the next 12 months should it remain a stand-alone entity, according to the average of six estimates compiled by Bloomberg. All of those analysts recommend investors purchase shares.

The company is open to doing deals and is always looking for potential assets or companies to acquire, or even a good partner, Chief Business Officer Gregory Flesher said in a phone interview.

“If there’s another company that we could come together with that would really make sense, we’d be open to that,” Flesher said.

Ian Clements, a spokesman for Aliso Viejo, California-based Avanir, declined to comment on whether it’s hired advisers or what options it may be exploring, including a sale.

Treating Outbursts

Representatives for Dublin-based Shire and St. Louis-based Mallinckrodt declined to comment on whether they’re considering buying Avanir. Representatives for Copenhagen-based Lundbeck and Indianapolis-based Eli Lilly didn’t respond to phone calls or e-mails seeking comment.

Avanir’s Nuedexta, which makes up almost all of the company’s sales, is approved to treat pseudobulbar affect (PBA), or uncontrollable crying or laughing believed to be caused by neurologic conditions such as Alzheimer’s, Parkinson’s and multiple sclerosis. Analysts estimate the drug generated $113 million of revenue in the fiscal year that ended Sept. 30. The April court ruling gave Nuedexta exclusivity through 2026.

Alzheimer’s Potential

A version of the medicine “significantly” reduced agitation in Alzheimer’s patients in the phase 2 study, Avanir said. The next steps for Avanir are to finalize the phase 3 trial design with the U.S. Food and Drug Administration, conduct it and then potentially secure approval in a couple of years.

“Because the phase 2 data was so positive, people have a lot of confidence that phase 3 will be successful,” JMP’s Butler said. And it could make Avanir a target that companies with neurology sales forces want, he said.

The market for agitation caused by Alzheimer’s is much larger than for Nuedexta’s currently approved indication. PBA can affect 200,000 to 300,000 Americans by some estimates, while agitation can affect 25 to 40 percent of the country’s 5 million Alzheimer’s patients, said Ritu Baral, a New York-based analyst at Cowen Group Inc.

“The ability to potentially address that larger market opportunity is the main reason behind” the recent surge in Avanir’s share price, Baral said in a phone interview.

Today, Avanir shares rose 6.5 percent to $13.20, the highest in more than eight years.

Even after the gains, the stock isn’t expensive, she said. The ratio of its enterprise value to trailing 12-month sales is 22. That’s roughly the median for U.S.-listed drugmakers of similar size, according to data compiled by Bloomberg.

Good Fits

Eli Lilly, which has a market value of $73 billion, has a medicine for thinking or memory problems in people who are being assessed for Alzheimer’s. Lundbeck and Mallinckrodt both have products to treat brain diseases. Shire focuses on rare diseases and also has a drug for attention deficit hyperactivity disorder.

Any potential bidders may first want to see how Avanir’s conversations with the FDA go and get clarity on how Avanir will be able to market and label the drug, Baral said.

“They will be taking a keen interest to see how that unfolds,” she said. “Then we’ll have a better idea of what the path forward looks like, at which point I think a lot of us will be thinking about where this asset makes sense as far as which large pharma CNS bag.”