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Biotech Stock Mailbag: Avanir Pharma

Biotech columnist Adam Feuerstein answers readers' questions about drug and health care-related firms.



) --An all-


Biotech Stock Mailbag this week, leading off with @aeroforce who asks, "What are your thoughts on

Avanir Pharmaceuticals



Not wanting to bury the lede, I'll declare up front that I'm not prepared to make a call on whether or not Avanir's drug AVP-923 receives U.S. approval on Oct. 30 as a treatment for pseudobulbar affect, or PBA. (What, you've never heard of PBA? More on the disease later.)

Avanir deserves props for collecting and presenting additional clinical data to ease concerns about the cardiac safety of AVP-923. In 2006, U.S. regulators rejected AVP-923 (then known as Zenvia and formulated at a higher dose) because the drug caused prolongation of the Qt interval, a measure of the heart's electrical cycle that can lead to dangerous heart arrhythmias, even death.

The reformulated AVP-923 still prolongs the Qt interval but to a lesser degree that was not clinically meaningful and did not result in any pro-arrhythmic events or serious adverse events, according to cardiac safety data compiled and presented by Avanir.

On this basis, Avanir management argues FDA should have all the safety data necessary to approve AVP-923 this time around.

The problem is that the cutoff between what regulators deem an inconsequential Qt prolongation and something that is a serious safety concern is rather arbitrary, according to the FDA's guidelines on the subject. Some of the new AVP-923 safety data on Qt prolongation falls into what I'd best describe as an FDA regulatory grey area.

The FDA has so far chosen not to bring AVP-923 in front of an advisory panel, so we don't know how the agency is analyzing the drug's cardiac safety data or whether or not the data are sufficient to approve the drug.

To me, the AVP-923 approval decision is too much of a black box to make a call, one way or the other.

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I'm unsure about AVP-923 but for what it's worth, the sell-side analysts who cover Avanir have more confidence. Avanir has picked up coverage from Jefferies, Cantor Fitzgerald and Wedbush this year, all of which forecast full approval for AVP-923 on Oct. 30. The analyst at Canaccord Genuity is also bullish on Avanir and AVP-923 but is a bit more conservative, forecasting approval but with a delay of three months beyond October mainly because FDA will need more time to analyze all the new data.

Getting back to pseudobulbar affect, or PBA. It's a rather obscure neurologic condition characterized by involuntary displays of emotion (think uncontrollable laughing or crying episodes). People who suffer from PBA usually have some other neurologic condition such as multiple sclerosis, Parkinson's or ALS (Lou Gehrig's disease). These PBA episodes can occur several times per day and last anywhere from seconds to minutes.

Avanir's AVP-923 consists of two well-known, approved drugs: Dextromethorphan, better known as the active ingredient in cough syrups like Robitussin, and quinidine, an enzyme inhibitor which increases the blood levels of dextromethorphan.

FDA rejected AVP-923 in 2006 (then known as Zenvia) because the formulation of 30 mg dextromethorphan/30 mg quinidine was deemed unsafe for the reasons stated above. (The QT prolongation culprit was quinidine). In response, Avanir came up with two reformulations -- 30 mg dextromethorphan/10 mg quinidine and 20 mg dextromethorphan/10 mg quinidine.

From an efficacy perspective, the data are fairly clear and convincing that AVP-923 reduces PBA episode rates compared to placebo. The approval decision is about the drug's safety.

Avanir shares trades around $3 and a market cap (including warrants and stock options) of around $320 million. The market is discounting AVP-923's approval although to what extent isn't clear. PBA isn't a well-diagnosed or commonly recognized condition which makes gauging the drug's commercial potential difficult. Avanir claims 2 million people in the U.S. suffer from PBA. I'd be more confident if the market assessment was more independent.


(MNKD) - Get MannKind Corporation Report

announcement this week of a $100-$110 million convertible debt sale just one week after entering into an 18 million-share equity financing deal prompted me to remark on Twitter:

"Geezy Peezy, Mannkind is grabbing as much money as it can before the December date with FDA."

These financings are not a bullish indicator for the stock, nor do they suggest management's confidence in a speedy FDA approval for the company's inhaled insulin device Afrezza, is what I meant.

In response, @quickgainstocks tweeted, "Mannkind: I don't think this is terrible news. Just a mere bump?

It's a mere bump if you believe Mannkind is raising all this money now to present a stronger negotiating position to potential marketing partners. That assumes, of course, that these potential partners exist and that Afrezza is on the cusp of approval.

I'm more inclined to believe the bear argument that Mannkind faces more Afrezza approval delays, potential partners are hesitant to commit until after approval, and Mannkind's billionaire founder Al Mann is no longer willing to pony up his own cash to keep the company afloat.

The equity financing deal announced last week had a $6.50-a-share floor under which the stock sales won't take place. As of Thursday, Mannkind's stock price is now well under that floor, which probably best explains why the company was forced to sell debt. The high short interest in Mannkind also forced the company to lend 9 million company shares to its bankers for short sales required as a hedge to induce investors to buy the convertible debt.

If you step back, all these Mannkind financing arrangements and the downward move in the company's stock price just four months before Afrezza's approval decision date doesn't paint an optimistic picture.


(XOMA) - Get XOMA Corporation Report

instituted a 15-for-1 reverse stock split Wednesday in an effort to retain its Nasdaq listing. The stock closed Tuesday night at 28 cents a share and reopened for trading Wednesday at $3.65.

Reverse stock splits are never a good thing, and true to form Xoma shares continue to slide. The stock sold off Wednesday and was down again in Thursday's intraday trading to $3.45, or 23 cents a share adjusted for the reverse split.

Discussing Xoma on Twitter, @Bobbandera took an upbeat line, stating, "Actually, the reverse split is bullish. Lower float allows them to run them up easier."

I'm not sure what that means, exactly; perhaps its trader talk. From a fundamental perspective, which is my focus, Xoma is deep in the danger zone. Investors are staying far away from Xoma for two reasons: Zero confidence in management and no excitement for XOMA 02, the company's experimental diabetes drug.

I've heard from a couple of large-ish shareholders who are trying to sow the seeds for a proxy fight and remove current management. The effort isn't gaining traction yet, perhaps because no one cares enough about Xoma.

As for XOMA 052, the drug's best and perhaps last chance of generating any investor buzz should come in early 2011 when results are released from a phase IIb study in type 2 diabetes. If the data show a clear signal of efficacy, Xoma may finally be able to snag a XOMA 052 partner -- a deal that's been long promised by management.

Given Xoma's weakened financial condition and management's poor track record for execution, however, what confidence should investors have that a XOMA 052 partnership deal gets done on favorable terms?

Last week, I called

Vanda Pharmaceuticals'

(VNDA) - Get Vanda Pharmaceuticals Inc. Report

commercial launch of the schizophrenia drug Fanapt "slow and disappointing." This prompted @maxthegoat to ask, "Why are you so adversely biased towards Vanda? It makes you look unprofessional."

If by unprofessional you mean warning readers back in October and again in April that

Vanda was at best fairly valued


more likely over-valued

when it was trading for $12-13, then I guess I'm guilty as charged.

Since Vanda now trades around $6.50, others might call my work highly professional and unbiased.

While we're on the subject of over-valued stocks,

Delcath Systems

(DCTH) - Get Delcath Systems Inc. Report

priced an offering of 5.2 million shares at a price of around $7.15 a share this week. On recent conference calls, Delcath management suggested to investors that stock sales to raise money wasn't necessarily in the company's near-term plans.

Yet, Delcath sold stock. The deal prompted @johnwelshphd to remark on Twitter, "Delcath secondary offering at less than half ASCO prices. Looks like @adamfeuerstein

overvalued comment in heat of cult rally

dead right."

Thanks, John.

One housekeeping note: The Mailbag will go dark next week because of my vacation. I return to work on Aug. 30 so look for the next Mailbag on Sept. 3.

-- Reported by Adam Feuerstein in Boston.

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Adam Feuerstein writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;

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