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AVNR > SEC Filings for AVNR > Form 10-Q on 6-Feb-2014All Recent SEC Filings

Show all filings for AVANIR PHARMACEUTICALS, INC.

Form 10-Q for AVANIR PHARMACEUTICALS, INC.


6-Feb-2014

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements concerning future events and performance of the Company. When used in this report, the words "intend," "estimate," "anticipate," "believe," "plan" or "expect" and similar expressions are included to identify forward-looking statements. These forward-looking statements are based on our current expectations and assumptions and many factors could cause our actual results to differ materially from those indicated in these forward-looking statements. You should review carefully the factors identified in "Risk Factors" in this report in Part II, Item 1A. and in Part I, Item 1A. in our most recent Annual Report on Form 10-K filed with the SEC. We disclaim any intent to update or announce revisions to any forward-looking statements to reflect actual events or developments. Except as otherwise indicated herein, all dates referred to in this report represent periods or dates fixed with reference to the calendar year, rather than our fiscal year ending September 30. The three months ended December 31, 2013 are also referred to as the first quarter of fiscal 2014.

EXECUTIVE OVERVIEW

We are a biopharmaceutical company focused on acquiring, developing and commercializing novel therapeutic products for the treatment of central nervous system disorders. Our lead product NUEDEXTA® (referred to as AVP-923 during clinical development) is a first-in-class dual NMDA receptor antagonist and sigma-1 agonist. NUEDEXTA, 20/10 mg, is approved in the United States for the treatment of pseudobulbar affect ("PBA"). It is also approved for PBA in the European Union in two dose strengths, NUEDEXTA 20/10 mg and NUEDEXTA 30/10 mg. We commercially launched NUEDEXTA in the United States in February 2011 and we are currently assessing plans regarding the potential commercialization of NUEDEXTA in the European Union.

We are studying the clinical utility of AVP-923 in other mood/behavior disorders and movement disorders. We have two ongoing Phase II clinical trials exploring the potential treatment of agitation in patients with Alzheimer's disease and potential treatment of levodopa-induced dyskinesia in Parkinson's disease (the "LID study"). The LID study is supported by a grant from the Michael J. Fox Foundation.

We are also developing AVP-786, a next generation drug product containing deuterium-modified dextromethorphan and quinidine for the treatment of neurologic and psychiatric disorders. We completed a pharmacokinetic study with AVP-786, and based on this data, we believe that we have identified a formulation of AVP-786 with a comparable pharmacokinetic profile, and likely a comparable, safety and tolerability profile to AVP-923. This AVP-786 formulation contains significantly less quinidine than used in AVP-923.


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We are also developing a novel Breath Powered™ intranasal delivery system containing low-dose sumatriptan powder to treat acute migraine, AVP-825. If approved, this product would be the first and only fast-acting dry-powder nasal delivery form of sumatriptan. AVP-825 is licensed from OptiNose AS ("OptiNose"). Under the terms of the agreement, we assumed responsibility for regulatory, manufacturing, supply-chain and commercialization activities for the investigational product. We filed a New Drug Application ("NDA") with the U.S. Food and Drug Administration ("FDA") in January 2014.

We entered into a multi-year agreement with Merck Sharp & Dohme Corp. ("Merck") to co-promote Merck's type 2 diabetes therapies JANUVIA® (sitagliptin) and the sitagliptin family of products in the long-term care institutional setting in the United States beginning October 1, 2013. The term of the agreement will continue for three years following the launch date of the co-promotion activities. Under the terms of the agreement, we will be compensated via a
(i) fixed monthly fee and (ii) performance fee based on the amount of the products sold by us above a predetermined baseline. A significant majority of the fee is performance based. Over the three years of the agreement, Avanir could receive up to a maximum of $60.0 million in compensation.

In addition to our focus on products for the central nervous system, we also have partnered programs in other therapeutic areas that may generate future revenue for us. Our first commercialized product, docosanol 10% cream (sold in the United States and Canada as Abreva® by our marketing partner GlaxoSmithKline Consumer Healthcare), is the only over-the-counter treatment for cold sores that has been approved by the FDA.

Avanir was incorporated in California in August 1988 and was reincorporated in Delaware in March 2009.

The following chart illustrates the status of research and development activities for our products and product candidates that are commercialized or under development.

[[Image Removed: LOGO]]

In addition to the research and development programs identified above, Avanir has provided unrestricted research grants to support several investigator initiated studies with AVP-923. Current studies planned or ongoing include potential treatment of behavioral symptoms of adults with autism spectrum disorder, treatment of bulbar function (impaired speech, swallowing, and saliva control) associated with amyotrophic lateral sclerosis (ALS), and treatment of refractory depression. For additional information regarding these studies please see http://clinicaltrials.gov.


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NUEDEXTA for the Treatment of Pseudobulbar Affect

NUEDEXTA is the first and only FDA-approved treatment for PBA. PBA occurs secondary to a variety of otherwise unrelated neurological conditions, and is characterized by involuntary, sudden, and frequent episodes of laughing and/or crying. PBA episodes typically occur out of proportion or incongruent to the patient's underlying emotional state.

NUEDEXTA is an innovative combination of two well-characterized components:
dextromethorphan hydrobromide (20 mg), the ingredient that is pharmacologically active in the central nervous system, and quinidine sulfate (10 mg), a metabolic inhibitor enabling dextromethorphan to reach therapeutic plasma concentrations. NUEDEXTA acts on sigma-1 and NMDA receptors in the brain, although the mechanism by which NUEDEXTA exerts therapeutic effects in patients with PBA is unknown.

Studies to support the effectiveness of NUEDEXTA were performed in patients with PBA and underlying amyotrophic lateral sclerosis ("ALS") and MS. The primary outcome measure, the number of laughing and crying episodes, was significantly lower in the NUEDEXTA cohort compared with placebo. The secondary outcome measure, the Center for Neurologic Studies Lability Scale ("CNS-LS"), demonstrated a significantly greater mean decrease in CNS-LS score from baseline for the NUEDEXTA cohort compared with placebo. NUEDEXTA has not been studied in other types of emotional lability that can commonly occur, for example, in Alzheimer's disease and other dementias.

A copy of the NUEDEXTA safety information has been filed as Exhibit 99.1 on our Annual Report on Form 10-K for the period ended September 30, 2013. For additional information regarding PBA or NUEDEXTA see www.pbafacts.com or www.nuedexta.com.

We launched NUEDEXTA in the United States in February 2011 with a specialty sales force calling primarily on physicians that care for patients where PBA is most commonly observed. This includes patients with underlying MS, ALS, Parkinson's disease ("PD"), Alzheimer's disease, traumatic brain injury and stroke. Our commercial efforts focus on the outpatient setting where patients typically receive prescription medications through retail and mail-order pharmacies and the institutional setting where patients typically receive prescription medications through an institutional pharmacy.

The table below shows total gross product sales and dispensed units (capsules) for NUEDEXTA during the past four quarterly periods.

                                                               Three Months Ended
                                   March 31,            June 30,           September 30,         December 31,
                                      2013                2013                 2013                  2013
Gross product sales               $ 20,849,581        $ 24,315,422        $    27,666,348        $  31,281,493

Total dispensed units
(capsules)                           1,839,842           2,334,898              2,606,289            2,834,877
Percentage growth over
previous quarter                             7 %                27 %                   12 %                  9 %

AVP-923 for the Treatment of Agitation in Patients with Alzheimer's Disease

Alzheimer's disease is generally characterized by cognitive decline, impaired performance of daily activities, and behavioral disturbances. Behavioral and psychiatric symptoms develop in as many as 60% of community-dwelling dementia patients and in more than 80% of patients with dementia living in nursing homes; as the disease progresses the risk of such complications approaches 100%. Dementia-related behavioral symptoms, including agitation, can be extremely distressing to the individual, the family, and caregivers. These behavioral disturbances have been associated with more rapid cognitive decline, institutionalization, and increased caregiver burden.

The objectives of this proof-of-concept study are to evaluate the safety, tolerability, and efficacy of AVP-923 for the treatment of agitation in Alzheimer's patients. The trial is a multicenter, randomized, double-blind, placebo-controlled study that is expected to enroll up to 200 Alzheimer's patients in the United States. Eligible patients will be randomized to receive either AVP-923 or placebo for 10 weeks. The primary efficacy measure is the


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agitation/aggression domain of the Neuropsychiatric Inventory or NPI. Secondary outcome measures include assessments of disease severity, behavioral abnormalities, cognition, activities of daily living, quality of life and caregiver strain. Standard safety assessments will also be conducted.

AVP-923 for the Treatment of Levodopa-Induced Dyskinesia

Levodopa-induced-dyskinesia ("LID") occurs in most patients with Parkinson's disease ("PD") after several years of treatment, generally in association with other motor response complications, such as wearing-off or "on-off" fluctuations. Dyskinesia may be as disabling as the parkinsonism itself, and current treatment options are limited and are not always effective.

This proof-of-concept, double blind, randomized, crossover study will compare AVP-923 (45mg DM/10mg Q) with placebo for treatment of LID. The study will enroll approximately 16 PD patients across three study centers in the U.S. and Canada. Study participants will receive, in a random order, a 2-week treatment with AVP-923 and a 2-week placebo treatment, separated by a 2-week break. At the end of each 2-week treatment period, patients will receive a 2-hour levodopa infusion to test the drug effect on dyskinesia. Patients will be carefully monitored throughout the 6-week study for side effects, Parkinson's symptoms and general health status. The results of this study will help inform future development of AVP-923 for LID. This study is being funded through a grant awarded by the Michael J. Fox Foundation.

AVP-923 for the Treatment of Diabetic Neuropathic Pain

Diabetic peripheral neuropathic pain ("DPN pain"), which arises from nerve injury, can result in a chronic and debilitating form of pain that has historically been poorly diagnosed and treated. It is often described as burning, tingling, stabbing, or pins and needles in the feet, legs, hands or arms. An estimated 3.5 million people in the United States experience DPN pain according to the American Diabetes Association. DPN pain currently is most commonly treated with antidepressants, anticonvulsants, opioid analgesics and local anesthetics. Most of these treatments have limited effectiveness or undesirable side effects resulting in a high degree of unmet medical need. The global neuropathic pain market was approximately $2.4 billion in 2010 and is expected to grow to $3.6 billion by 2020 among the seven largest markets, consisting of the United States, Japan, France, Germany, Italy, Spain and the United Kingdom.

Avanir has completed a Phase III clinical trial for AVP-923 in the treatment of patients with DPN pain. In April 2007, we announced positive top-line data from our first Phase III clinical trial of AVP-923 for the treatment of patients with DPN pain. The most commonly reported adverse events from this Phase III study were dizziness, nausea, diarrhea, fatigue and somnolence, which were mild to moderate in nature. Given the recent setback in our Phase II study (PRIME) for the treatment of central neuropathic pain in multiple sclerosis, we are continuing to evaluate our options for this program, including the use of AVP-786 in the advancement of this program.

AVP-786 for the Treatment of Neurologic and Psychiatric Disorders

AVP-786 is a novel investigational drug product consisting of a combination of deuterium-modified dextromethorphan (a new chemical entity or NCE) and the metabolic inhibitor quinidine. The compound was developed through incorporation of deuterium into molecular positions of dextromethorphan, resulting in strengthened molecular bonds which reduce susceptibility to enzyme cleavage. Based on interim data, we believe that we have identified a formulation of AVP-786 with a comparable pharmacokinetic profile, and likely a comparable safety and tolerability profile to AVP-923. This AVP-786 formulation contains significantly less quinidine than used in AVP-923. In June 2013, the FDA agreed to an expedited development pathway for AVP-786, requiring only a limited non-clinical package as part of the Investigational New Drug application. Upon completion of these non-clinical studies, we intend to proceed directly into human clinical trials. We currently intend to study AVP-786 in neuropathic pain, agitation in patients with Alzheimer's disease and treatment resistant depression.

AVP-825 for the Treatment of Acute Migraine

AVP-825 is an investigational drug-device combination product consisting of low-dose sumatriptan powder to treat acute migraine. The powder is delivered intranasally utilizing a novel Breath Powered delivery technology. If approved, AVP-825 would be the first and only fast-acting dry-powder intranasal form of sumatriptan. We have filed an NDA with the FDA in January 2014.


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Migraine represents an area of significant unmet medical need. According to the Centers for Disease Control and Prevention, over 37 million Americans suffer from migraine headaches. The triptan class of medications is generally considered the standard of care with over 13 million prescriptions written annually. Sumatriptan is the class leader with a market share of over 50%, making it the most commonly prescribed migraine drug in the U.S. An online survey of over 2,500 frequent migraine sufferers revealed that 66% were dissatisfied with their treatments. As a result, many migraine sufferers are seeking fast-acting, well tolerated treatment options.

Partnered Programs

Docosanol 10% Cream - Cold Sore Treatment

Docosanol 10% cream is a topical treatment for cold sores. In 2000, we received FDA approval for marketing docosanol 10% cream as an over-the-counter product. Since that time, docosanol 10% cream has been approved by regulatory agencies in Asia, North America, and Europe. In March 2000, we granted a subsidiary of GlaxoSmithKline, SB Pharmco Puerto Rico, Inc. ("GSK"), the exclusive rights under a license to market docosanol 10% cream in the United States and Canada ("GSK License Agreement"). GSK markets the product under the name Abreva® in these markets. Under the terms of the GSK License Agreement, GSK is responsible for all sales and marketing activities and the manufacturing and distribution of docosanol 10% cream. Under the GSK license agreement, we received a total of $25 million in milestone payments from GSK and we were entitled to receive an 8% royalty on net sales of Abreva by GSK.

In November 2002, we sold to Drug Royalty USA an undivided interest in our right to receive future Abreva royalties under the GSK License Agreement for $24.1 million (the "Drug Royalty Agreement"). Under the Drug Royalty Agreement, Drug Royalty USA has the right to receive royalties from GSK on sales of Abreva until the expiration of the patent for Abreva on April 28, 2014. We retained the right to receive 50% of all royalties (a net of 4%) under the GSK License Agreement for annual net sales of Abreva in the U.S. and Canada in excess of $62.0 million. From the effective date of the GSK License Agreement up to the 2002 sale of our royalty rights to Drug Royalty USA, Inc., we received a total of approximately $5.9 million in royalty payments from GSK attributed to the 8% royalty on net sales by GSK.

Under the terms of our docosanol license agreements, our partners are generally responsible for all regulatory approvals, sales and marketing activities, and manufacturing and distribution of the product in the licensed territories. The terms of the license agreements typically provide for us to receive a data transfer fee, potential milestone payments and royalties on product sales. We purchase the active pharmaceutical ingredient ("API"), docosanol, from a large supplier in Western Europe and have, on occasion, sold material to our licensees. We currently store our API in the United States. Any material disruption in manufacturing could cause a delay in shipments and possible loss of sales.

General Information

Our principal executive offices are located at 20 Enterprise, Suite 200, Aliso Viejo, California 92656. Our telephone number is (949) 389-6700 and our e-mail address is info@avanir.com. Our Internet website address is www.avanir.com. We make our periodic and current reports available on our Internet website, free of charge, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. No portion of our website is incorporated by reference into this Quarterly Report on Form 10-Q. The public may read and copy the materials we file with the SEC at the SEC's Public Reference Room, located at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information regarding the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The public may also read and copy the materials we file with the SEC by visiting the SEC's website, www.sec.gov.


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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

To understand our financial statements, it is important to understand our critical accounting policies and estimates. The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are required in the determination of revenue recognition and allowances, certain royalties and returns and losses. Significant estimates and assumptions are also required in the appropriateness of amounts recognized for inventories, income taxes, contingencies, and share-based compensation. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. For any given individual estimate or assumption made by us, there may also be other estimates or assumptions that are also reasonable. Although we believe that our estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions are made. Actual results may differ significantly from our estimates.

A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in Part II, Item 7 of our Annual Report on Form 10-K for the year ended September 30, 2013 in the "Critical Accounting Policies and Estimates" section, as updated and amended in Note 2 of the Notes to our Condensed Consolidated Financial Statements included herein.

RESULTS OF OPERATIONS

COMPARISON OF THREE MONTH PERIODS ENDED DECEMBER 31, 2013 AND 2012

Revenues



                                               Three months ended
                                                  December 31,
                                             2013              2012            $ Change         % Change
REVENUES
Gross product sales                      $ 31,281,493      $ 18,373,831      $ 12,907,662              70 %
Less: discounts and allowances              7,982,466         3,494,569         4,487,897             128 %

Net product sales                          23,299,027        14,879,262         8,419,765              57 %
Revenues from royalties                     2,089,314         1,626,010           463,304              28 %
Revenues from research grant services              -             15,000           (15,000 )            -
Revenues from co-promote activities         1,358,078                -          1,358,078             100 %

Total revenues                           $ 26,746,419      $ 16,520,272      $ 10,226,147              62 %

Total revenues were approximately $26.7 million for the three months ended December 31, 2013 compared to approximately $16.5 million for the three months ended December 31, 2012. The increase in total revenues of approximately $10.2 million was primarily attributed to an increase of 62% in volume for NUEDEXTA net product sales when compared to the same period of the prior year and revenues from our co-promote activities which began in the first fiscal quarter of 2014.

Discounts and allowances increased by approximately $4.5 million for the three months ended December 31, 2013 when compared to the three months ended December 31, 2012. Discounts and allowances were 25.5% of gross product sales for the three months ended December 31, 2013 compared to 19.0% of gross product sales for the three months ended December 31, 2012. The increase in the discount and allowances percentage of gross product sales is primarily due to new contracts entered into with managed care entities during fiscal 2013 and increases in government mandated rebates.

Potential revenue-generating contracts that remained active as of December 31, 2013 include licensing revenue from our agreement with GSK, co-promote revenues from our co-promotion agreement with Merck and modest potential revenue generated from various other licensing agreements. Partnering, licensing and research collaborations have been, and may continue to be, an important part of our business development strategy. We may continue to seek partnerships with pharmaceutical companies that can help fund our operations in exchange for sharing in the success of any licensed compounds or technologies.


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Operating Expenses



                                             Three months ended
                                                December 31,
                                           2013              2012           $ Change          % Change
OPERATING EXPENSES
Cost of product sales                  $  1,292,411      $    838,129      $   454,282               54 %
Cost of research grant services                  -              9,398           (9,398 )             -
Research and development                  9,525,320         6,648,091        2,877,229               43 %
Selling and marketing                    17,475,404        13,522,419        3,952,985               29 %
General and administrative                8,449,890         6,538,403        1,911,487               29 %

Total operating expenses               $ 36,743,025      $ 27,556,440      $ 9,186,585               33 %

Cost of Product Sales

Cost of product sales was approximately $1.3 million for the three months ended December 31, 2013 compared to cost of product sales of approximately $0.8 million in the same period of fiscal 2013. The increase in cost of product sales is attributable to an increase in the volume of NUEDEXTA net product sales as compared to the same period of the prior year.

Research and Development Expenses

Research and development expenses increased by approximately $2.9 million from approximately $6.6 million in the first quarter of fiscal 2013 to approximately $9.5 million for the first quarter of fiscal 2014. The increase is primarily due to regulatory and development/manufacturing expenses for our AVP-825 program which began in fourth quarter of fiscal 2013.

Selling and Marketing Expenses

Selling and marketing expenses increased by approximately $4.0 million from approximately $13.5 million for the first quarter of fiscal 2013 compared to approximately $17.5 million for the first quarter of fiscal 2014. The increase is primarily attributed to increased marketing and promotion costs of approximately $2.0 million, a $1.2 million increase in personnel expenses resulting from sales force expansions and increased other corporate costs of approximately $0.8 million.

General and Administrative Expenses

General and administrative expenses increased by approximately $1.9 million from approximately $6.5 million for the first quarter of fiscal 2013 compared to approximately $8.4 million for the first quarter of fiscal 2014. The increase is primarily attributed to increased legal costs of $0.6 million, increased personnel costs of $0.5 million and increased other costs of $0.8 million.

Share-Based Compensation

Total share-based compensation expense in the three month periods ended December 31, 2013 and 2012 was approximately $1.4 million for each period. Selling and marketing expense in the three month periods ended December 31, 2013 and 2012 includes share-based compensation expense of approximately $0.5 million and $0.3 million, respectively. General and administrative expense in the three month periods ended December 31, 2013 and 2012 includes share-based compensation expense of approximately $0.6 million and $0.8 million, respectively. Research and development expense in the three month periods ended December 31, 2013 and 2012 includes share-based compensation expense of approximately $0.3 million for each period. As of December 31, 2013, approximately $12.5 million of total unrecognized compensation costs related to non-vested options and awards is expected to be recognized over a weighted average period of 2.7 years. See Note 9, "Employee Equity Incentive Plans" in the Notes to Condensed Consolidated Financial Statements (Unaudited) for further discussion.


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Interest Expense

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