Otsuka price should have Avanir investors laughing all the way to the bank
The only way Otsuka’s $3.5bn buyout of Avanir Pharmaceuticals makes sense is as a big gamble on degenerative diseases.
The steep price ought to have Otsuka investors shaking their heads, as the valuation relies on continued clinical success of Nuedexta in Alzheimer’s disease agitation, an indication whose regulatory pathway will likely be little easier than the currently approved pseudobulbar affect. US government intervention might have cooled the M&A fervour and checked the biotech market’s inexorable rise, but Otsuka shows that there still are companies with open chequebooks.
Otsuka’s offer of $17 a share puts a 13% premium on Avanir’s $15 close yesterday; this is modest by 2014 standards, but comes in the wake of a doubling in value on positive phase IIa data in Alzheimer’s agitation (Avanir’s Alzheimer’s data prompt unchecked outburst of investor enthusiasm, September 16, 2014).
This was one of two label expansions in degenerative disease the California-based group has been planning for Nuedexta, which carries the lab codes AVP-923 and AVP-786 in its experimental indications. The second of these is levodopa-induced dyskinesia in patients with Parkinson’s disease, which relates nicely to the approved indication, a condition that also affects Parkinson’s patients.
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Nuedexta has underperformed early expectations – at launch in 2011, the pill was reckoned to ring up more than $400m in sales in 2014, while $104m looks more likely under today’s more realistic consensus. The 2020 consensus now stands at $478m. Otsuka is gambling on success in the label expansion, a situation made more obvious by the FDA’s decision last month to reject Avanir’s intranasal sumatriptan for migraines.
In valuing Avanir at a very prescient $17 a share after the Alzheimer’s disease success, Charles Duncan, an analyst at Piper Jaffray, estimated that Nuedexta in the current indication was worth $4.62, and in Alzheimer’s was worth $9.93 a share. Thus the Alzheimer's progress will have a huge bearing on whether Otsuka can justify its purchase price in the coming years.
There are no specific drugs for Alzheimer’s agitation, though Otsuka’s antipsychotic Abilify and antidepressants like Prozac and Zoloft are among the options that can be used for patients experiencing symptoms.
This makes for a somewhat uncertain regulatory path, as on the one hand AVP-923 is specific to the condition and had no adverse events and few discontinuations in phase II, but on the other physicians already have options. New consensus definitions of agitation should help develop the endpoints for pivotal trials.
To get Nuedexta past the FDA in pseudobulbar affect, or inappropriate emotional outbursts in Parkinson’s disease, it took four years and two rounds of pivotal trials, required because of cardiovascular safety worries relating to QT prolongation. Although Avanir addressed this by dropping its dose from 30mg of dextromethorphan and 30mg quinidine to 20mg and 10mg respectively, these concerns will scarcely have been forgotten by regulators.
Achieving a $3.5bn takeout on a franchise of repurposed cold medicine and antiarrythmics, the primary indications of dextromethorphan and quinidine, takes some doing. Achieving it without any conditions is even more surprising. With a multi-billion-dollar valuation so dependent on clinical development, putting earnouts into the offer price would not have been unreasonable.