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Why You Should Pass on Avanir Pharmaceuticals

Shares of Avanir Pharmaceuticals (AVNR) soared to an eight-year high on Monday after the company reported positive Phase II clinical trials.

The stock closed at $12.49, up more than 85.3% from Friday’s closing price of $6.74.

As you might expect on such news, trading volume also saw a dramatic increase. More than 88 million shares changed hands, compared to just 2.1 million shares on a typical day.

But will the momentum continue?

A Closer Look at Avanir’s Growth Potential

As I mentioned, the catalyst for the stock price explosion came from the company’s clinical trial results.

In a study that lasted 10 weeks and included 220 patients, Avanir reported that Alzheimer’s patients treated with AVP-923, also known as Nuedexta, became “less agitated” than patients given a placebo.

And as you can see, the news triggered an extraordinary uptick in shares.

Not a Typical Day for Avanir: Avanir Pharmaceuticals (AVNR) Five-Day Chart

Now, the results weren’t completely unexpected. Nuedexta has proven to calm patients who have mild cases of pseudobulbar affect (PBA) – a medical condition characterized by sudden and uncontrollable episodes of crying or laughing.

PBA is thought to affect more than one million people in the United States, and is often a side effect of a stroke or other neurological condition, such as multiple sclerosis and traumatic brain injury.

In the end, yesterday’s impressive stock rise will likely turn out to be nothing more than style over substance…

You see, Nuedexta is simply a combination of an over-the-counter cough suppressant (dextromethorphan) with generic quinidine, a drug used to control heart rates.

And, of course, most teenagers are well acquainted with the mellow feeling dextromethorphan imbues on the body, and have been pinching it from their parents’ medicine cabinets for decades.

Granted, Nuedexta sales levels reached $75 million in 2013, and will likely surpass $100 million in 2014.

Unfortunately, these sales levels don’t translate to significant revenue generation for a drug maker that sports a $2-billion market capitalization.

Additionally, the treatment for agitation in Alzheimer’s patients will likely prove unimpressive for the same reasons the stock has languished for the last eight years…

Insurance companies have placed substantial restrictions on Nuedexta reimbursements for PBA, and there exists no new claims that Avanir’s treatment of the estimated one and a half million Alzheimer’s patients suffering agitation will prove any different.

Especially considering that patients can effectively purchase a cheap over-the-counter imitation.

To top it off, there’s yet another obstacle to Avanir’s plans…

The company optimistically assumes that it can successfully convince the FDA that giving overpriced cough syrup to Alzheimer’s patients – to quell a relatively minor symptom – constitutes meaningful therapy in an otherwise devastating disease.

This will prove to be no small feat for Avanir!

At the end of the day, the company’s announcement of a Phase II breakthrough was hyperbole at its finest, and investors should avoid the hype.

Good investing,

Richard Robinson

Richard Robinson

, Ph.D., Equities Analyst

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