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S.D. Biotech’s Shareholders Question Firm’s Candor on Drug




Correction:

A story in the Nov. 21 issue of the San Diego Business Journal inaccurately stated that priority review status means the Food and Drug Administration could approve or deny a drug within six weeks instead of 10 weeks. The story should have read six months instead of 10 months. The Business Journal regrets the error.

Some stockholders of Avanir Pharmaceuticals, Inc. are questioning the forthrightness of the company’s management.

Avanir Chief Financial Officer Greg Hanson acknowledged to the

San Diego Business Journal

a flurry of Internet postings from angry investors on Yahoo Finance message boards last week but declined to comment.

Two different online identities posted copies of the Business Journal’s Oct. 3 biotechnology column on the Avanir message board on Nov. 14 and 15, which had announced the latest delay of San Diego-based Avanir’s new drug application for Neurodex, a medicine to treat uncontrollable laughter or crying in patients with neurological damage.

Dozens of postings accusing management of false promises of Neurodex’s potential and speculation that the company is not keeping stockholders in the loop followed in the next couple of days.

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In December, former Avanir Chief Executive Officer Gerald Yakatan prematurely announced at a conference in New York that the company had priority review status for Neurodex. A press release from that month announcing the priority review remains on the Avanir Web site.

However, priority review status cannot be granted under rules of the Food and Drug Administration until the application is accepted for review, and Avanir has not announced that the agency has accepted the application.

In the Oct. 3 Business Journal column, Hanson said the company expected to meet with the FDA in the “next few weeks,” at which time the company hoped the agency would decide if Neurodex would receive priority review status.

Some investors on the message board said they felt misled by the company, saying they were under the impression Avanir already had priority review. Others said the company has glorified Neurodex’s chances for priority review.

Priority review status would mean the drug could be approved or denied within six months instead of 10 months from the date of acceptance. It could allow the company’s sales force, if the drug ultimately gained FDA approval, to pitch Neurodex to doctors as the only drug approved by the FDA specifically for the uncontrollable emotions condition, called pseudobulbar affect.

One person claiming to be a shareholder wrote on the Yahoo message board that the company was leading stockholders “astray” regarding the status of the Neurodex application.

“The company stonewalled shareholders when they asked about the FDA rules and the lack of the FDA acceptance of the (application),” wrote the person, who used the online name sickandtiredofpolitics2003.

Since Avanir began the drug application submission process in December, the FDA has twice requested more information, delaying the agency’s decision to review the application. In the Oct. 3 column, Hanson said the latest delay, which pushed the FDA’s deadline to Oct. 10, was due to clerical formatting.

Robert Jacobs, who said he owns “far more” than 150,000 shares, said in a phone interview that he thinks the company is being “a little less than honest with its stockholders.”

“It’s unlikely that it was a formatting issue that is holding this application up,” said Jacobs, who lives in New York where he owns an entertainment company. Jacobs said he has been a stockholder for almost five years.

“This is the computer age,” he said. “Someone who knows something about computers can reformat a few thousand pages in a couple days.”

Later, Jacobs said there could have been a clerical issue, but added he doesn’t believe it’s “the real issue.”


Seeking An Update

According to the online messages and Jacobs, investors are nervous because the company has not updated them on the Neurodex application since September. While Jacobs said he has not posted on the message board recently, he has read the board and said he knows that many of the identities are investors.

Hanson would not say last week if Avanir has met with the FDA or how close the company is to obtaining a decision from the agency.

In the September announcement of the latest delay, the company said the “FDA requested that the company expand certain summary analyses in its application to better support the agency’s new electronic data submission guidelines.”

Investors expressed their angst regarding the convoluted statement on the finance message boards.

One person using the screen name nirvana_avanir, wrote: “It goes back to that we’re left to speculate because Avanir won’t tell us. Supplemental data? Formatting issues? Certain summary analyses? Semantic diarrhea?”

Hanson said Avanir Chief Executive Officer Eric Brandt should speak to the investors’ concerns, and that Brandt was traveling. Hanson said later in an e-mail that, “The company intends on providing an update to the status of its submission to the FDA in its next earnings conference call, currently scheduled for December 5, 2005.” Hanson said that Brandt spoke at a health care conference this month where he mentioned “a couple sentences” about the status of Neurodex.


A Matter Of Trust

Jacobs said investors were left with a sense of distrust following the December announcement, which he says was never publicly corrected.

Juan Sanchez, a biotechnology research analyst from Punk, Ziegel & Co., in New York said he respects Avanir’s new CEO Brandt. “We like the new management,” he said. Brandt began at Avanir in August, and previously spent six years as CFO of Irvine-based Allergan, Inc. Before that, he was a senior member of Boston Consulting Group’s health care practice in Boston.

Sanchez said he has faith in the company because of Neurodex’s “strong clinical data,” which showed “significant” reduction in the number of pseudobulbar affect episodes in a 2004, Phase III double blind study of 150 patients with multiple sclerosis, when compared to those given a placebo.

As for the premature announcement about priority review, Sanchez said, “My understanding is that the company thought it was going to get FDA priority review. Nothing goes as planned. That’s biotech for you.”

Still, Steve Brozak, a New York-based analyst who works for San Diego-based WBB Securities, said regardless, “It’s up to management to make sure they present as clearly as possible.”

“And if they misspoke, they should come back and correct themselves,” said Brozak.

Avanir markets Abreva, a cold sore medication, with North Carolina-based GlaxoSmithKline. Shares, which trade on the American Stock Exchange, closed at $2.92 on press day, Nov. 17, up 2.46 percent from the previous day’s close.

The stock has dropped more than 8 percent during the last year, fluctuating from a low of $2.10 to a high of $3.85. Despite the investor concerns about misinformation and Neurodex delays, financial research firms have given Avanir good ratings in the last three months, ranging from “buy” to “outperform,” according to Yahoo Finance. Brozak said Avanir has a number of respected institutional investors.

Founded in 1988, Avanir has about 60 employees. It reported a net loss of $8.2 million for the three months ended in June. In 2004, Avanir brought in $3.6 million in revenues and operated at a $28.2 million loss.

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