Stockprowler.com | 8/7/00

Stockprowler's pick this week is...

Avanir Pharmaceuticals (Amex:AVN)

Corporate Web site: http://www.avanir.com
Shares Outstanding: 55.1 million
Public Float: 45.7 million
Insider Ownership: 17%
Institutional Ownership: (9) 1%
Market Capitalization: $144.8 million
Closing Price Friday: $2.63

San Diego based Avanir Pharmaceuticals, Inc. is engaged in the development of novel therapeutic products for the treatment of chronic diseases. The company's lead product, docosanol 10% cream, a topical treatment for recurrent oral-facial herpes simplex infections, recently received FDA full marketing approval. It is the first FDA approved product for the treatment of herpes cold sores able to be sold without prescription. Docosanol 10% cream has a novel mechanism of action and is most effective early in the course of an outbreak. As a result, docosanol 10% cream can reduce the length of time patients experience discomfort from cold sores. Eighty percent of adults in the United States are carriers of the virus that causes cold sores. Each year, 20 to 40 percent of these -- more than 50 million adults -- develop symptomatic episodes, characterized by the formation of a blister on the upper or lower lip. The number of treatable episodes ranges from 100 to 130 million outbreaks annually, with 70 to 80% of these episodes treated by products in the over-the-counter (OTC) market. In clinical trials, docosanol 10% cream significantly reduced the healing time of patients' cold sore episodes. In addition, patients treated with docosanol demonstrated statistically significant reductions in the duration of associated symptoms of pain and/or burning, itching or tingling. Cold sore episodes can be brought on by a variety of factors, including stress, fever, fatigue and exposure to sunlight. Cold sore sufferers have reported that they avoid family and friends during outbreaks, which usually last about a week, but can last as long as two weeks. Up to 15 percent of sufferers have reported staying home from work during an outbreak. Due in part to the fact that there have been few effective treatments, only a small percentage of patients seek professional care. "Cold sores have a negative impact on the lives of millions of Americans, but most people believe there isn't anything that can be done to effectively treat outbreaks," said Terry M. Jones, M.D., an investigator in the company's clinical trials. Docosanol 10% cream can make cold sore sufferers more comfortable both physically and psychologically, with the result that people are able to return to their normal activities sooner.

Avanir recently signed a license agreement giving the manufacturing and marketing rights to docosanol for the United States and Canada to SmithKline Beecham (NYSE:SBH). Under terms of the agreement, SmithKline Beecham Consumer Healthcare will be responsible for all sales and marketing activities, as well as manufacturing and distribution of the product in the licensed territory. The terms of the agreement provide for Avanir to receive an upfront licensing payment as well as milestone payments up to $25 million tied to FDA approval, product launch and sales performance criteria up to one year from product launch. Avanir will also receive royalties on product sales.

In addition to docosanol, the company's product development pipeline includes an option to in-license a drug for the treatment of emotional lability in neurodegenerative diseases, expected to enter Phase II/III clinical trials this year. The company also has a drug discovery program in the advanced pre-clinical stage of development for the treatment of the underlying biological causes of allergy and asthma. Other areas of development include recently patented fully human monoclonal antibody technology, clinical development work on genital herpes, and preclinical work on cholesterol lowering and inflammation. The company is also working on technology to replicate a human immune system in mice for testing AIDS drugs and other compounds, hunan antibody technology, and central nervous system research.

On August 1, 2000, Avanir Pharmaceuticals was awarded a grant from the National Institutes of Health (NIH) under its Phase I Small Business Innovation Research (SBIR) program to evaluate the enhancement of antiviral therapy by combining docosanol with known antiviral agents. The NIH grant provides $100,000 to the company to study the potential benefits of combination therapy of n-docosanol with acyclovir and other nucleoside antivirals in animal models of herpes simplex viruses. The rationale for the research is based on earlier work by Avanir scientists showing n-docosanol can enhance the antiviral activity of nucleoside analogs against replication of several herpes viruses in vitro. The NIH awards SBIR grants for research on a competitive basis. Innovation and the potential for commercialization are among the important factors included in the review criteria used in the scientific and technical merit evaluation process. The Phase I SBIR grant is customarily utilized for proof of concept and can precede a Phase II SBIR grant used to optimize a technology or technique being developed. "The funding of this SBIR grant will accelerate our evaluation of potential docosanol line extensions and could provide evidence that combination treatment, as commonly used in the treatment of AIDS, may provide more effective control of serious cases of herpes infections," said Gerald J. Yakatan, Ph.D., Avanir's CEO and president. "The approval and funding by the NIH of this research for more aggressive treatments with drugs of diverse mechanisms of action is very timely for us, given the FDA's approval last week of docosanol 10% cream." The compound n-docosanol is the active ingredient in docosanol 10% cream. The compound has a novel mechanism of action that doesn't act directly on the virus and will not produce drug resistant strains of herpes simplex viruses. The safety profile for docosanol 10% cream combined with the increased effectiveness if applied early led the FDA to allow the approved product to be available over-the-counter without the need for a prescription.

The company received $1.0 million in license fees during the three months ended March 31, 2000 for docosanol 10% cream. Operating expenses, excluding litigation settlement costs in the quarter, were lower compared with the same period a year ago due to continued cost constraints on program spending while the company awaited a decision from the U.S. Food and Drug Administration on its new drug application for docosanol. For the six months ended March 31, 2000, the net loss was $6.5 million, or 14 cents per share compared with a loss of $4.2 million or 10 cents per share for the same period a year earlier. The net loss for the first six months of fiscal year 2000 was $2.4 million or five cents per share excluding litigation settlement costs of $4.1 million.

As of March 31, 2000, the company had cash and cash equivalents of $11.7 million and working capital of $11.4 million. Gregory P. Hanson, Avanir's chief financial officer, stated "We made considerable progress in the first six months of fiscal year 2000 in improving our cash resources, by raising a total of $15.5 million in financing. Financings included the completion of a $6.0 million private placement in common stock to three accredited financial institutions and through the exercise of stock purchase warrants and stock options and other financings which brought in an additional $9.5 million in equity, debt and mezzanine capital. We also repaid $1.5 million in 11% convertible debentures in February 2000."

Stockprowler.com views this as an excellent opportunity to get in on the ground floor of a biotech company with a potentially hot FDA approved product, in addition to the exciting future possibilities from their continued antiviral research. AVN closed Friday at 2 5/8 on 122,200 shares traded.

Good trading... Stockprowler