Has Avanir Pharmaceuticals Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether Avanir Pharmaceuticals (NASDAQ: AVNR  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Avanir Pharmaceuticals.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

40.7%

Pass

 

1-year revenue growth > 12%

219.6%

Pass

Margins

Gross margin > 35%

94.8%

Pass

 

Net margin > 15%

(110.4%)

Fail

Balance sheet

Debt to equity < 50%

110.7%

Fail

 

Current ratio > 1.3

3.17

Pass

Opportunities

Return on equity > 15%

(118.8%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

4 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at Avanir Pharmaceuticals last year, the company has maintained its 4-point score. But the stock hasn't managed to stay flat, giving up about 5% over the past year.

Avanir remains dependent largely on its sole approved drug, Nuedexta, which treats a neurological condition called pseudobulbar affect. Although revenue growth figures look immense, it's important to realize that the raw numbers here are small, with the company bringing in just $16.5 million in sales during its fiscal first quarter.

Avanir gets other revenue from licensing and royalty income. Emergent BioSolutions (NYSE: EBS  ) produces vaccines against anthrax using Avanir's technology, while GlaxoSmithKline (NYSE: GSK  ) pays Avanir royalties on its over-the-counter cold-sore medicine Abreva.

What Avanir really needs, though, is either an expansion of Nuedexta's uses or a new drug from its pipeline with more potential beyond a niche condition. Avanir has waited for the European Medicines Agency to rule on expanding Nuedexta's indications to include multiple sclerosis, but it hasn't yet gotten a response. Meanwhile, the company announced favorable phase 1 study results for its AVP-786 drug last week, which could eventually become an MS treatment in its own right. Moreover, with Johnson & Johnson (NYSE: JNJ  ) and Elan (UNKNOWN: ELN.DL2  ) having seen failures in Alzheimer's drug bapineuzumab, they may be interested if Avanir's AVP-923 proves useful in treating the disease.

For Avanir to improve, it needs to get sales of Nuedexta rising to the point at which they can make the company profitable. At that point, the company would look much more promising as an acquisition candidate.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Could J&J buy Avanir?
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Click here to add Avanir Pharmaceuticals to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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