Buy, Sell, or Hold: Avanir Pharmaceuticals

When considering any stock for your portfolio, don't be swayed just by the positives. Examine its pros and cons, and decide whether it's possible upsides outweighs its risks. Let's take a look at Avanir Pharmaceuticals (NAS: AVNR) , which has slumped by about 25% over the past year, to see why you might want to buy, sell, or hold it.

A glance at Avanir's financial statements offers some reasons to consider investing in the company. Its revenue, for example, dipped between 2007 and 2010, but it has been surging since then and is currently at a multi-year high. It has no long-term debt and enough cash to keep it afloat for a while.

But, most critical to biotech companies are their pipelines. Avanir's isn't the richest pipeline, but just one very successful drug can make a big difference. It has two approved treatments out right now: Nuedextra, for Pseudobulbar Affect, a condition associated with brain disease or injury that features involuntary emotional outbursts such as laughing or crying, and Abreva, an over-the-counter anti-viral treatment. In research or clinical trials are treatments for central neuropathic pain in multiple sclerosis, behavioral disturbances in Alzheimer's disease, and diabetic peripheral neuropathic pain.

One reason someone might want to avoid Avanir is its industry -- biotechnology. It's a tough one. A company has to develop a promising treatment and get it into clinical trials, which is a very costly process. Success in the trials is never guaranteed, either. If a drug earns FDA approval, it still needs to be favored and prescribed by doctors. Ideally, a drug will treat a condition that affects a lot of people; also ideally, there won't be many competing treatments. As an example of a biotech company that has experienced a lot of turbulence, consider Dendreon (NAS: DNDN) , with its promising prostate-cancer vaccine, Provenge. It made its debut with good marks but has struggled to garner the sales many expected, as the high cost of the vaccine has made doctors hesitant to prescribe it.

Avanir already has some trouble with the FDA, which rejected an earlier version of its drug Nuedexta, before ultimately approving it in 2010. The FDA's concerns about safety are well established -- it delayed approval for Eli Lilly (NYS: LLY) and Amylin Pharmaceuticals' (NAS: AMLN) Bydureon for a similar reason (potential heart problems).

You might want to sell Avanir if you're not a big fan of volatility. So far this year the stock is up 45%. (And it more than doubled in a single day, when the FDA approved Nuedexta, back in 2010.) But check out these annual returns:

  • 2006: (83%)

  • 2007: (43%)

  • 2008: (69%)

  • 2009: 363%

  • 2010: 115%

  • 2011: (50%)

Consider not letting volatility alone sway you, though. If you have confidence in a company and you expect it to be trading significantly higher in the future, how much does it really matter if it gets to that higher price via a straight line or a jagged, zig-zaggy one?

Here's a more worrisome concern: The stock's price has recently been well below $5 per share -- deep in penny-stock territory. That's not a death-knell for a company, but it's a red flag.

Avanir's financial statements offer more reasons to worry. Yes, revenue has been increasing, but so have net losses.

While Avanir does have its fans, it also has lots of detractors. In fact, it has so many investors bearish on it that about 25% of its shares have been sold short by folks expecting its stock to go lower.

Given the reasons to buy or sell Avanir, it's not unreasonable to decide to hold off. You might want to just wait. You might wait for more of its drugs to receive FDA approval. You might wait for them to start generating a solid (and growing) revenue stream. You might wait for Avanir to post consecutive quarters of net gains, not losses.

The verdict
I think I'll be holding off on Avanir Pharmaceuticals, at least for now. After all, there are plenty of compelling stocks out there with less uncertain futures. For example, check out our special free report, "Discover the Next Rule-Breaking Multibagger," to learn about a rapidly growing health-care stock outside the biotechnology field.

Looking for promising investments? Here are "5 Stocks with Explosive Potential" and "4 Stocks as Cheap as They've Ever Been."

At the time thisarticle was published Longtime Fool contributorSelena Maranjian, whom you canfollow on Twitter here, holds no position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of Dendreon. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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