Obesity Investor by Ruthanne Williams Roussel

A few quick thoughts on Orexigen's (OREX) anticipated PDUFA (FDA decision) date scheduled for January 31.

First of all, we may not hear from the FDA on time at all, which isn't necessarily all bad. By some counts, the FDA has been missing up to 40% of its PDUFA deadlines in recent years, and the bad weather on the East Coast may not help it any this time.

The best possible outcome for OREX would, of course, be approval. In this case look for the stock price to rise. I have seen price targets of $11 to $18, which differ mostly in the size of the assumed market for Contrave once it reaches its peak and the extent to which Empatic is expected to cannabalize it. I actually think there is room for more than one drug, particularly since different patients will respond differently to different drugs, but I am feeling less confident in the $1 billion market for every drug that was being bandied about a few years ago.

A more likely outcome, and a good one, would be a "conditional response letter" setting forth conditions for Contrave's approval relating to the scope of post-approval safety studies as discussed in the advisory panel.

While the price may well rise above its current levels in this scenario, it's important to bear in mind that the value should decrease not only by the discount for the expected delay, but also for dilution associated with the capital raise OREX will need -- it has burn of about $60 million a year and cash to last through about the middle of this year. If the stock is trading at about $8 and six months of cash are needed at $30 million, that will represent about 13% dilution.

There are also some bad scenarios, such as a worse CRL (perhaps even specifying pre-approval safety studies, which some in the field believe could be prohibitive to further development of any obesity drugs) or outright disapproval. No point in modeling these, I think, since they are pretty darn bad and the stock price falls off a cliff.

Disclosure:  Long OREX

Thumbs Up For OREX Shows Diversification Strategy Can Work

It was sweet to see the FDA advisory panel vote to recommend approval for OREX's Contrave.  I don't know if this was true on Wall Street -- in fact I'm sure the team at JP Morgan would disagree -- but in my circles, it had always seemed as though everyone was a partisan of either VVUS or ARNA, with OREX not getting the attention I thought it deserved.  I usually felt like I'd walked into a Buffalo Wild Wings (BWLD) during the Oregon-OSU Civil War game wearing a shirt for UC Santa Cruz Volleyball.  Well, now they can all Fear The Slug.

(The rest of this post was cross-posted at Seeking Alpha)

On Tuesday, December 7, a Food and Drug Administration advisory panel voted 13 to 7 to recommend approval for Orexigen Therapeutics (OREX)'s obesity drug Contrave. Contrave moves closer to commercialization while its two principal rivals -- Arena Pharmaceuticals's (ARNA) Lorquess, or lorcaserin, and Vivus Inc's.(VVUS) Qnexa -- were sent back to the drawing board in October because of safety concerns.

I have previously suggested an approach for investors interested in making a general play on obesity drug development, or in taking a view that the FDA will come to regard obesity drugs as tools for improving health rather than as "vanity" or cosmetic aids. I call it the "basket" approach, although up until Tuesday it was leading some to call me a "basket case." The idea was to invest in a basket of all three of the small obesity drug developers, VVUS, ARNA, and OREX. This diversifies out some of the company-specific risk, and relieves the investor of the mental burden of constantly handicapping one of the companies against the other two. Whether or not someone actually made money on this basket, of course, would depend on when it was purchased, how it was weighted at the start, and how and whether it was reweighted. But in principle, it is nice to feel vindicated.

Going forward, it may still be worth considering a modified, or at least reweighted, basket approach. VVUS now has two years of safety data that it may well be able to resubmit to the FDA for Qnexa. While ARNA's prospects look cloudier, a small exposure to ARNA can be had for relatively cheap. When you own all three stocks, you don't have to worry about the ups and downs or relative merits of any one of them so much.

Contrave is a combination of two existing drugs, the antidepressant bupropion and the anti-addiction drug naltrexone, in a sustained release formulation. On average, patients had a 4.2% placebo-adjusted weight loss. However, the average does not tell the whole story, since it seems that patients either respond to Contrave strongly or they don't: about 50% of patients achieved weight loss of 5% or more of body weight. This meets one of the FDA benchmarks for efficacy, and that's all that is required.

The panel also voted 11 to 8, with one abstention, that additional cardiovascular safety studies be conducted post-approval rather than pre-approval. This second vote is very good news for Contrave as well as all other obesity candidates, since the studies in question would be very extensive and time-consuming, enrolling thousands of patients over several years. Conducting such studies pre-approval would arguably make obesity drug development prohibitively difficult. VVUS shares rose 10% Tuesday afternoon on the news of the safety study vote.

OREX has a marketing partnership in place for Contrave with Takeda of Japan.While the FDA is not required to follow the recommendations of its advisory panels, it usually does.

Contrave's PDUFA date, or approval decision, is scheduled by January 31. Expect volatility in the stock leading up to that date.

Disclosure: Long OREX, no other positions

Hi all, thanks for your patience. Just wrapped up a three-month project that put food on the table and presents under our tree but took a big bite out of my time and energy. Posting an article on the basket strategy shortly (and deleting the Cialis ads, folks you know that's not me doing that right?)

Folks, postings will be light (in spite of the news developments) for at least a few weeks as I am burning the candle at both ends doing a business planning project. Like everyone, I didn't know about the cancers in ARNA's rats either, and my question would be, if it is not any big deal, then why didn't they tell us earlier? We will see how this plays out. I have not sold any of my obesity stocks or changed my positions.

What a Letdown for VVUS

As many will know by now, the FDA briefing panel today recommended against approval of Vivus' (VVUS) Qnexa by a vote of 10 to 6.  This was originally announced as a vote of 9 to 7, but a new electronic voting system was in use, and it must have been a little confusing, because one panelist later claimed that they had unintentionally voted "Yes" for approval instead of "No" against.  (Insert "Jim, I'm a doctor, not an electronic voter!" joke here.)

The main concerns cited were:

• a lack of safety data longer than one year, although patients will likely be taking Qnexa long-term, at least at maintenance levels, and 
• concerns about birth defects when women taking Qnexa become pregnant.

Trading in VVUS shares was halted today.  I expect the price to tumble from $12.11 to around $4 or so tomorrow (Friday, July 16), which actually might be a good place to buy, if you share my view that Qnexa is not dead.

While the panel's vote is taken into consideration by the FDA, it is not binding.  Moreover, VVUS has from now until its late October FDA decision date to put together a longer-term package of safety data.  Its pivotal Phase III Qnexa studies reach the two-year anniversary of full enrollment in mid-2010, suggesting that VVUS may be able to assemble robust two-year safety data by October. 

The company may also be able to assemble some safety data from the existing available evidence on topiramate, which has been in use for over ten years, and phentermine, which has been in use over 45 years.  Finally, the original data that piqued VVUS's interest in developing the topiramate/phentermine combination, the data observed in ten years of practice by Dr. Richard Najarian, although not clinical trial data, may include some safety data that could be useful in some context.

The immediate winner from this is Arena Pharmaceuticals (ARNA), whose lorcaserin weight-loss candidate seems to be less efficacious but has undergone two years of rigorous tests for cardiovascular safety, including an independent monitoring board.

FDA Briefing Docs Are Up, So Are Stock Prices

The FDA briefing documents are up.  Have a read.  They are over 300 pages, so allow some time.

Clearly, many agree with me that FDA raised no new concerns about VVUS today, and that this is good for OREX as well.  The shares of VVUS, OREX and ARNA are all well up.

Don't be surprised if Qnexa ends up with a category X counterindication for use in pregnancy though. Lots of data around this in the documents.  Interestingly, both topiramate for epilepsy and phentermine are the milder Category C: use in pregnancy only if benefits to mom (and, therefore, baby) clearly outweigh risks to baby.

Also, there are case histories included of the serious adverse events (AEs), and while there were not a lot of them, I note that despite the studies' having excluding bipolar patients, there still were a few AE's in the "going too far up" class (hallucinations, flight of ideas etc.)

How To Drive Your Analyst Nuts

Friendly reminder: Check FDA's web site http://bit.ly/blfLUP Monday for possible 7/15 Qnexa panel meeting briefing docs. Nothing there now though as of 4 pm Friday PDT.

If you have access to a sell-side analyst, and feel like making a pest of yourself, you might try calling your sales rep every hour or two and asking if the documents are up yet and what do they say.  The rep will probably call up his analyst every time and ask him, instead of going to the FDA Web site him- or herself.  Be sure to also ask when the documents will be up, and why they are not yet up.  If the rep does not demonstrate a sufficient sense of urgency for you, mention casually that you hear some other analyst is "the axe" in VVUS.  (Of course, this doesn't make much sense if everyone is long in VVUS, since now who wants an axe, but it may light a fire under people anyway.)

ARNA First To Partner, Though Deal Not Quite What Everyone Hoped

This morning Arena Pharmaceuticals (ARNA) announced a US marketing partnership with the US arm of Japan's Eisai, known for gastrointestinal drugs, among others.  A well-attended conference call with many new (to me, at least) faces was held before market open, which will be archived on the company's web site for 30 days.

Reasonable people may disagree whether this is the long hoped-for partnership with Big Pharma by one of the three small-pharma obesity drug developers, ARNA, Vivus Inc. (VVUS) and Orexigen Therapeutics (OREX).  While I personally am in the camp that would think of the top dozen or so by worldwide revenues when people say "Big Pharma" -- Pfizer, GlaxoSmithKline, Roche et al. -- Eisai is certainly in or close to the top 20, depending on who's counting and over what period, and a muscular partner.

The deal is structured to reflect lorcaserin's risk profile relatively early in the game, that is, pre-approval -- lorcaserin will face an FDA advisory panel only in September and receive an approval decision in October.  For the moment, ARNA will receive only $50 million upfront from Eisai, which isn't much for a drug that analysts have been ballyhooing as potentially a $1B or more annual blockbuster. Milestone payments of up to $160 million then follow, mostly contingent upon approval and delivery.  All this limits Eisai's risk during the approval and pre-launch manufacturing process.

However, the back end is heavily weighted in ARNA's favor if lorcaserin does get approved and take off: a $1.16B sales-related milestone payment could kick in, which is rich considering that Eisai's most recent US revenues in fiscal year 2009 were $3.9B.  Eisai's purchase price to ARNA also steps up from 31.5% of sales to 36.5% of sales as sales volume rises.

All in all, it would appear that ARNA is happy to lock in some first-dealer advantage and very favorable partnership terms in the event that lorcaserin does come to market.  I like this strategy and so should other shareholders, since if lorcaserin does not come to market close to schedule, ARNA's prospects are very limited anyway -- why not increase the possible upside?

Two side notes in closing.  First, CEO Jack Lief insists that ARNA's market research shows that doctors will prefer to prescribe lorcaserin as a monotherapy.  I'd be interested in seeing that research or at least hearing more details of it.  I'm not convinced that there is no interest at all in a potential lorcaserin-phentermine combination (the much-rumored "safe fen-phen").

Second, and this is not limited to ARNA -- I'm not opposed to values.  But partnerships, alliances and mergers and the like don't require a perfect match of values, so please don't go on too much about how much everyone agrees with everyone's values.  Of course we don't want one side's values to be "We hug the trees" and the other side's to be "We steal shareholders' money and line our pockets with it."  But short of this, maybe we can take the values thing as read sometimes.

(Trying out Typepad's new "Quick Compose" feature, so if this post looks funny, I'll have to edit it later) The FDA's newly announced decision date of 1/31/2011 for OREX's Contrave is exactly 10 months after OREX submitted its New Drug Application (NDA) for Contrave to the FDA. This is further confirmation (reassurance) that the process so far is on time.

FDA has also tentatively set a panel meeting for Contrave for Dec 7, 2010, separate from the Qnexa review coming up in mid-July and the lorcaserin review in September. This is, on balance, fine news for OREX and confirms our analysis that the fortunes of these three obesity drugs, while linked insofar as they are all in the obesity space, also may rise and fall independently, particularly as regards approval.

Finally, let's not all get too excited about the (long-established) fact that Avandia, also being reviewed in July, has been the subject of cardiovascular concerns. While this is true, it also is not new, and cardio effects of Qnexa have been watched both inside and outside VVUS throughout Phase III.

Short Squeeze Potential In ARNA As VVUS Panel Date Looms

As expected, and as management discussed as a possibility a few weeks ago on the Q1 conference call, the FDA's Endocrinologic and Metabolic Drugs Advisory Committee will review Arena Pharmaceuticals (ARNA)'s weight-loss drug candidate lorcaserin at its already scheduled Sept. 16 meeting.  We rate this news as good.  In the small-cap world, it is always especially reassuring when outside agencies behave as management expects them to.  While lorcaserin's cardiovascular safety has been extensively studied and independently reviewed, we still were never in the camp that believed that this might give lorcaserin some sort of free pass to FDA approval with no further review.  The PDUFA (approval decision) date for lorcaserin is in late October.

The New Drug Application (NDA) for Orexigen's (OREX) competing weight-loss drug candidate Contrave has been accepted for review, the FDA also confirmed on Tuesday, June 1.  Contrave's PDUFA date will probably be in early 2011, but Contrave could still also be included in the September committee meeting.  OREX management has said they are preparing for an FDA advisory meeting for Contrave, although they have not received word yet that there will definitely be one.  Finally, this acceptance confirms our belief that OREX's restated clinical trial data should not affect its filing schedule.

Now to Vivus (VVUS) and its weight-loss candidate Qnexa.  As has happened around this time every year for several years now, VVUS CEO Lee Wilson's preplanned stock sales have ruffled a few feathers among investors.  However, I think this concern is overblown.  Without delving into the particulars of his personal life, Mr. Wilson is of an age where wives, ex-wives, and kids may all have a say in what he does with his wealth.  This sales plan has been in place for several years and anyway other VVUS executives are not selling.  For most investors, this is another great argument for my pet strategy of holding a little of each of VVUS, OREX and ARNA instead of worrying about which of the three is best. 

Finally, the big news obesity drug investors are all waiting for.  On July 15, the FDA's Endocrinologic and Metabolic Drugs Advisory Panel will review VVUS's NDA submitted for Qnexa.  The FDA decision is not expected until late October, so there may be time to go back to the drawing board if additional analyses of the existing data are required.

The panel's recommendations are not binding on the FDA, but are usually followed.  Watch the FDA web site a few days in advance of the panel meeting for the briefing documents, which may give some hints as to the direction the panel is leaning. 

Note that at close of market June 2, VVUS shares were up 4.92% in heavy trading, while ARNA was up 5.9% in above-average trading.  As of May 14, VVUS short interest represented 3.5 days to cover, while ARNA short interest represented about 10 days to cover.  While VVUS has passed the $1B market cap mark, ARNA is still definitely a small-cap stock, with market cap close to $330M and relatively small float of just under $100M.

Arguably, good news for VVUS could be good for all the weight-loss candidates, if the FDA shows itself more receptive to this class of drug than it has been in the past, while bad news for VVUS could help its two rivals in the space, particularly ARNA, since lorcaserin is a novel agent with a completely different mechanism of action than Qnexa.  Those who like to look for short squeezes would do well to watch ARNA over the coming weeks.