Obesity Investor by Ruthanne Williams Roussel

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.)

Basket of Obesity Stocks Spreads Company Risk, Preserves Upside

Now that Arena Pharmaceuticals (ARNA), Vivus (VVUS) and Orexigen Therapeutics (OREX) have all announced full year 2009 financial results, it's time to revisit my pet strategy of investing in the obesity treatment space by investing in a basket of these three stocks.

This basket essentially represents an option on the obesity drug market that I believe will mature in 2011, and that I hold in my own portfolio.

A Tisket, A Tasket, Three Stocks In One Basket

To sum up, these are three small-cap drug developers, each of which has a late-stage pharmaceutical candidate for weight loss that has completed Phase III trials.  In clinical trials, all three drug candidates met FDA approval guidelines for efficacy (that is, patients did lose weight on these drugs) and showed minimal side effects.   It is possible for all the drugs, or any two, or none, to be approved.

These drugs, if all approved, should all be coming on the market around the same time in early 2011.  The FDA has set decision dates (technically called "PDUFA dates," pronounced "Puh-DOO-fuh") of October 22, 2010 for lorcaserin and October 28, 2010 for Qnexa.  OREX announced last week that it expects to submit its NDA for Contrave by the end of April, which would put its PDUFA date ten months later, or somewhere around February, 2011. 

However, there are two notable wild cards in this schedule.  The first is that the FDA may refer any of these drugs, or perhaps the entire bunch, to an advisory panel, whose recommendations are non-binding but usually respected.  If this happens, it would likely happen in September 2010, at least for lorcaserin and/or Qnexa.  It is very possible that a positive advisory panel recommendation would be sufficient to conclude a partnership.

The second is that the FDA has just been running very late in recent years, for reasons that are beyond the scope of this discussion, and there is not much anyone outside of Washington, DC can do about this.  By one count, the FDA missed 40% of its PDUFA dates in 2008.  So maybe don't reserve a really fancy restaurant table for the night of October 22 just yet.

They Have The Cash To Make It To Partnership

All three companies say they are in negotiations with partners for marketing and commercialization of these drugs, although I would not be shocked if at least one of them ended up getting purchased outright.   Most likely, a partner will wait for FDA approval, or at least advisory panel approval, to mitigate risk.  Again, this is expected at the end of October for ARNA and VVUS, and in February or March 2011 for OREX.

Big Pharma has struggled (at best) in the obesity space, and is cash rich, and should be looking for an entry -- one or more of these companies could provide that.  ARNA purchased a manufacturing facility in Switzerland and also has one on-site in San Diego (thanks commenter Mike Devry for highlighting this) and on Friday afternoon OREX announced a manufacturing agreement with Canadian drugmaker Patheon.  Both ARNA and OREX have begun to claim that if need be, they could engage contract sales organizations to launch lorcaserin and Contrave on their own, but I regard this as mostly a negotiating stance.

OREX has cash and investments of $92 million, and burn of $14.8 million in the most recent quarter, which annualizes to about $60 million (this assumes any further spending on Empatic development is funded separately).   VVUS has cash and equivalents of $207 million and has guided to burn of $95 million for the year.  ARNA is cutting it tighter, with cash of $115 million at year-end plus another $24 million drawn down March 9, 2010 under an equity financing, versus burn of $28 million in the most recent quarter or $112 million annualized.

Buy All Three - Mitigate Company-Specific Risk

In small pharma investment, promising companies and technologies often just don't make it for one or another out-of-left-field reason.  While I believe that all three of ARNA, OREX, and VVUS have a lot going for them, why put all your eggs in one basket?   Owning three instead of one gives an investor some protection against the FDA taking exception to some quirk in the clinical trial data that we haven't seen, or a last-minute manufacturing bugaboo, or a scandal tainting the name of Topamax or Wellbutrin in some other indication that has nothing to do with these companies but falls out on them anyway, etc. etc.

While there are important distinctions among the companies and their candidates (Qnexa showed the highest mean weight loss in clinical trials, lorcaserin is a novel compound rather than a combination drug, and more), I have covered these in earlier posts and will return to them in later posts.

Signs of Undervaluation

We've made a few assumptions, all arguable but all we think reasonable, most importantly: 

• a 50% chance that each of these drugs (lorcaserin, Qnexa for obesity, Qnexa for diabetes or other second indication in 2012, Contrave, and Empatic in 2012) will reach market;
• a $10 billion US market for obesity and an $18 billion market for diabetes;
• 10% market share for each drug ramped up over 4 years;
• 18% discount rate;
• 34% tax rate;
• 30% royalty rate.
• Prices as of 3/12/2010 close

This yields the following summary:

Investment	1 share
OREX	$           6.55
ARNA	$           3.01
VVUS	$           9.26
Total	$         18.82
Expected Return
OREX	$         12.56
ARNA	$           3.50
VVUS	$         10.58
Total	$         26.64
Expected return	42%

I've attached the supporting documentation here for anyone who wants to play with the assumptions Download Basket Valuation Supporting Docs

One other thing stands out:  over the last two years, as time to approval and market has shortened, and uncertainty has dropped, the option value has risen -- as one would expect -- but the market value of the stocks has not necessarily.  This would appear to be an anomaly attributable to the thinly-traded small-cap market -- an anomaly that could mean profit for those who believe this space is worth an investment.

Share price	3/17/08	3/17/10
VVUS	5.71	9.26	62%
OREX	10.57	6.55	-38%
ARNA	6.54	3.01	-54%
Basket	22.82	18.82	-18%

Of course, it's a bit of an oversimplification to look at any of these companies as simply an option on a future obesity drug.  OREX also has a very efficacious second obesity drug, Empatic, about one year back in its pipeline, plus a collection of interesting early-stage candidates.  ARNA's several Phase I candidates include a partnership with Ortho-McNeil-Janssen Pharmaceuticals, Inc. for diabetes, and VVUS's avanafil, an erectile dysfunction candidate in Phase III studies, shows promise as effective in only 15 minutes with so few side effects that it may be safe for patients using nitrates for chest pain.  So our quick valuation approach may well leave money on the table.

"Pretty quiet round here tonight, sheriff..."

"Yeah, too quiet."

A quiet couple of weeks in the obesity space as (presumably) Vivus (VVUS) and Arena (ARNA) are busy as bees preparing those NDA submissions for the end of the year.

While I agree that it's good news that lorcaserin has low abuse potential, I don't think this is much of a game-changer because as far as I know not many people were concerned that it would be abused.  More of a game-confirmer.  Also yes, there is plenty of interest in what happens when lorcaserin is combined with phentermine, and no, we won't have solid science around that for another couple of years.

On another topic:  I didn't cross-post the below article I wrote earlier today for Seeking Alpha here because I do try to keep this blog on topic, and this link isn't -- but if you'd like to read my take on someone who has had a little bit more eventful last few weeks and what it might mean for Nike (NKE):

http://seekingalpha.com/article/178917-nike-not-just-nike-golf-may-have-tiger-exposure?source=yahoo

Obesity Society Buzz Still Great For Partnership Chances

Usually I don't dwell much on Amylin (AMLN) because with at least 15 sell-side analysts covering it and all kinds of press, I don't see that the investing community is clamoring for another opinion.  However, today a few good little obesity calls do seem to be getting lost in the hullabaloo.

Obesity Partnership For AMLN with Takeda

AMLN announced last night that it has partnered with Japan's Takeda to develop two Phase II injectable weight-loss candidates, some data regarding which it presented at last weekend's Obesity Society Annual Meeting.  The deal includes two synthetic hormones (AMLN's modus operandi, and arguably its raison d'etre) -- a pramlintide-metreleptin combination and davalintide. 

It certainly sounds like a good deal for AMLN.  AMLN is to receive $75 million upfront from Takeda, and says future milestone payments (development, commercialization and sales)  potentially total over $1 billion.  Development costs associated with obtaining US approvals will be split 80% Takeda - 20% AMLN, and Takeda will shoulder 100% of development costs outside the US as well as all commercialization costs.

The products have promise.  In Phase II results announced in July, patients in the pramlintide-metreleptin (please, Takeda, help us out and come up with a commercial name for this combo soon) high dose group lost an average of 11% of body weight.  Monotherapy groups lost about 5%.  (A Phase II trial for davalintide is currently underway and those results are not yet available.)

Based on all this, AMLN shares took off in early trading, and are up almost 15% at noon.  

AMLN Won't Eat VVUS's Lunch, Or OREX's, Or ARNA's

Certainly, there should be some first mover advantage to locking up the first major obesity marketing partnership.  But let's not send the competitors with late-stage Phase III oral compounds for obesity -- VVUS, ARNA and OREX -- to the back of the lunch line.  They all have two big advantages on their side:

1)  VVUS, ARNA and OREX have Phase III products, with less risk and less time to market than a Phase II product, even a really extra-super-wonderful Phase II product.  Even the plainest vanilla Phase III obesity trial involves a full year of dosing.

2)  VVUS, ARNA and OREX are asking patients to take once-daily pills, while AMLN's products are injections.  AMLN has argued that since many diabetics take injections anyway, this won't be such a big hump to get over.  I'm not convinced.  Besides, nowhere near all overweight people are diabetic.

In fact, the AMLN news is arguably good for all the obesity stocks.  It shows there is serious interest among major drug companies in marketing obesity drugs.  The kind of money we have been talking about evidently is possible.

Disclosure:  Long VVUS, ARNA and OREX.  No positions in other stocks mentioned

___________

For those who are interested, here's the study details on the July Phase II pramlintide-metreleptin study, from AMLN's press release.  Broadly, the "conditions of contest" as far as patient BMI, behavior modification etc. are comparable to most other Phase II obesity studies.  This study confirmed the results of AMLN's earlier Phase II pramlintide-metreleptin study:

Study Details

This Phase 2, 28-week, double-blind, placebo-controlled multi-center study randomized 608 obese or overweight patients with a BMI ranging from 27-45 kg/m2. Patients were well-distributed across this BMI range, with approximately 40% of patients at a starting BMI less than 35 kg/m2. Following a one-week placebo lead-in period, study subjects were randomized in a balanced fashion to receive twice-daily therapy with one of the following eight treatment regimens: 1) placebo/placebo; 2) pramlintide 360 mcg/placebo; 3) metreleptin 5 mg/placebo; 4) pramlintide 180 mcg/metreleptin 2.5 mg; 5) pramlintide 180 mcg/metreleptin 5 mg; 6) pramlintide 360 mcg/metreleptin 1.25 mg; 7) pramlintide 360 mcg/metreleptin 2.5 mg; or 8) pramlintide 360 mcg/metreleptin 5 mg. 

Lifestyle intervention was included throughout study (dietary, exercise and behavioral). Body composition was assessed using DEXA scanning at enrollment and again at study termination. Across all treatment arms, approximately 60% (n=360) of patients were deemed evaluable (subjects who completed at least 24 weeks of treatment on study medication and had no major protocol deviations).

As part of an ongoing extension protocol, study participants may continue on therapy for a total of 52 weeks. Data from this study will be submitted for presentation at a future medical meeting and for publication in a peer-reviewed journal.

CMRG Getting Beat Up Today With Other Galleon Holdings

Paul Kedrovsky notes that the besieged Galleon hedge fund holds (among other things) a 3.4 days to cover position in CMRG.  A few minutes ago CMRG was down 2.4% on 113K shares (166K is the three-month daily average, so this is solid but not crushingly heavy volume -- with small-caps it can be tricky to read volumes interday though, as they tend to be lumpy). 

This likely represents traders beating up on all Galleon's holdings anticipating forced sales as clients pull their money out.  If that's the case, then anyone who likes the long-term CMRG case -- more and more obesity, aging US population demographics, repositioning toward a more style-conscious customer, capturing more of the 42-inch-waist guys, and/or is willing to take a view that the US retail cycle has upswing ahead -- will want to consider this a possible buying opportunity.

Upcoming Events: Earnings Calls, Etc. and avanafil results (Updated 11/17/09)

Not directly obesity-related, but VVUS announced after market close on Tuesday, November 17 that it plans to announce results from the Phase III clinical trial of its erectile dysfunction candidate avanafil, a fast-acting PDE5 inhibitor that may be safe for use together with nitrates, on Wednesday, November 18th before market open. The announcement will be followed by a webcast and conference call at 8:30 a.m. Eastern time.  Domestic callers: 1-800-776-0853, international callers: 1-913-312-0980, webcast: http://ir.vivus.com.  The webcast replay will be available for 30 days.

_______

If I knew when anyone was submitting their NDA this is where I'd put it.  Let me be upfront that I don't, nor do I have a good line that would give me an inside scoop (such as a mole at a certain FedExKinko's, although maybe I should develop one).  I expect late November - early December ish from both VVUS and ARNA and will be listening to their earnings calls for clues like everyone else. 

This is actually an OK situation, in the sense that since the FDA is running very slowly and missing quite a few of its PDUFA dates, the exact moment of submission of the NDA isn't quite that important to focus on.  It is unlikely that it will matter one whit to partnership or marketability or anything else whether anyone's NDA is turned in on say the Friday instead of the expected Tuesday before.

Transcripts of all the below quarterly conference calls should be available next day from Seeking Alpha, and often also are filed with the SEC by the companies within the week (as Forms 8-K).

ARNA 3Q09 financial results were released after market close on Monday, November 9, 2009.  The conference call was held November 10, 2009. The conference call was webcast live under the investor relations section of Arena's website at www.arenapharm.com, and will be archived there for 30 days.

OREX 3Q09 call was Wednesday, November 4, 2009 after the markets close, at 5:00 p.m. Eastern time.  Call-in number was (866) 783-2138 (domestic) or (857) 350-1597 (international), participant code 88599521. The webcast can be accessed live on the investor relations section of the Orexigen web site at http://www.orexigen.com, and will be archived for 14 days following the call.

VVUS reported financial results for 3Q09 ended September 30, 2009 on Tuesday, November 3, 2009.  A webcast replay will be available on the VIVUS web site for 30 days.

Retailers a little harder and faster, but have 31 January year-end to capture holiday sales so are also a little later.  Casual Male CMRG reporting 19 November BMO (before market open) and Charming Shoppes/Lane Bryant reporting 2 December BMO.

Welcome NYT Searchers! Or, How To Get Rich While Losing Weight (Well, Maybe)

If anyone still doesn't know, Andrew Pollack of the NYT did a nice two-parter on obesity drug development that hit the Web Saturday morning (I never see the paper NYT any more, although I do know how to get one) featuring several patients from the Qnexa and Contrave clinical trials, as well as various docs, Cory Kasimov of JPM and the usual CEO suspects. 

The NYT article is written for a general audience, so does not bog down in some of the discussions of the various placebo-adjusted-completer-vs.-ITT-is-1.2%-significant-or-not from one study to the next that some of us enjoy.  But that's fine by me.  It's all here somewhere if anyone wants it. 

What's really important is that all three of Qnexa, Contrave and lorcaserin --not to mention VVUS, OREX and ARNA -- just came to the attention of a wider audience right in time for next weekend's Obesity Society meeting.  Potential patients, potential investors, potential prescribers, it's all fine by me and should be fine by everyone else too.

This blog has an About Me for those who are interested, and is a sometimes idiosyncratic look at the obesity space (including, but not limited to, the companies mentioned above) from the perspective of an investor, analyst and potential patient.   As I mentioned in my last post, I am long all three of VVUS, OREX and ARNA.

At the moment I'm trying to get my weight down using Glaxo's alli (over-the-counter orlistat), but I'm willing to consider a better mousetrap.  I am down about 45 lbs from my top weight in 2003, and someday may post some before and after pics, but this hasn't been primarily a diary of my weight loss, until I figure out how you can (or at least I can) monetize that.

Flying The W Flag, Or, Why I Like Obesity Better Than Cancer

I've never been much of a sports fan myself.  I married a Cubs fan, after dating a fluky plural number of Celtics fans (the Celtics are not widely loved outside of Boston, and yet for some years if they did have one fan somewhere in my circle, an inexorable force would drag us together). 

When we are watching the Cubs on TV at home and they win, I put a big W flag just like the one at Wrigley Field to fly outside our house.  If anyone happens to be walking by at the time, I yell at them, "Cubs win!"  This is because my husband, who is the actual fan, would never do anything this dumb.

Now a Cubs fan does not expect to win every play, every game, every season and every post-season.  For that matter, though, neither does a Yankees fan or a Man U fan even.  No matter how much you love your team or how winning they are or what dominant players they have, you still figure here and there will come a bad play, or bum ankle, or goofy mistake, or something.

Unfortunately, this attitude seems too rare in fans of small pharma.  I used to follow some cancer drugs, and still have a few on my radar screen.  It's hard not to love the idea of a small, scrappy, innovative company battling cancer, especially since most of us have had our lives touched by cancer more than once by mid-life.  But an analyst looking at such a drug or device has a thankless task.  Not so much from the company -- in my experience, management was eager to get their story out -- as from some of the investors. 

In more than one case, there were a few vocal partisans in whose eyes the company could do no wrong and competition was either non-existent or did not count (because of being nothing like Our Product).  These people seemed very emotionally invested in the company, sometimes to the point of losing some objectivity.  I sat through several conference calls where these investors announced that they were going to find a "real analyst" through their connections (they remained stuck with me, however, for reasons unexplained).  The "real analyst" was supposed to get the word out to the Street that this company was as great as it really was, something I wasn't doing because of not loving the product enough.  (Ironically, in several cases I can think of, I was pretty fired up about the product at the time.)

At the moment, we can see this drama playing out with Antigenix (AGEN).  The short version:  it's a kidney cancer vaccine, it hasn't done well in clinical trials but they've sold some to Russia, and on the basis of that, we have an article on Seeking Alpha yelling that TheStreet.com's Adam Feuerstein is in the bag for some unnamed "big boys" (I like that -- these big boys are Jim Cramer?  Banks?  The Trilateral Commission?)  for not liking the stock. 

While we do have some of this rabid partisanship on occasion with the three leading obesity drug candidates, I think there is a broader spectrum of opinion.  Sure, there's a lot of us overweight people who feel invested in an obesity drug, but I don't know that we have the same sort of intensity that kidney cancer survivors may feel about kidney cancer drugs.

I have long argued that holding a little basket of all three would be a reasonable strategy that would save an investor the bother of following the day-to-day ups and downs of each candidate vis-a-vis the others, and that there is room in the market for two, three or perhaps more candidates. 

The main argument around ARNA's lorcaserin seems to be that it is a novel agent, not a combination of existing agents.  Personally, I don't care about this at all, and I doubt very many patients will care much.  The main question is whether docs will care.  Until we've got some actual data on this, such as a survey of more than just my doctor or your doctor or you and your friends (if you are a doctor), I'm going to regard this as an open question.

These Are Cold Hard Times, JPM

Selling yesterday's dreams wrapped in tomorrow's paper
Whistling for a dog named kindness that you'll never find
It's a cold, hard world, love
These are cold, hard times
These are cold, hard times

OK so I am a big Lee Hazlewood addict.  But these are certainly cold, hard times.  One never knows who will still be picking up the phone.

Investment banks typically try to to maintain research coverage on stocks they have brought to market.  Even if the stock ends up going badly pear-shaped, they will have introduced some of their institutional customers to the name.  They see maintaining research coverage as a service to those accounts, as well as anyone else who holds the stock.  (If they can't put any of their institutional accounts into the name, then they really shouldn't do the deal in the first place.) 

There is no shortage of pear-shaped stocks lately.  In mid-2000, ING Barings and SG Cowen led the underwriting of Arena's (ARNA) IPO.  It closed at $29.50 on its first day.  Today it closed at $4.01.  I haven't seen much from ING Barings on ARNA (maybe it's just me, sell-side connections aren't my strongest suit), but Cowen & Co. is very active in covering them.

JP Morgan and Merrill Lynch led the underwriting of Orexigen's (OREX) IPO in December 2006.  OREX closed at $14.25 that day and today closed at $2.43.  I am so used to having JP Morgan's Cory Kasimov around (telephonically) that I actually became a little concerned when he wasn't on this and a couple of other calls, but I am assured second-hand that he is still at Morgan, still covering these stocks and is just overloaded because of departures in his group.

I was once told that Cory is "the axe" in one or another stock, and I do have a lot of respect for his work on obesity, but I don't know that stocks this thinly traded really have to have an "axe" at all.  They tend to swing around plenty all by themselves.

There has been a lot of analyst turnover and just plain "ghost estimates" in recent months (where an analyst leaves and the estimate lives on), particularly in small caps.  In downturns, when analyst teams shrink, those who remain tend to focus resources more narrowly.  So if despite all assurances JPM ends up dropping any or all of these stocks, it will say more about belt-tightening at JPM than it will about any of these names.

Disclosure:  Author is long JPM.

(Vivus (VVUS) has been public much longer than the others, since 1994.  Its original focus was on erectile dysfunction.)