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.)

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.)

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. 

VVUS FDA Panel Sooner Than Expected, July 15

VVUS announced that it has been given an FDA panel date for a recommendation on Qnexa.  It's sooner than expected, July 15, which of course is good news.  A partnership announcement is possible afterwards.  This must be why VVUS presentation was cancelled earlier this week at Barclays conference.  No word yet on ARNA panel date for lorcaserin, though one would expect it to be around the same time.

Don't Be A PDUFA Doofus

In spring the buds burst, ducklings and lambs frolic, Golf Galaxy has some sort of special on new clubs, and a young man’s fancy turns to thoughts of the Food and Drug Administration (FDA) approval process.  Or if it doesn’t, then this old girl’s does anyway. 

 

I find it helpful to remember two things about this process:

 

1        The Prescription Drug User Fee Act (PDUFA) sets a goal for the FDA to reach a decision on each New Drug Application (NDA) within ten months after it is filed (in special cases this can be reduced to six months).  

2        The key word here is “GOAL.”   The FDA will make a really good effort to meet the “PDUFA date,” but it sometimes does not.  This is not an exact science.

 

Be A PDUFA Date Investor, Not A PDUFA Date Trader

 

For example, in the last week of December, 2009, Arena Pharmaceuticals (ARNA) and Vivus, Inc. (VVUS), competitors in the novel obesity drug market, both announced that they had submitted NDA’s to the FDA, in line with their previous guidance.  Counting forward ten months, we then expected their PDUFA dates to be in late October, 2010.  Sure enough, last week ARNA announced that the FDA had set its PDUFA date for October 22, 2010, and VVUS announced that the FDA had set its PDUFA date for October 28, 2010.  No surprises.

 

However, given that the FDA doesn’t always make its own PDUFA dates right on the nose, we would not advise a short-term trading strategy based around getting in and out around one or both of these exact dates.  Nor do we attach great significance to the six-day difference.   Certainly it’s not worth losing sleep over the wordsmithing of the announcements of the PDUFA dates by either of the companies.

 

Adivsory Panel

 

It is likely that the FDA may convene an advisory panel before its decision on approval of one or both drugs.  We believe this not only because both managements are steering expectations toward a panel, but also because obesity is an evolving topic in public health.   When the weight-loss pill “fen-phen” was on the market in the 1990’s, it was widely perceived as a “vanity” or “cosmetic” medication.  By contrast, the anti-obesity candidates of ARNA and VVUS are to be marketed to physicians and payors for their health benefits, such as  reduction in cardiovascular risk and blood glucose levels.

 

The recommendations of such an advisory panel, if there is one, would be non-binding, but the FDA usually gives them great weight.  The panel would most likely take place in September 2010.  Since the FDA must notify the subject company of the panel at least 55 days before its PDUFA date, we can expect to hear from the companies by late August 2010 if there is to be a panel.

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.

Quick Summary of Today's ARNA Call

As I mentioned yesterday, I am working up a sector overview for early next week, but here are the highlights of today's call.  Most of the themes from the OREX and VVUS calls earlier in the week recurred.

Lorcaserin's PDUFA date, or FDA decision date, is set for October 22, and the company expects a non-binding advisory panel to meet a few weeks earlier and give a recommendation (although the FDA has not committed to this). 

Arena Chief Executive Officer Jack Lief still hopes to secure a commercial marketing partner for lorcaserin before approval, but says Arena is prepared to hire a contract sales team on its own if need be to launch within 12 weeks after approval.  Everything I said about Orexigen on this point applies to Arena as well.  Lief declined to discuss in detail the number of reps that might be needed.

Arena's burn estimates for the year assume that Arena pays for pre-commercial launch and manufacturing ramp-up itself, without a partner, but does not include costs for hiring a contract sales force, which will be required if a partner is not secured. 

Initial Thoughts On This Week's Earnings Calls

A quick run-down of the main points, with a return later to details.  Arena has its earnings call tomorrow morning, so I hope to get something of a sector view pulled together by early next week (I am fighting a ghastly head cold):

Orexigen (OREX) narrows its guidance, plans to submit NDA for Contrave for obesity by end of April -- this of course is terrific.

OREX also still insists it can go it alone with some sort of in-house or, more likely, contract sales force for Contrave, at least at first, and does not need a partner right away.  I have a hard time believing this -- I know, I know, the docs who write weight-loss prescriptions are highly paretoized, and probably the OREX management team could just break out its (virtual) Rolodexes and get the main "thought leaders" on the phone in an afternoon, but still, really, is that the way to do it?  It just lacks the ring of authenticity to me, and I think it's a negotiating stance.  For what that's worth.

Vivus (VVUS) has received a PDUFA date from the FDA, that is, the FDA has committed to get a decision to VVUS on Qnexa for obesity by the date of October 28.  On the plus side, VVUS says the FDA has been timely with its last two PDUFA dates to the company.  On the minus side, the FDA is generally swamped and has been late on about 40% of its PDUFA dates in recent years.  A signal that a decision is on the way will be an FDA advisory panel.  The advice of the advisory panel is non-binding but usually is taken.  VVUS expects to have such an advisory panel for Qnexa in September, so let's all watch for it.

I've said before that I am just bowing out of all discussion about VVUS's erectile dysfunction drug avanafil.  There was plenty of discussion of avanafil on the call.

VVUS CEO Lee Wilson appears to be steering analysts toward focusing on a possible secondary indication for sleep apnea for Qnexa and downplaying diabetes.  The company is meeting next month with the FDA to agree a pathway toward a sleep apnea indication approval.  The incidence of sleep apnea in the US adult population is roughly that of diabetes (as much as 2% to 4% of the population may have undiagnosed sleep apnea, which makes it hard to be precise) but there are fewer effective treatments.  I refer the reader to the Mayo Clinic site for more on this Mayo Clinic.

FDA Accepts ARNA NDA For Review Without Diabetes Trials

The FDA has accepted the application (NDA) for its flagship obesity drug lorcaserin, Arena (ARNA) said today.  The main significance of this is that the FDA has apparently agreed to review ARNA's data without waiting for data from its slow-enrolling clinical trials on diabetic patients.

Arena expects the FDA to inform it in a few weeks of its "PDUFA date," or deadline for the FDA's decision whether to approve lorcaserin.  As we've noted before, this is supposed to be ten months out, but in recent years has often slipped. 

As a reminder, Arena submitted its NDA on December 22, 2009, and competitor Vivus (VVUS) a week later on December 29.  Vivus's application is expected to include data from its completed trials on diabetic patients.  It has been a slow period for news since then, but we are hoping to see this pick up soon.