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.)

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.

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. 

Upcoming Events: Earnings Calls, Etc.

An attempt to corral some of the notable dates coming up next week and later into one handy post.

Monday, May 3

Arena (ARNA) CEO Jack Lief presents at Deutsche Bank 35th Annual Healthcare Conference, webcast available, 11:20 am Eastern, 8:20 am Pacific

These days, between Regulation FD limiting the value of private access to company officials at these conferences and most all the presentations being webcast for free, we wonder if a major benefit of such conferences isn't just providing cover for confidential meetings and chats.

Vivus (VVUS) Q1 Earnings release after market close, call/webcast 4:30 pm Eastern 1:30 pm Pacific

Tuesday, May 4th

VVUS's Qnexa data presented orally at American Society of Hypertension Annual Meeting during 7:45 am session

Wednesday, May 5

Tim Morris, VVUS CFO, presents at Deutsche Bank 35th Annual Healthcare Conference, webcast available, 9:20 am Eastern, 6:20 am Pacific

Friday, May 7

ARNA Q1 Earnings release before market open, call/webcast 8:30 pm Eastern 5:30 pm Pacific

Orexigen (OREX) has not yet announced its Q1 earnings call, but we expect it the second week in May.

Thursday, May 27

OREX annual meeting of shareholders

Friday, June 11

ARNA annual meeting of shareholders

June 25-29

American Diabetes Association 70th Scientific Sessions in Orlando

OREX Restates Some Trial Data Downward

Or, Why I Am Not A Day Trader

 

Tuesday morning, April 13, Orexigen Therapeutics (OREX) filed an 8-K with the SEC restating downward some of its previously released clinical trial data for its flagship weight loss drug Contrave and including an updated slide show. 

 

OREX filed a New Drug Application (NDA) for Contrave two weeks ago on March 31.   The stock price has slumped 11% midday as I write.  The opportunity to buy is better now than it was last week when I bought more OREX.  My timing is dismal.

 

This announcement may produce short-term volatility, but I do not expect that it should affect OREX’s long-term prospects for partnership or approval.  Although the data have been revised downward, they are still above FDA efficacy guidelines. 

 

The data affected were in the continuation trial after week 28 originally called NB-303, then renamed COR-II.  The percentages as originally reported incorrectly re-weighted the patients re-randomized to Contrave32, without accounting for the patients that had already been re-randomized to Contrave48.  

 

The error was of a magnitude of roughly 10%-14% (not percentage points) for the modified intent-to-treat, last observation carried forward (ITT-LOCF) group, the stricter version used by the FDA.  This goes up to 14% - 18% for the completers, the group OREX has preferred to emphasize.

NB-303 / COR-II Comparison	Lost 5% of body weight at week 56		Lost 10% of body weight at week 56
	Revised	Originally	Revised	Originally
ITT-LOCF	50.5%	56.3%	28.3%	32.9%
Completers	64.9%	75.8%	39.4%	48.2%

This is not quite as low-level as the “clerical error” claimed this morning by a Jeffries analyst.  That would be an arithmetic blooper, or a misplaced decimal point.  It’s more of a “junior-grade” error, and I’m surprised that it wasn’t caught earlier. 

 

OREX is up to around 60 employees now, from 30-ish two years ago, but most of the adds we have heard of are in marketing and commercialization. 

 

Slide Show Suggests Partnership Discussions May Lag

 

The slide show, although billed as an “Investor Presentation,” appears geared more toward potential partners, which is slightly worrying at this late stage of the game – I had hoped that discussions might be a bit farther along.  Five slides of the 60-odd total intermittently repeat a graphic that shows four blocks representing Contrave, Empatic, “Proven Team for Commercialization,” and “Deal Structure” all pointing inwards to an oval called “Orexigen Partnerability.”  (One of these slides is infelicitously titled “Orexigen:  An Attractive Partner For Three Key Reasons.”)

 

Contrave Sticks To Marketing Plan

 

The slide show (PowerPoint deck, if you will) includes a handy one-page summary of OREX’s previously mentioned market research:

 

Ÿ         The launch of new agents should expand the obesity pharmaceuticals market 3 to 4 times within a few years

Ÿ         The entry of branded products will dramatically increase the dollar size of the market (currently mostly generics such as phentermine)

Ÿ         Efficacy and safety will be key to win over prescribers, both current and potential

Ÿ         OREX plans to target differentiated segments with Contrave if approved, such as women, patients with difficulty controlling food cravings and patients with depressive symptoms

 

I particularly like this last bullet point.  The interaction between depression and obesity is complex and worthy of attention.  Being heavy makes supporting one’s mental health more challenging in many ways – it puts pressure on personal relationships, reduces confidence, and limits physical and creative activity.   Even if you stop doing the wrong things and start doing the right ones, the weight doesn’t come off right away, making it hard to reinforce good behavior.

 

The nutshell buy case:  while a pill isn’t likely to be the magic answer all by itself, it could help jump-start weight loss when diet and exercise alone have not grabbed hold.

The paragraph on the restatement from the 8-K filed with the SEC (full text and complete slide show available at www.sec.gov):

 

Item 8.01 Other Events.

The Company is updating certain previously-released COR-II, or NB-303, trial data for Contrave (naltrexone SR/bupropion SR), pertaining to the percentage of patients losing greater than or equal to 5% of their body weight at week 56 and the percentage of patients losing greater than or equal to 10% of their body weight at week 56. The percentages previously reported did not apply the intended weighting to those patients re-randomized to Contrave32. Specifically, for modified intent-to-treat, last observation carried forward on treatment patients 50.5%, as opposed to 56.3%, lost greater than or equal to 5% of their body weight at week 56 and 28.3% of such patients, as opposed to 32.9%, lost greater than or equal to 10% of their body weight at week 56. For patients who completed 56 weeks of treatment 64.9%, as opposed to 75.8%, lost greater than or equal to 5% of their body weight at week 56 and 39.4%, as opposed to 48.2% lost greater than or equal to 10% of their body weight. The Company has confirmed that after these adjustments the primary and secondary endpoints continue to be met for the COR-II trial and that the revised percentages continue to meet the U.S. Food and Drug Administration's ("FDA") categorical efficacy benchmark for clinically significant weight loss.

 

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.

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.

VVUS Submits Its NDA Also Right On Time

VVUS announced this morning that it had submitted its NDA to the FDA for approval of Qnexa for weight loss.  This is bang on schedule (they had promised to do this before the end of 2009) and sets the clock going on their "PDUFA date," the date by which the FDA is supposed to respond to them with a decision for or against approval, for 10 months out, or late September 2010.  (However, the FDA has been missing as many as 40% of its PDUFA dates in recent years, so let's not get too excited yet.)

ARNA submitted its NDA for lorcaserin for obesity a week ago.  OREX originally was looking at a similar time frame, but for some months has said that it plans to submit its NDA for Contrave for obesity only in the first half of 2010. 

VVUS announced this morning that it had submitted its NDA to the FDA for approval of Qnexa for weight loss.  This is bang on schedule (they had promised to do this before the end of 2009) and sets the clock going on their "PDUFA date," the date by which the FDA is supposed to respond to them with a decision for or against approval, for 10 months out, or late September 2010.  (However, the FDA has been missing as many as 40% of its PDUFA dates in recent years, so let's not get too excited yet.)

ARNA submitted its NDA for lorcaserin for obesity a week ago.  OREX originally was looking at a similar time frame, but for some months has said that it plans to submit its NDA for Contrave for obesity only in the first half of 2010. 

ARNA Submits Its NDA, Right On Time

ARNA announced this morning that it had submitted its NDA to the FDA for approval of lorcaserin for weight loss.  This is on schedule (they had promised to do this before the end of the year) and sets the clock going on their "PDUFA date," the date by which the FDA is supposed to respond to them with a decision for or against approval, for 10 months out, or late September 2010.  (However, the FDA has been missing as many as 40% of its PDUFA dates in recent years, so let's not get too excited yet.)

We expect VVUS to submit its NDA for Qnexa for obesity very shortly, also before the end of 2009.  OREX originally was looking at a similar time frame, but for some months has said that it plans to submit its NDA for Contrave for obesity only in the first half of 2010.