2012 means a lot to three obesity treatment players: Arena Pharmaceuticals Inc (ARNA), Vivus Inc (VVUS) and Orexigen Therapeutics Inc (OREX). All of them had their New Drug Application, or NDA submission for obesity treatment turned down by the FDA in their first attempts. They all received the complete response letter, or CRL, around end of 2010. Moreover, the rejection reasons given are common too: the FDA was not able to challenge the solid efficacy profile provided by all the three firms, so the agency went after potential cardiovascular safety issues, which is sort of sarcastic to some extent as obesity treatment is aimed to improve cardiovascular function of obese patients instead of further deteriorating the situation.
Starting off from 2012, the FDA loosened up the threshold of approval based on the prevalent social demands on tackling obesity, and accompanying health issues such as diabetes, hypertension, high cholesterol and strokes etc.
The positive attitude shift of the FDA benefited ARNA in the first place.
ARNA has a brand new drug – Belviq (Lorcaserin), which is a serotonin receptor agonists developed from its proprietary G protein-coupled receptors, or GPCR, technology. The FDA issued CRL in October 2010, listing diagnostic uncertainty in the classification of mammary masses in female rats, unresolved exposure-response relationship for lorcaserin-emergent mammary adenocarcinoma, and an unclear safety margin for lorcaserin-emergent brain astrocytoma.
ARNA did some serious work to erase the issues raised by the FDA, particularly on the lorcaserin relationship with mammary tumor in rats and brain astrocytoma. That’s why in early February 22, 2012, the FDA Endocrinologic and Metabolic Drugs Advisory Committee recommended that Belviq be granted marketing approval by the FDA for the treatment of obesity in adults.
As was expected by most investors, Belviq was approved by the FDA on Jun 27, 2012 for Chronic Weight Management in Adults who are Overweight with a Comorbidity or Obese. The price of this stock shot up 26% in just one day after the news was announced. The bears still doubt the profit profile of ARNA in the long run since the drug’s safety concern won’t be completely identified with just a certain amount of clinical trials, and willingness of physicians is questionable to prescribe it to obese patients for only 5-10% weight loss efficacy.
Nonetheless ARNA is having a building momentum now. A $50 million milestone fee was cashed in upon the FDA approval. Moreover, its submission to Switzerland for a marketing license further expands the optimism since the drug has met the rigorous FDA guidelines.
In addition, there is another player – VVUS, who competes with ARNA head to head, is waiting for the Prescription Drug User Fee Act (PDUFA) date on this Tuesday – July 17, 2012.
VVUS, a mountain view based company, has similar market capitalization as ARNA and is also focused on developing obesity drugs. its new drug Qnexa, composed of two existing generic chemicals (phentermine and topiramate), was rejected by the FDA on October 28, 2010. The FDA expressed its concerns on clinical teratogenic potential and elevation in heart rate, which increases risk of major cardiovascular events for patients.
VVUS did further investigations and proposed solid evidence to erase the teratogenic cause from topiramate; and VVUS also attempted to clean up any concern on this regard by containing a contraindication for women of childbearing potential. The Endocrinologic and Metabolic Drugs Advisory Committee meeting on February 22, 2012 turned out extremely positive with 22 to 2 recommendations on licensing VVUS marketing rights in the US.
It seems quite obvious that Qnexa would be approved by the FDA in near term. That’s why the price of VVUS has been driven up from around $12 per share in the beginning of this year, to around $20 and even $30 per share recently. However, there are two issues emerged: first off, the FDA extended the PDUFA date of April 17 to July 17 after the positive Advisory vote; secondly, the top three executives of VVUS sold their shares right before the PDUFA date, arousing significant concerns among investors that the managers themselves doubt the likelihood of Qnexa’s approval. The concerns account for the share price declining from $30 peak to $27 last Friday on the imminent PDUFDA event pressure.
In my perspective, since the FDA has relaxed the criteria and permitted ARNA’s locarserin to enter the market, there is no reason Qnexa, which has both solid efficacy and safety evidences, would be stalled next week. The question is whether or not the $27 stock price has factored in the expectation of approval?
I would bet there is at least 10% upticking space for VVUS since the latest slippage from $30 to $27 per share. In addition, we shall count on another good upside catalyst – its submission to EMA European Medicines Agency’s (EMA) Committee for Medicinal Products for Human Use (CHMP). Usually, the FDA’s decision would affect EMA’s verdict. I conclude that VVUS can rise further than the current $27 price point.
What’s more, based on the pure competitive characteristics between ARNA and VVUs, we can earn extra alpha by playing ARNA on the coming news of VVUS.
ARNA and VVUS contradict each other pharmacologically, meaning – if a patient is prescribed to use locarserin from ARNA, phentermine, the major component of Qnexa is forbidden to be used. Hence, if VVUS gets approved next week, it’s very likely that ARNA would be driven down and vice versa. For option traders, the volatility of both ARNA and VVUS could be a good play irrespective of the direction of FDA decision.
The third company, OREX, is also a very good investment because of its new obesity control drug.
OREX submitted New Drug Application, or NDA, for Contrave, a combination of two well-established drugs, bupropion and naltrexone. OREX received on January 2011 the CRL from the FDA. The major concern was the cardiovascular safety profile of Contrave when used long-term in a population of overweight and obese subjects.
In September 2011, OREX agreed with the FDA to conduct a phase3 clinical trial – CVOT for Contrave that would address issues in the CRL. It’s possible for OREX’s Contrave be approved prior to completion of the CVOT if it meets the primary outcome measure. On July 11 2012, the firm announced strong enrollment trend in this Contrive study and shares rose up 5% on this news.
Similarly, I am quite optimistic on OREX because I sense the friendly attitude from the FDA. The price has already risen up from around $1 in the beginning of this year to $6 and hitting $7 last week. The result of CVOT would be most likely positive as the two components of Contrave had already been through rigorous safety verification. Taking account into the milestone fee that can be collected from Tekara and the large obesity market, I expect that OREX still has upside potential to perhaps reaching $8 -$9 a share.