I posted the article below to my Instablog on SeekingAlpha.com, and submitted it to become an article.
Buy The Obesity Drug Basket: ARNA, OREX, VVUS
For many years, the Department of Agriculture has published a food triangle that recommends carbohydrates as the basis of a healthy diet, even though there is no minimum daily requirement for carbs. None. Dr. Atkins is rolling over in his grave.
Although this has done far more damage to the populace than the management of Enron, Citicorp, AIG and Moody’s combined, no one was ever fired.
Then the FDA blessed high fructose corn syrup as a sugar replacement, over the strong objections of the soft drink industry that said the stuff was dangerous. Archer Daniels Midland has one of the largest political operations in Washington – why do you think our government is committed to corn-based ethanol? Americans now average 60 gallons of soft drinks a year and 40 pounds of high fructose corn syrup.
The obesity resulting from these two humongous errors in judgment is a risk factor for diabetes, heart disease, cancer, osteoporosis and liver damage. Obesity is widely recognized as a public health epidemic, growing fastest in developing countries. The World Health Organization says 700 million adults will be obese in 2015, up from 400 million in 2005 – nearly a double in 10 years.
According to the National Center for Health Statistics, 34% of American adults are obese with a body mass index of 30 or more, and another 32.7% are overweight with a body mass index of 25 to 29.9. For a 5’6” woman, an overweight body mass index of 25 equates to 155 pounds, and an obese body mass index of 30 equates to 186 pounds. For a 6′ man, an overweight body mass index of 25 equates to 184 pounds, and an obese body mass index of 30 equates to 221 pounds. You can find the bad news for your height and weight at http://www.nhlbi.nih.gov/guidelines/obesity/bmi_tbl.htm.
For every 2 ¼ inch increase in waist circumference, the chances of death rise by 17% for men and 13% for women. Obesity is serious stuff, responsible for at least 300,000 deaths a year in the U.S. alone.
So a weight loss drug with a high benefit to risk ratio is a certain blockbuster. The U.S. market alone is estimated at $5 billion to $10 billion a year. But a winning drug has to be really effective and really safe. The only two FDA-approved anti-obesity prescription drugs currently on the market are Roche’s Xenical and Abbott Laboratories’ Meridia.
Xenical was approved in 1999 and reduces the absorption of dietary fat into the bloodstream. Aside from the common side effects of gas with fecal discharge and fecal incontinence, Xenical blocks the absorption of beta-carotene and the fat soluble vitamins A, E, D, and K, so you have to take a multivitamin within two hours of taking Xenical. But the biggest problem is that it doesn’t work very well, as it does nothing to reduce one’s appetite and requires a reduced-calorie diet and an exercise regimen to lose weight. Patients just don’t comply very well, possibly because gas with fecal discharge is not all that welcome in the weightlifting room.
Meridia was approved in 1997, and it acts on brain chemicals to create a feeling of fullness, hopefully leading to reduced food intake. Unfortunately, reports of adverse reactions began piling up, and groups petitioned the FDA to recall the drug. The FDA refused to ban it, but they keep strengthening the label. It also doesn’t work very well, because obese people usually keep eating for other reasons than they feel full.
Although Meridia is still on the market, many others are not. Fen-phen, the combination drug of fenfluramine and phentermine from Wyeth, reached $6 billion in sales but then was banned in 1997 after fenfluramine was found to cause leaky heart valves, a serious heart condition.. Acomplia from Sanofi-Aventis was approved in the European Union in 2006. In June 2007, the FDA rejected Acomplia, saying that the drug’s benefits did not outweigh its risks. It turned out to cause serious psychiatric disorders and was banned by the EU in 2008.
With the fen-phen and Accomplia problems, Solvay Pharmaceuticals killed its Phase II obesity drug in late 2008, citing the current stringent regulatory environment. At the same time, Pfizer abandoned Otenabant, a late-stage antagonist of the cannabinoid type 1 receptor. Merck puled the plug on Taranabant last October, a Phase III program unfortunately of the same class as Accomplia. They cited unspecified side effects.
So with the obesity docs desperate for better drugs, Arena Pharmaceuticals (ARNA), Orexigen Therapeutics (OREX) and Vivus (VVUS) are in a horse race to provide the next big winner. Amylin (AMLN) is in the early stages of trying a combination of leptin, which was a bust for Amgen (AMGN) and pramlintide, Amylin’s approved drug for diabetes. They will not be a contender for many years, if ever.
Arena reported its BLOOM Phase III data in the spring, and we just got the BLOSSOM Phase III data on September 18. Vivus recently reported good Phase III data and their stock rocketed higher. Orexigen reported their Phase III data in June. The table below compares what we know so far.
Arena’s lorcaserin is a new chemical entity, not tested in combination with anything else. Patients had very significant weight loss in the first year, and at the recent American Diabetes Association meeting, Arena showed that continued treatment with lorcaserin helped significantly more patients maintain their weight loss in the second year, as compared to those on placebo. The diet and exercise guidelines in Arena’s Phase III trials were very minimal, so there was good patient compliance with only a 7% dropout rate due to adverse events. In general, there was a large subset of patients who saw rapid weight loss in the first four weeks, and those patients continued to be the best responders in the trial, losing far more weight than the average.
Because lorcaserin is of the same family as the recalled fenfluramine, heart valve safety was a major issue in the BLOOM and BLOSSOM trials. The data from both trials added together clearly will convince the FDA that lorcaserin has no negative impact on heart health. Remarkably, both trials actually showed it improved heart health, so I feel confident cardiac impact is a non-issue.
Finally, about 20% of the obesity docs surveyed by the company said they would prescribe lorcaserin with phentermine right from Day One. This should give a major boost to all the weight loss figures in the table above, and I expect LorPhen to quickly become the talk of the cocktail circuit and the most-requested regimen by patients. There is a critical mass point in the adoption of any new technology, where the S-curve really takes off, and it happens to be 20%. I expect the progress from 20% of the obesity doctors combining lorcaserin with phentermine to 80% (the usual top of the S curve) doing so will take less than three years. It’s also helpful that weight loss in the first four weeks is a very good indication that lorcaserin will work well for a particular patient. If it isn’t working, the doctor can add phentermine for a while, and if that doesn’t work they can move on to one of the other two drugs.
Arena will file for approval for lorcaserin by the end of the year, and with few safety issues it probably will be first to market by a few weeks, towards the end of 2010.
Orexigen’s Contrave is a combination of two generic drugs, bupropion and naltrexone. Bupropion is an antidepressant formerly marketed as Wellbutrin. It is used for smoking cessation and, unlike many antidepressants, does not cause weight gain. Naltrexone is an opioid receptor antagonist used primarily in the management of alcohol and opioid dependence.
Contrave’s numbers are very close to Arena’s, except for the safety issue. Wellbutrin had a number of well-known side effects, and these appear to be a problem in Contrave, with a 22% dropout rate, triple that of lorcaserin. However, even though the FDA might examine this issue very closely for label purposes, I still expect Contrave to receive approval. Orexigen will not file for approval until early in 2010, so they will be third to market.
Doctors are very unlikely to combine phentermine with a combination drug like this until they have seen safety studies, so Contrave will have to stand on its own against lorcaserin plus phentermine. There have been questions about the pricing model and insurance reimbursement for a drug that is a combination of two widely available, cheap generics. While compounding pharmacists can easily make a combination of bupropion and naltrexone, I expect most doctors will prefer to prescribe Contrave and most insurers will pick up the tab.
Vivus’ Qnexa recently reported all its Phase III data. Like Arena, patients taking Qnexa also achieved significant improvements in cardiovascular and metabolic risk factors including blood pressure, lipid levels, and type 2 diabetes. Qnexa also is a combination of two generic drugs, phentermine plus 100 milligrams of topiramate. Phentermine we know. It is the leading diet drug today, but must be prescribed for intermittent use due to side effects.
Topiramate is an anti-epileptic drug. Unfortunately, in its 200-milligram standard dosage form it has a long list of side effects and FDA warnings. Significant side effects include headache, numbness & tingling, upper respiratory tract infection, diarrhea, nausea, somnolence, anorexia, insomnia, memory problems and dizziness. The FDA has warned that topiramate can cause acute myopia and secondary angle closure glaucoma with blurred vision and eye pain. Another serious side-effect is the development of osteoporosis. Most anti-epileptic drugs have been associated with a statistically significant increase in suicidality.
Qnexa includes about half the standard dosage of topiramate, 92 milligrams. With an 18% adverse effect dropout rate, the FDA will again review safety very closely. I am expecting some heated advisory panel discussions for both Contrave and Qnexa, in the latter case also focusing on dosing phentermine continuously instead of intermittently. Phentermine alone is very effective for weight loss, so it is not surprising that Qnexa posted great numbers. However, phentermine can only be used for short periods, to give the patient time to detox. But I think Vivus has collected enough data to show that Qnexa has a positive risk/reward profile, and the side effect issues can be dealt with on the label and in the package insert. So I do expect approval, although some weeks or a few months after lorcaserin, even though Vivus also will file by the end of this year.
Vivus faces the same business model issues as Orexigen about how aggressively they can price a drug that is a combination of two widely available, cheap generics, insurance reimbursement and compounding pharmacists. However, like Contrave, I expect most doctors to simply prescribe Qnexa and most payers to reimburse it.
Marketing
I expect all three drugs to be approved, lorcaserin around next October, Qnexa by the end of 2010 and Contrave sometime in early 2011. Due to topiramate’s well-known side effects, I think most obesity doctors will start with lorcaserin alone, while 20% of them will combine lorcaserin with phentermine right from the beginning. Patients that don’t respond to lorcaserin can either be moved to lorcaserin plus intermittent phentermine, or moved on to Qnexa, with close monitoring of long-term side effects. When Contrave is approved, it should become the alternate choice after lorcaserin to Qnexa, again due to the side effects. Because people respond differently to drugs, doctors will have the luxury of being able to switch among the three drugs (four, counting LorPhen) until they find the one the patient best tolerates and still loses significant weight.
Where the deep-pocket big pharmas have struck out again and again in developing an obesity drug, these three companies have all hit home runs. Any company that gets to market with a safe and effective weight-loss drug will reap huge profits. Due to its sweet spot profile on efficacy, safety and easy tolerability, plus being a new chemical entity and a single-agent drug, I expect Arena to eventually get about half the U.S. market for obesity drugs, especially as more and more doctors prescribe lorcaserin with phentermine. The other half will split roughly 25% to Qnexa, held down by caution over topiramate, and 25% to Contrave, held down by caution over bupropion.
Half the market would mean roughly $3 billion in sales for Arena in three years, which at 25% a year discounts back to $1.9 billion today. Arena has about 122 million shares outstanding if everything was exercised, so that is $15.50 a share in sales. Because this is a new chemical entity, it will have high gross margins and should support a typical pharmaceutical valuation of 5X to 6X revenues, or $77.50 to $93, either in the public market or as an acquisition price. That is over 10 times higher than the current price.
Orexigen also would have a blockbuster in Contrave if they got 25% of the market, or $1.5 billion in sales in three years. That discounts back to $950 million today. Orexigen has only 46.4 million shares outstanding, so discounted Contrave revenues are around $20.65 per share. Orexigen may not be able to get quite the gross margins that Arena does, but a valuation of 4X to 5X revenues, or $82 to $103 seems fair, again either in the public market or as an acquisition price. Again, that is 9 to 11 times higher than the current price.
The situation with Vivus is no different. Qnexa should be the third blockbuster in the group, also bringing in $1.5 billion in three years. Vivus has about 80.2 million shares outstanding after their recent offering, so the $950 million present value of Qnexa revenues translates to $11.85 a share. Again using a 4X to 5X revenue valuation range to adjust for possibly lower gross margins, the stock is worth $47 to $59 a share. Not surprisingly, that also is dramatically higher than the current price, four to five times higher.
It appears that Wall Street is so focused on the trees of which drug will “win” that they are missing the forest – three potentially huge winners that will revolutionize the treatment of a major worldwide health problem, all with their clinical risks behind them. Focus on the forest and buy a basket of all of them. At the upcoming Obesity Society annual meeting in Washington, DC October 24 – 28, all three companies will present additional data. I urge you to buy the stocks before that meeting.
Disclosure: Long ARNA
You can go to http://seekingalpha.com/instablog/128006-michael-murphy/28185-buy-the-obesity-drug-basket-arna-orex-vvus to see the comments on this article. I expect the full complement of Arena bashers.
