FDA's Bizarro World - Orexigen Gets Panel Approval

Welcome to Bizarro World, courtesy of the FDA. At the beginning of 2010, there was a widespread belief that Vivus (Nasdaq:VVUS) would get approval for its obesity drug Qnexa and that Arena Pharmaceuticals' (Nasdaq:ARNA) lorcaserin had at least a fighting chance; Orexigen (Nasdaq:OREX) was the long-shot candidate with its drug Contrave. When FDA panels subsequently voted down both Qnexa and lorcaserin and the FDA followed up with complete response letters (rejections), most observers thought Contrave had little chance.

Late on Tuesday, the FDA's panel reviewing Contrave voted 11-8 to recommend approval. That is a huge win for Orexigen. It also looks to be a boon for Vivus and Arena as well, though, as it raises the possibility that these companies will eventually convince the FDA to grant approval.

Going Through the Details

Contrave is a combination drug that blends the long-approved drugs naltrexone (originally approved to treat addiction) and bupropion (depression) into a single sustained-release treatment. Contrave missed one of the FDA's efficacy benchmarks (an average of 5% weight loss), but surpassed the other (35% or more patients achieving 5% or better weight loss). In terms of safety, the trials have shown some risks relating to blood pressure, but far and away the worst side-effect was nausea (which has led as many as one-quarter of patients in trials to drop out). (For more, see Orexigen Finds A Cautious Partner.)

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FDA To Obesity Drugs: Drop Dead

Lorcaserin, Arena Pharmaceutical's (Nasdaq:ARNA) experimental obesity drug, was not necessarily the last best hope for new obesity medications, but a 5-9 panel vote against recommending FDA approval is a pretty clear indication that the standards for obesity drugs are exceptionally high. This ruling is not altogether shocking in the wake of Vivus' (Nasdaq: VVUS) similar rejection on Qnexa, but it should certainly have Orexigen (Nasdaq:OREX) shareholders feeling nervous when their company's number comes up.

Why The Panel Said "No"Are 
It was clear from listening to the proceedings that many panelists had issues with the efficacy and safety of the drug, as well as how Arena went about designing the trials and performing the statistical analysis. If I may be so bold, though, it sounded like at least a few panel members went in locked and loaded with a mindset against this drug and judging by their comments and concerns, it is difficult to foresee just how good a drug would have to be to get their blessing. (For more, see Arena's Big Day Looms Large.)
 
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Arena's Big day Looms Large

For investors who believe in the predictive power of Wall Street, things are not looking good for Arena Pharmaceuticals (Nasdaq: ARNA), the small biotech that is facing an FDA panel meeting for its potential obesity drug lorcaserin. Amidst downgrades and worries about FDA concerns regarding safety and efficacy, Arena shares were off more than a third midday Tuesday. This follows in the wake of the surprising recommendation against approval in July for Vivus' (Nasdaq:VVUS) drug Qnexa and widespread uncertainty regarding Orexigen's (Nasdaq:OREX) Contrave. 

Is the Data Good Enough?
The biggest problem for Arena is the efficacy data. Although the one-year efficacy data on lorcaserin is okay, it is no blockbuster. More than 47% of patients who took lorcaserin in the BLOOM trial lost 5% or more of their baseline weight (versus about 20% in the placebo group), with an average loss of 5.8%. More than one in five people who took Lorcaserin saw better than 10% weight loss.


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Note: The editors at Investopedia made a small error here in the original version, capitalizing "lorcaserin", "valvulopathy", and "fenflueramine". That should all be changed and corrected soon. 

FDA Panel Rejects Vivus Obesity Drug

Wow!

I am cynical and bitter enough that very little surprises me any more (hey, I lived in DC four years, worked on Capitol Hill for a year, and worked for investment firms through two bubble/busts!). But I have to say that I am very surprised to see Vivus get KO'd at the FDA.

In a 10-6 vote, the FDA's panel voted NOT to recommend Qnexa for approval. The panel was apparently bothered by the risks of depression, birth defects, and memory loss, particularly in relation to the weight loss benefits seen with the pill. Overall, it looks like a lack of safety data is what really bothered the panelists.

Now, the FDA could go against this recommendation and approve the pill anyway. In the wake of the panel decision, even representatives from the FDA expressed surprise and made comments that could be interpreted as suggesting the panel was too conservative and was not "strongly" opposed to Qnexa.

The FDA did ignore a negative panel vote on an obesity drug before; that years ago when a panel voted against a weight loss drug called Redux. The FDA approved the drug anyway, the drug was a major hit initially ... and then was withdrawn because of severe side-effects. All in all, it cost Wyeth (now part of Pfizer) billions in legal costs and class-action settlements.So, I have to think that the FDA is going to be *extremely* cautious about doing anything that could repeat that disaster.

What's more, I hate to say it, but drugs like Qnexa are not strictly necessary. You *can* lose weight without drugs. I speak from experience; I have been fat my entire life, but I have lost about 65 lbs in the last 9 months, and I have not been using any pharmaceuticals (just diet and exercise).

Vivus' news is clearly going to chill the sector. I would expect to see Arena and Orexigen both sell off tomorrow on the presumption that the FDA is just not receptive to less-than-perfect obesity drugs. I think Orexigen's drug Contrave is particularly at risk - the efficacy is not that great and the side-effect profile was worse than Qnexa.

Arena does still have an outside shot here. The drug is not extremely effective, but it does help some. What's more, while it has side-effects, they do not seem to be too serious. My bigger fear, though, is that Arena gets caught up in guilt-by-association with Redux. Arena's drug lorcaserin is superficially similar to Redux and my fear is that the FDA panel looks at it and says "eh, why risk it?" and blacklists without realizing that Arena is different. Redux non-selectively stimulated 5-HT2b receptors; lorcaserin selectively stimulates 5-HT2c receptors. That is a major difference at the biochemistry level, and Arena's trials have shown none of the valvulopathy and pulmonary hypertension risks that doomed Redux, but will the panelists or the FDA care?

Vivus is not doomed yet. There is the chance that the FDA will overrule the panel. Vivus could also elect to try again when data from a 2-year study comes out later this quarter. Alternatively, the company may have to do a massive (10,000) additional Phase 3 study to fully allay these worries. Given the environment for financing right now (and the unusual deal that Arena had to strike with Eisai), I am not sure they can afford that.

All in all, a very surprising day. 

Arena Pharm - Probably The Best They Could Have Hoped For

It's interesting to see how Big Pharma's attitude about obesity drugs has changed. There was a time when that was one of the most appealing areas. Now, though, they seem to be rather cagey about the space.

To wit, Arena Pharmaceuticals (Nasdaq: ARNA) announced a deal today with Eisai to market its lorcaserin anti-obesity drug, assuming it gets final FDA approval later this year (or early next). Arena gets $50M upfront and another $90M if/when the deal goes through. On top of that, Arena will get a royalty of 31.5% of sales on amounts under $750M and 36.5% on amounts above that.

It's an interesting deal. On one hand, 30%+ of revenue is a very healthy royalty rate (amounts in the 20%'s are arguably more common). Given that Big Pharma net margins are typically in the 20%'s, that's not a bad deal for Arena. Then again, that upfront payment is on the low side for a drug with $1B+ potential.

So what should be read into this? Well, it's a pretty clear sign that Eisai is not convinced that the drug gets approved - Eisai is apparently willing to trade a sizable chunk of future profits in exchange for minimal upfront risk. For the other obesity companies, Vivus (Nasdaq: VVUS) probably gets a bigger upfront payment (higher likelihood of approval and commercial acceptance), but lower royalties. Orexigen (Nasdaq: OREX) likely won't get such a good deal - they may have to accept a smaller upfront payment, and I'd be surprised if they pull as large of a royalty.

All in all, not a bad deal for Arena. And even with today's big jump, I think the stock is still cheap. That all depends on getting FDA approval for lorcaserin, though, and that seems probable, but certainly not definite.