Take Advantage of Market Confusion to Buy Orexigen Therapeutics

• Orexigen Therapeutics’ (OREX) flagship drug candidate Contrave is moving through Phase III trials for obesity.
• In Phase II trials, Contrave also reduced the prevalence of metabolic syndrome.
• A second candidate, Empatic, has initiated Phase IIb trials.
• From 48-week data, it appears there is little or no weight loss plateau with Empatic.
• More data for both Contrave and Empatic is expected in mid-2009.
• Two directors made sizable investments totaling over $3 million in OREX shares in December.

Results from Arena Pharmaceuticals (ARNA) around the end of March should attract the spotlight to the entire obesity drug development space and may well lift ARNA’s rivals OREX and Vivus, Inc. (VVUS) as well.

We believe there is still opportunity to take advantage of confusion in the market in interpreting OREX’s first Phase III results for Contrave. This first study included a more intensive diet and exercise regime than most obesity studies, meaning that the placebo group lost more weight than would usually be expected and the results were not really comparable to competitors or to Contrave Phase II. The mean weight loss, placebo-adjusted, was less than the 5% of body weight that the FDA guidelines specify as a minimum.

However, in what’s called the “categorical” weight reduction analysis, 41.5% of the Contrave patients lost greater than or equal to 10% of their body weight, compared to 20.2% in the placebo group. Taken together, this suggests that there may be a sub-population of strong responders to Contrave. If these strong responders could be identified, it could even present a marketing opportunity. It also exceeds FDA guidelines, reducing the regulatory risk that many investors perceived when first hearing that the mean weight loss was under 5%.

The price of OREX held up on March 13, but don’t be surprised if it should dip this week. While the company’s March 12, 2008 earnings call showed cash burn basically on target, Eckard Weber, M.D., Interim President and CEO, announced that the company now plans to submit its NDA for Contrave only in the first half of 2010, rather than the end of this year, as had previously been the guidance. (ARNA and VVUS still say they will submit NDA’s this year.)

Also, Dr. Gary Tollefson stepped down as CEO for health reasons in early December. The company is searching for a new CEO, and investors should watch to be sure the post does not remain open indefinitely.

We interpret other executive departures at that time as cost-cutting moves, once it became clear that the financing environment for small companies was going to be difficult-to-nonexistent for a while. The company turned its focus to developing its two existing obesity candidates, which made the positions of the Chief Business Officer and the Vice President of Neuroscience redundant. Dr. Michael Cowley, a founder and Chief Scientific Officer, became a consultant. This didn’t change much besides costs, we believe, since he is still a large shareholder (OREX has high insider ownership in general for a small pharma) and since some months earlier he had left Oregon Health Sciences University for a post in Australia, which must have limited his day-to-day interaction with OREX in any event.

Lastly, an added and often-overlooked plus about OREX: OREX-003, the skinny counterpart to Eli Lilly’s (LLY) best-selling Zyprexa ($4.8 million), has potential to be even bigger than Contrave or Empatic. OREX-003 is a combination of olanzapine (the active ingredient in Zyprexa) and zonisamide. It may have the benefits of Zyprexa without the associated severe weight gain.

Since Zyprexa goes off-patent in 2011, LLY may well be watching OREX-003 closely, even though its development is on pause while OREX focuses its resources on the obesity drugs. If there were a branded version of Zyprexa that did not cause weight gain, and a generic version that did, many patients and doctors would opt for the branded version. OREX-003 has potential to be that branded version. If Lilly hasn't already ruled it out for whatever reason, they could fund its development with grants to OREX (who could then hire another head of neuroscience) or just license the IP from OREX and develop it themselves.

However, the main story at the moment is obesity -- Contrave and Empatic. Current levels present an appealing opportunity to buy OREX at prices representing significant potential upside.

Disclosure: The author holds no positions in any of the stocks mentioned in this article.

Comments

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How will Orexigen go about preidentifying who the strong responders are.

2009 Mar 18 08:46 AM

[Ruthanne Williams Roussel]

They could analyze the data, try to find some commonality X among the strong responders that isn't shared by weak responders (could be age, gender, starting BMI, certain types of diet, or pretty much anything), then run another trial testing the hypothesis that commonality X is, in fact, a differentiator. I hope I have understood your concern. If not, please ask again.

2009 Apr 06 10:40 AM