Arena, The Aftermath 11 comments
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Following up on Arena Pharmaceuticals' (ARNA) results for its flagship obesity drug lorcaserin released Monday, I realized red-facedly that I have apparently swallowed a line. One of the company's main arguments in favor of lorcaserin over other weight-loss drugs in late-stage development, such as Orexigen's (OREX) Contrave and Vivus's (VVUS) Qnexa, is that lorcaserin is a novel compound, a true biotech if you will, while Contrave and Qnexa are combinations of existing drugs.
I've always thought it seemed plausible that there might be some investor out there with a mandate to invest only in completely new compounds cooked up in plucky little biotech labs, and not in combinations of ho-hum old stuff. I have talked to investors who felt leery after getting burned by Nitromed (NTMD), or at least seeing others get burned by it, and I've even gone to some trouble to explain why NTMD was completely different from OREX and VVUS (basically, NTMD based all their marketing on results from a post-hoc subset). But yesterday I realized that I haven't actually talked to anyone whose rationale for investing in ARNA was that lorcaserin is a new compound.
Mind you, those investors could be out there somewhere and just not talking to me. But at the least, we can say that they are laying rather low.
Disclosure: no positions
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"I spoke to a distinguished MD who consults with, and writes for, the FDA and he would agree that Phentermine would naturally be prescribed with Lorcaserin and that the 2 would safely produce double-digit % weight loss for most.
Going back a couple of days when I raised this, I think the FDA requested ARNA to prove Lorcaserin as a single agent so that it could then be tested in combinaton with other drugs. like phentermine, post approval. It is for this practical reason that I think Lorcaserin (which, again, is uniquely positioned for combinations because of its emphasis on safety with a contributing effectiveness) will take off in the market. For sure $500M in the first 2 years and very possibly, if the combination with other drugs works in practice, then over $1B as this huge market really begins to open up for the first time (safety and siginificant weight loss without heavy exerecise and diet regime)
I do not think the market understands this and has significantly undervalued the stock assuming it was supposed to deliver blockbuster effectivenss om its own. Again, do people understand that ARNA has IP around different combinatons including Lorcaserin and phentermine.
1) In my experience, not many institutional investors pay much attention to Cramer, except occasionally to beat up on salespeople about whatever Cramer has recently said. Spending time on Cramer is a very poor use of it, unless he's cutting you a paycheck.
2) Sure, a lorcaserin/phentermine combination is a possibility. However, it does raise the questions why haven't we seen any trials at all around it? and what about OREX's market research suggesting that after the fen-phen debacle, docs don't want to make up their own cocktails, they want an FDA-approved compound? and if we are going to add phentermine to anything, why not add it to the apparently more efficacious Qnexa or Empatic (OREX's compound that is a year behind Contrave in trials)?
On Apr 02 12:50 PM Obesity Investor wrote:
> Thanks for your thoughts.
>
> 1) In my experience, not many institutional investors pay much attention
> to Cramer, except occasionally to beat up on salespeople about whatever
> Cramer has recently said. Spending time on Cramer is a very poor
> use of it, unless he's cutting you a paycheck.
>
> 2) Sure, a lorcaserin/phentermine combination is a possibility. However,
> it does raise the questions why haven't we seen any trials at all
> around it? and what about OREX's market research suggesting that
> after the fen-phen debacle, docs don't want to make up their own
> cocktails, they want an FDA-approved compound? and if we are going
> to add phentermine to anything, why not add it to the apparently
> more efficacious Qnexa or Empatic (OREX's compound that is a year
> behind Contrave in trials)?
Arena has a very high short interest, over 17% of the stock is held in short positions. I believe that an analyst like Adam Cutler of Cannaccord Adams is more of the culprit in the stock price being trashed. His downgrade about 10 days before the announcement was based on his reasoning that Arena would not have the safety data for Lorcaserin to get FDA approval. In addition he stated incorrectly that they would run out of money by the 3rd quarter when it clear that they have enough cash to get to the end of 2009.
He is a creep of the first order and a lousy analyst. Not because he stated his opinion but because he is a coward. He never asks any questions on the conference calls. He creates his own facts and then when the results are announced, he states that the results on efficacy were underwhelming but neglected to say anything about the excellent, yes excellent safety results.
As an investor in Arena, I believe patience is required. I think the Blossom results in terms of weight loss will be better while adding more oomph to the safety and tolerability profile. I do believe that they will sign a partnership and start work on a compound drug as indicated above by Mr. Osborn. In fact, I would recommend that Arena investors add to their position while the price is at this level.
On Apr 02 10:01 AM quark7 wrote:
> I have followed Arena for many months. I liked what they were doing
> and accepted the results for Phase III and looked forward to more
> successes. However, over the weekend the creeply Jim Cramer wrote
> a terrible article about Lorcaserin. He was off the deep end so while
> the drug did meet the standards established, Cramer pounded away
> with creative math and a very loose mouth. I understand that this
> guy is a shock jock and is extremely far from being correct on anything.
> However, the psychology works and institutions, BEFORE THE BELL,
> analyzied the market and cleaned our clocks before we even had a
> chance to participate. I believe a lot of behind the scenes made
> a lot of money off individual investors. Where is the SEC, was do
> money page people like MSN Money or other webs carry this garbage.
> We live in bad times due to a lot of bad people. Cramer just made
> it worse.
On Apr 02 01:29 PM PhillyDan wrote:
> Interesting that over two years ago, Cramer declared "Lorcasering
> the best anti-obestiy drug in development" then trashed Arena for
> doing a 2nd round of equity financing when it was obivious they needed
> the funds for continued development.
>
> Arena has a very high short interest, over 17% of the stock is held
> in short positions. I believe that an analyst like Adam Cutler of
> Cannaccord Adams is more of the culprit in the stock price being
> trashed. His downgrade about 10 days before the announcement was
> based on his reasoning that Arena would not have the safety data
> for Lorcaserin to get FDA approval. In addition he stated incorrectly
> that they would run out of money by the 3rd quarter when it clear
> that they have enough cash to get to the end of 2009.
> He is a creep of the first order and a lousy analyst. Not because
> he stated his opinion but because he is a coward. He never asks any
> questions on the conference calls. He creates his own facts and then
> when the results are announced, he states that the results on efficacy
> were underwhelming but neglected to say anything about the excellent,
> yes excellent safety results.
>
> As an investor in Arena, I believe patience is required. I think
> the Blossom results in terms of weight loss will be better while
> adding more oomph to the safety and tolerability profile. I do believe
> that they will sign a partnership and start work on a compound drug
> as indicated above by Mr. Osborn. In fact, I would recommend that
> Arena investors add to their position while the price is at this
> level.
As an example, Pfizer's Caduet, a combination of (still patented) lipitor and generic norvasc (amlodipine) has not had anywhere near the success that they expected pre-launch. I prescribe separate simvastatin and amlodipine, get the same result and cost the patient a fraction of potential expense.
I think this will be an even greater factor with a weight loss drug as many insurers will deny payment for them or put them at the highest co-pay. That will prevent the kind of sales you would expect from a safe and effective anorectic.
"Frankly, I was going to let this one pass and just not talk about, even though I think the odds of a successful trial are high. But yesterday the analyst at Canaccord Adams downgraded the stock from Hold to Sell, set a new target price of $2.50, and knocked ARNA from $5.09 on Friday to $3.99 yesterday. It is not bouncing back today. His reason for the downgrade: The BLOOM trial results will draw intense scrutiny from the FDA for the safety side effects. Such a penetrating insight!
Without accusing anybody of anything, in the past I have seen analysts who aren't bullish anyway (his previous recommendation was a hold) downgrade a stock for a non-reason in advance of an event. Their firm then provides a market for the stock because they have a big buyer: A hedge fund that is short and needs to cover at a low price just before they might get blown out of the water by some good news. As I say, I'm not accusing anyone of anything, it's just something to think about. "
Like PhillyDan, I'll be interested to see the April data on how many shorts covered, but we won't be able to tell what percentage of them were well-served by the Canaccord Adams downgrade, and what percentage were even better served by the ignorant or deliberate misrepresentation of the efficacy data by every media outlet I saw.
I just recommended both buying the stock and writing the July $2.50 put for 55 cents, which gives you a $1.95 cost basis before the September results are announced. You're not likely to get put the stock, but assuming your broker requires 25% margin on a naked put, you earn 88% on your collateral in 3.5 months.
1. Approximate 4% weight loss (placebo adjusted) is nothing to get excited about (and is less than the FDA expects).
2. There are existing FDA approved drugs that can cause a >4% placebo adjusted weight loss - with minimal side effects. These include metformin, sibutramine, phentermine, bupropion, and topiramate.
3. The FDA just approved generic topiramate. Metformin and bupropion are already generic.
4. Even if Contrave, Qnexa or lorcaserin are approved by the FDA, sales will be low because almost no insurance company will cover them (they never paid for Meridia or Xenical).
I have no long or short positions in any of these companies.
I understand that there are about 2,500 MD's in the U.S who specialize in treating obesity and in weight loss. Scripts for existing weight loss drugs such as phentermine are highly paretoized, as far as who writes them. While I don't doubt that a relatively safe, effective weight loss drug or method (such as cognitive behavioral therapy, which full disclosure is how I've lost most of my weight) would be welcomed by these doctors, I have to ask how it would affect their practices if such a thing were to be effectively marketed and widely prescribed by primary care doctors. This is what has to happen to get the figures you so often see of $10 billion marketplace for prescription obesity drugs or $1 billion for a drug that has 10% of the market.
Since none of us has much idea what third-party reimbursement is going to look like in 2010 or 2011, except that it will probably be different from now, and since there is widespread movement at the highest levels both politically and at the FDA specifically toward treating obesity as preventive care, I don't think it matters much that as of today a lot of insurance companies won't pay for obesity treatment.