Investing in the Obesity Drug Basket

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, Citigroup (C), AIG (AIG) and Moody's (MCO) 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 here.

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 the 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 tolerates best 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

Comments

[rob134:]

I am amazed at the author's ability to ignore the phase III data on all of these drugs and come to a conclusion favorable to his long holdings. If the doctor gives me a choice as to which drug I wish to take it will be the one that can provide the most weight loss while positively effecting my diabetes. Qnexa wins hands down.

Sep 21 07:48 AM

[SivBum:]

vvus has the winning hand so far.

Sep 21 10:38 AM

[dlsbrk:]

My understanding is that high-fructose corn syrup was WELCOMED by the soft drink industry because it was cheaper than sucrose (regular sugar). Furthermore, it is by no means established that the Pyramid recommendation of ample carbs (grains, more specifically) has damaged anyone. For example, you might wish to consider the Japanese, Chinese, and other Asians who have for a very long time subsisted primarily on rice. These are actually some of longest-lived people in the world. Michael, the problem is not carbs--it is instead gluttony and lack of physical activity and the resulting obesity and metabolic damage leading to type 2 diabetes and artery disease.

Sep 21 12:17 PM

[Michael Murphy:]

rob134: The overall weight loss figures are 5.9% for lorcaserin, 6.1% for Contrave, and 10.6% for Qnexa. Don't be fooled by variations in the placebo response. Lorcaserin and Contrave were about equal, and Qnexa was, as you said, better.

Now look at adverse events - 7% for lorcaserin, 22% for Contrave, 18% for Qnexa. Then look at the diet and exercise regimen - essentially nothing for lorcaserin, and only a little bit more for Contrave. Much more for Qnexa.

That's why all these drugs are winners. The elephant in the room is LorPhen. 20% of obesity doctors surveyed said they would prescribe lorcaserin plus phentermine from the beginning. Most of the other 80% said they would prescribe lorcaserin instead of phentermine. I'm sure they would be equally happy to prescribe Contrave or Qnexa instead of phentermine. In the real world, I expect doctors to switch patients among these four choices as needed to find that balance between weight loss (which includes patient compliance on the diet and exercise required) and side effects.

That's why I think ARNA, OREX and VVUS make a great basket to participate in a virtual revolution in obesity care. You don't have to guess on which one might have FDA approval problems, or which ones doctors will start with, or which one will eventually get the largest market share. Just buy them all.

Sep 21 12:25 PM

[Michael Murphy:]

dlsbrk - the soft drink industry filed a 100+ page brief against the approval of high fructose corn syrup, citing a long list of health concerns. Coca-Cola and Pepsi feared a "race to the bottom" as off-brand sodas used the cheaper HFCS to undercut prices. Once it was approved, Coke and Pepsi had no choice but to join in.

Carbs are not the problem? Well, we are all entitled to our own opinion. "The government's initial decision 30 years ago to promote low-fat diets was not based on recommendations from doctors or scientists, but rather from lawyers who worked for Sen. George McGovern in the mid-1970s."
abcnews.go.com/Health/...

Sep 21 12:34 PM

[dlsbrk:]

"Coca-Cola and Pepsi feared a "race to the bottom" as off-brand sodas used the cheaper HFCS to undercut prices."

Right, and far more likely to be the real reason behind any resistance. HFCS is for practical purposes the same as sucrose--composed of approximately equal parts glucose and fructose (slightly more fructose in HFCS). The only difference is that sucrose requires digestion, which occurs readily and rapidly. Several companies have now switched back to sucrose. Will this have any effect on consumers' weights or belly dimensions? Of course not.

The "government"'s decision to promote low-fat diets was really a decision by nutrition/medical scientists in recognition of the fact that fat has twice the Calories of carb, per gram, and hence reducing fat in the diet is likely to allow weight loss while not reducing overall food intake as much. Did this advice work? No, because the American public then decided to buy low-fat chocolate-chip cookies and eat the entire package because heck, they're low in fat! Do not blame nutrition scientists for what was (and still is) perfectly sound advice. Put the blame where it belongs--on those who chronically over-eat and are inactive.

Sep 21 01:03 PM

[User 78634:]

The safety profile & lack of side effects for ARNA seems to give it the edge. But with the size of the market, buying a basket of all three makes sense.

Sep 21 10:41 PM

[User 489978:]

How can you ignore the results from the placebo groups? Without the comparison of placebo, the weight loss may come from the other factors.

On Sep 21 12:25 PM Michael Murphy wrote:

> rob134: The overall weight loss figures are 5.9% for lorcaserin,
> 6.1% for Contrave, and 10.6% for Qnexa. Don't be fooled by variations
> in the placebo response. Lorcaserin and Contrave were about equal,
> and Qnexa was, as you said, better.
>
> Now look at adverse events - 7% for lorcaserin, 22% for Contrave,
> 18% for Qnexa. Then look at the diet and exercise regimen - essentially
> nothing for lorcaserin, and only a little bit more for Contrave.
> Much more for Qnexa.
>
> That's why all these drugs are winners. The elephant in the room
> is LorPhen. 20% of obesity doctors surveyed said they would prescribe
> lorcaserin plus phentermine from the beginning. Most of the other
> 80% said they would prescribe lorcaserin instead of phentermine.
> I'm sure they would be equally happy to prescribe Contrave or Qnexa
> instead of phentermine. In the real world, I expect doctors to switch
> patients among these four choices as needed to find that balance
> between weight loss (which includes patient compliance on the diet
> and exercise required) and side effects.
>
> That's why I think ARNA, OREX and VVUS make a great basket to participate
> in a virtual revolution in obesity care. You don't have to guess
> on which one might have FDA approval problems, or which ones doctors
> will start with, or which one will eventually get the largest market
> share. Just buy them all.

Sep 22 06:51 PM

[Penn Bioinv...:]

This Micheal Murphy guy is a joke. He kept pumping the stocks he own. He predicted early this year DNDN will go to $360/share very soon, which translate into about 40 billion market capital for this small biotech. (Shocked)

I just asked him yesterday if he will allow me to sell all my DNDN shares to him at $180/share, so he can make handsomely 2X on it.

I also challenged his pumping on ARNA: Safe? If doctors are looking for a low-risk solution, they might be better off prescribing diet and exercise changes than trying to eke out an additional 6- to 8-pound loss for a 200-pound person on lorcaserin (ARNA drug). LOL.

Put in this way, if a 200 pound person take ARNA's "wonderful' drug, by paying tens of thousands of dollars in two years, he shed off 4-6 pounds! Toxicology 101: EVERY DRUG IS TOXIC. why not take some diet, which is much safer. Game pretty much is over for ARNA, period.

I was shocked by his statement ARNA drug can be marketed together with Phen. Lack of basic drug approval knowledge: FDA will NEVER allow any such drug without all proper clinical trials.

Sep 22 08:18 PM

[klip:]

Don't forget NeuroSearch's Tesonfesine. It's a novel drug in Ph3 right now and has shown efficacy similar to Qnexa with a relatively benign safety profile. They're the sleeper that has yet to show up on many people's radar. Moreover, this company is far from a one-trick pony with a couple drugs in late-stage development and a growing number of partnerships w/big pharma.

Sep 23 10:26 PM

[Goodguy:]

The difference for Qnexa may be the 500 calorie deficit. If I read Mr. Murphy's table correctly: if the other protocols didn't specify that the patient achieve a 500cal per day deficit via exercise or lowered intake or some combination, the Qnexa trial theoretically should be ahead of the others by a loss of 56/lbs avg per participant over the course of their trial, even without using the drug. This is the calculation-->>> -500 cal/day X 392 days = -196,000 cal/ (3500 cal per pound of fat) = -56lbs. . So in the Qnexa trial if the protocol was followed, even without the drug a 56 lb weight loss should have resulted on average per person.

Nice balanced analysis Mr. Murphy. All three companies should have a good run.
Disclosure: Long VVUS, ARNA

Sep 24 10:55 PM

[PhillyDan:]

Your Doctor will not agree with that! He will want you to have the safest drug that gives you reasonable weight loss while improving your diabetes condition and that would be Lorcaserin not Qnexa.

Remember, Vivus had a 500 calorie deficit per day diet for their patients in the study. That equates to 182,500 calories less per year assuming followed correctly by the patients. In general a 500 calorie deficit per day will lead to a one pound loss per week.

Riddle me this? Was it the drug or the diet that caused the weight loss?


On Sep 21 07:48 AM rob134 wrote:

> I am amazed at the author's ability to ignore the phase III data
> on all of these drugs and come to a conclusion favorable to his long
> holdings. If the doctor gives me a choice as to which drug I wish
> to take it will be the one that can provide the most weight loss
> while positively effecting my diabetes. Qnexa wins hands down.

Sep 30 12:38 PM

[PhillyDan:]

The only joke is you Penn Bioinvestor. You sir are a liar!!
Murphy never said DNDN would go to $360.00 very soon but his projection was over a number of years. This lie on your part alone does not entitled you to any credibility at all.

Lorcaserin is slated to cost about a $1.50 per dose. Here again, you lie when you say it would cost: "Tens of thousands of dollars".
The average weight loss for completers is 18.2 pounds, the only mistake that Murphy made in his chart above since he uses ITT-LOCF data for Arena but Completer data for Vivus. Over 26% lost greater than 30 pounds. Now tell me that wouldn't make a difference in someone's health? In addition, Vivus had a 500 calorie deficit per day which equates to about a one pound loss per week. I suggest you study the AEs for Qnexa and exclusions and restrictions before recommending a potentially unsafe toxic drug for people.

In closing, you are liar since you have distorted the facts several times in your comments. We don't need liars like you in Seeking Alpha.

Come back when you can get your facts straight.
On Sep 22 08:18 PM Penn Bioinvestor wrote:

> This Micheal Murphy guy is a joke. He kept pumping the stocks he
> own. He predicted early this year DNDN will go to $360/share very
> soon, which translate into about 40 billion market capital for this
> small biotech. (Shocked)
>
> I just asked him yesterday if he will allow me to sell all my DNDN
> shares to him at $180/share, so he can make handsomely 2X on it.
>
>
> I also challenged his pumping on ARNA: Safe? If doctors are looking
> for a low-risk solution, they might be better off prescribing diet
> and exercise changes than trying to eke out an additional 6- to 8-pound
> loss for a 200-pound person on lorcaserin (ARNA drug). LOL.
>
> Put in this way, if a 200 pound person take ARNA's "wonderful' drug,
> by paying tens of thousands of dollars in two years, he shed off
> 4-6 pounds! Toxicology 101: EVERY DRUG IS TOXIC. why not take some
> diet, which is much safer. Game pretty much is over for ARNA, period.
>
>
> I was shocked by his statement ARNA drug can be marketed together
> with Phen. Lack of basic drug approval knowledge: FDA will NEVER
> allow any such drug without all proper clinical trials.

Sep 30 12:52 PM

[PhillyDan:]

My calculation was based on 52 weeks but Goodguy is correct, the study was 56 weeks long.


On Sep 30 12:38 PM PhillyDan wrote:

> Your Doctor will not agree with that! He will want you to have the
> safest drug that gives you reasonable weight loss while improving
> your diabetes condition and that would be Lorcaserin not Qnexa.<br/>
>
> Remember, Vivus had a 500 calorie deficit per day diet for their
> patients in the study. That equates to 182,500 calories less per
> year assuming followed correctly by the patients. In general a 500
> calorie deficit per day will lead to a one pound loss per week.
>
>
> Riddle me this? Was it the drug or the diet that caused the weight
> loss?

Sep 30 12:55 PM