Orexigen's Possible One-Two Punch

| About: Orexigen Therapeutics, (OREX)


Possible Q2 Approval of Contrave in U.S.

Possible Q3 Approval of Contrave in Europe.

Lower Market Cap than Competitor Arena makes Valuation Upside Attractive.

While Orexigen (NASDAQ:OREX) may not yet be in the news as much as competitor Arena Pharmaceuticals (NASDAQ:ARNA) and Vivus (NASDAQ:VVUS), it may have a one-two punch that is exactly what the street is seeking. The company is seeking approval for its anti-obesity drug Contrave in both the United States and Europe, and expects decisions from both this year. In contrast, the Vivus product Qsymia is approved only in the United States. The same is true for Belviq, the anti-obesity drug from Arena.

If approved by the FDA this June, Orexigens Contrave will be the third entrant to the U.S. market. The European dynamic could well place Orexigen in a situation where it will actually be first to market in the European Union. Qsymia was rejected in Europe and failed on an appeal. Belviq was facing rejection and its application was pulled by Arena. Subsequent to coming up short in Europe Arena brokered a broader deal with it marketing partner Eisai (OTCPK:ESALY) to include Europe and most of the globe.

The timing of events for Orexigen may have been frustrating for the last couple of years, but in the end could be very fortuitous. Vivus, Arena, and Eisai have been doing the bulk of the legwork in the anti-obesity space for over a year now. These companies have been winning broader insurance coverage, detailing and education doctors, and getting the word out that there are new drugs and combinations that can help with weight loss. On all fronts, Orexigen and Contrave should have an easier path to penetrate the market.

Essentially Orexigen has news pending on Contrave approval in the United States in Q2 of 2014 and possible approval in Europe in Q3. This one-two punch, combined with broader acceptance of obesity drugs than we had a year ago could be exactly what the street is looking for. Recently analysts such as Piper Jaffrey and Wells Fargo have been positive on Orexigen.

"We think that, in the short term, Contrave may not have better uptake than the other two drugs. But in the longer term, looking out a couple of years, I think Contrave will be the winner. The other thing that differentiates the Orexigen story from the two comparables is that the company has the potential to get approval for and launch Contrave in Europe. Neither of the other two products is positioned for that, because neither has completed a cardiovascular outcomes study." - Charles Duncan, Piper Jaffrey

Wells Fargo has initiated coverage on Orexigen and rates the equity as outperform with a price target of $11 to $12. In contrast, the company rates competitors Arena and Vivus at market perform.

Wells Fargo initiated coverage on Orexigen Therapeutics with an Outperform rating and a price target of $11-$12. Analyst Matthew J. Andrews said:

"Orexigen's lead value driver is NB32/Contrave, a novel anti-obesity agent under review in both the U.S. and Europe with regulatory decisions expected on June 10 and in Q3. While OREX's U.S. partner Takeda has the requisite metabolic disease sales and marketing experience (via Actos and Nesina for Type 2 Diabetes Mellitus), appropriate strategy, and committed resources necessary for a strong NB32 launch, we believe competition and U.S. private payers willingness to improve coverage/reimbursement will be key near-term headwinds for all obesity drugs."

Based on our recent interviews with U.S. private payers, they expressed broad universal support for improved coverage if an obesity drug receives approval to treat T2DM, but were a bit more cautious on the impact a positive CV outcomes study will have on future coverage. While OREX s T2DM strategy still has clinical, regulatory, and marketing risks and won t play out until 2017E, we like it and believe it could ultimately be a key differentiator vs. Qsymia and Belviq in terms of NB32 s sales and improved U.S. coverage/reimbursement. We are initiating coverage with an Outperform rating based on our view that OREX s share price does not appropriately account for its T2DM strategy," he added. For an analyst ratings summary and ratings history on Orexigen Therapeutics click here. For more ratings news on Orexigen Therapeutics click here. Shares of Orexigen Therapeutics closed at $5.54 yesterday."

Perhaps one of the drivers here is valuation and potential. While Orexigen, Vivus, and Arena all trade in similar ranges of stock price, the market capitalization story is much different:

  • Arena - $1.33 billion
  • Orexigen - $631 million
  • Vivus - $513 million

Essentially the analyst feels that Orexigen is deserving of a valuation similar to that of Arena, and if Orexigen can indeed get approval in both the United States and Europe in 2014, he could be very right in that assessment. In January I wrote that I saw Orexigen as a buy near $5.00. The equity recently hit that level and I once again brought up the subject of Orexigen as a buy. The equity is now up 10% from the lows near $5.

Any investment is not without risk. While I believe that U.S. approval will happen with relative certainty, Europe is not as solid. In my opinion Orexigen could be attractive with just one punch (the FDA approval) and could be very attractive if it add the second punch to the combination. Stay Tuned!

Disclosure: I am long ARNA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have no position in Orexigen, Vivus, or Eisai

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.