Arena Pharmaceuticals (ARNA) investors have had a tough road over the last 12 months since a negative vote by an Advisory Committee called to review Arena’s lead drug candidate for the treatment of obesity – lorcaserin. The stock was trading close to $7.00 a year ago heading into that fateful Advisory Committee, down to under $2 after a negative vote foreshadowed a Complete Response Letter (CRL) from the Food & Drug Adminstration (FDA). ARNA has bounced between $1.25 and $1.60 for most of 2011. So will Arena have a better chance of seeing lorcaserin approved in 2012 than it did in 2010?
According to recent reports, the U.S. Senate Committee on Appropriations has instructed the FDA to report back by the end of March 2012 on the steps the agency will take to support novel treatments for obesity. In this report the Committee noted that the “lack of obesity medications is a significant unmet medical need” and that they were “concerned with the absence of novel medicines to treat obesity.” Any investor who has followed the obesity space knows that of the three obesity drugs recently rejected by the FDA; Vivus’ (VVUS) qnexa, Orexigen’s (OREX) contrave and Arena’s (ARNA) lorcaserin – the only one that is a “novel” drug is lorcaserin. The other two drugs were combination pills of existing compounds. Perhaps the efforts by Arena investors last fall to express their concern to their congressional representatives has paid off by increasing the pressure on the FDA to look at obesity as a disease rather than a lifestyle problem.
Obesity continues to be the largest unmet medical need in the world and the root cause of many of our biggest diseases including Type II diabetes & heart disease. With 1/3 of American’s facing obesity – a safe and effective novel treatment would become a mega-blockbuster. Given Arena’s $1.25 share price, the Street clearly believes there is little chance lorcaserin will ever be approved. So is this a stock worth buying? Let’s examine the details of what was contained in Arena’s 2010 Complete Response Letter to see where they stand in addressing each concern to allow the company to refile their New Drug Application by the end of this year.
The committee listed four major points for Arena to address before they could approve lorcaserin:
1) Diagnostic uncertainty in the classification of mammary masses in female rats: On August 9, 2011 Arena announced results from a Pathology Working Group's (PWG) re-adjudication of female rat mammary tumor diagnoses from a two-year rat carcinogenicity study of lorcaserin. The PWG was able to decisively demonstrate that there is no increased cancer risk to humans and that the risk is actually lower than Arena originally estimated in their first New Drug Application. The PWG results also show that the FDA-erred when combining tumor types to determine cancer risk, a practice not generally accepted in the medical community.
2) Unresolved exposure-response relationship for lorcaserin-emergent mammary adenocarcinoma: Arena is still conducting a study, 3 months in duration, that measures the increase in prolactin that lorcaserin may cause. An increase in prolactin is an accepted cause of increased mammary risk. However, given the results of the Pathology Working Group, this may no longer be of concern since there is no statistically significant increase in mammary risk for lorcaserin patients. Regardless, results of this study are expected later this year and well prior to resubmission of the NDA.
3) Unidentified mode of action and unclear safety margin for lorcaserin-emergent brain astrocyloma: On August 2, 2011 Arena announced the completion of a clinical study that measured lorcaserin concentrations in human cerebrospinal fluid (CSF) and plasma and related data analyses. In this study, Arena was able to conclusively demonstrate that the exposure to the human brain with lorcaserin was 5X lower than in the brains of rats. This provides the data necessary to show that there is absolutely no increased risk of brain cancer in humans.
4) The agency wanted to review results of Arena’s BLOOM-DM trial to see effect of lorcaserin with Type II diabetics: The results of this study were released in November 2010 and were quite impressive. Not many people thought that lorcaserin would have much success in this population that tends to have a difficult time losing weight. After 52-weeks of treatment, 37.5% of patients taking lorcaserin lost at least 5% of their body weight, more than double the 16.1% who did so in placebo and meeting the FDA criteria for approval of a weight-loss drug. In addition, over 16% of lorcaserin patients lost over 10% of their body weight compared to just 4.4% on placebo. Diabetes drugs are measured by their ability to lower HbA1c and those on lorcaserin lowered HbA1c by .9% compared to .4% on placebo. This is significant because a reduction in HbA1c of .9% is similar to a number of diabetes-specific treatments. To have such an impressive reduction of HbA1c could make lorcaserin a first line treatment for Type II diabetics and pre-diabetics – a population of over 70M Americans.
It is important to note that the FDA expressed no concern in the CRL with heart safety like they did for qnexa and contrave. Arena conducted extensive heart safety testing in their trials understanding that there was great concern in the aftermath of the Phen-Fen debacle around the potential for heart-valve damage. Arena apparently made the agency comfortable that there was no increase in heart valve risk to patients who took lorcaserin, since there was no language in the CRL expressing any concern in this regard. Lorcaserin is the only treatment that has been recently up for review that not only doesn’t increase risk to the heart, it actually decreases it.
I spoke with Arena last week and the company is still very confident they will be able to refile their NDA for lorcaserin prior to the end of 2011, which would start a 6-month review and 2nd PDUFA in mid-2012. Our Congress is now pressuring FDA to approve “novel” new agents to fight obesity. Lorcaserin is the only novel new drug that will be up for approval anytime soon. It has virtually no risk associated with it, given the updated study results and is effective for a significant amount of the population. It lowers cardiovascular risk, HbA1c, waste circumference and reduces the need for anti-lipids, anti-hypertensives and potentially other diabetes treatments. It has the potential to also be used for other indications over time including smoking cessation or other addictives.
Given that Arena appears to be on-track to answer all of the FDA’s concerns listed in the CRL and refile by the end of 2011, it is a good speculative play and I purchased a nice position over the last 2 months. If they continue on this path and refile in December, you could see a good move north of $3 in Q1 2012 and it might recover to the $5-7 range as it approaches a 2nd PDUFA in June 2012 – a +400% return from here. I’ll plan on taking some profit prior to the next FDA action date but lorcaserin stands a far better chance of approval in 2012 than it did this time last year. Approval could launch ARNA north of $20 in a hurry and it stands a good chance of major blockbuster status once on the market. That to me is worth a speculative play on a $1.25 stock. At this level, Arena is trading like a never-expiring zero strike call option.
Disclosure: I am long ARNA.