Weight Loss Drugs: Why Arena's Is Likely To Win Approval Before Vivus's

| About: Arena Pharmaceuticals, (ARNA)

Will a new weight loss drug be approved in 2012?

Here we are, two months into 2012 and the FDA has another opportunity to approve a new drug to help fight obesity. Will this be a déjà vu event from 2010 or will we witness a turn in the hallways of the FDA that there are some acceptable risks in the name of weight loss? Obesity treatments remain the largest unmet medical need in all of pharma and a new option for physicians could lead to billions in revenue. So will either Vivus' (NASDAQ:VVUS) Qnexa or Arena's (NASDAQ:ARNA) Lorcaserin be approved in 2012?

On Wednesday, February 22nd, Vivus will face a second Advisory Committee for its weight loss drug - Qnexa. Last week, we received insight from the FDA on how it may be viewing the approvability of the drug and there are still some obstacles for Vivus to overcome. There are two main areas of concern around Qnexa within the agency. The first is an increase in heart rate for patients taking Qnexa and the second is an increased risk of birth defects for women who become pregnant while taking Topiramate, a key ingredient of Qnexa.

Qnexa is not a novel drug but rather a proprietary formulation of Phentermine (the most widely prescribed generic for weight loss) and Topiramate, a drug to treat seizures and migraines. These drugs have been prescribed in combination for weight loss in practice, although not in great numbers, for many years. Qnexa now packages these drugs into one pill and they will be marketed as a new treatment for obesity. There is nothing preventing a physician from prescribing these two pills today together and that becomes a problem for both long-term product success and the potential lack of willingness for payers to foot the bill. First the drug needs to be approved, however, and we'll find out this week what an independent panel of experts thinks.

I believe that the cardiovascular risk isn't a big factor here and I don't believe a large pre-approval study will be mandated like for Orexigen's (NASDAQ:OREX) Contrave, but I could be wrong. I believe the bigger issue to overcome is that of teratogenicity. Birth defects are as scary as mammary tumors, which was the major black eye Arena faced for Lorcaserin during its advisory committee. Teratogenicity concerns are the first two questions posed by the FDA and this one is going to be a difficult one for Vivus to overcome. As the FDA states in its briefing docs, it will be impossible to manage this through a REMS program, given the generic nature of the components that comprise Qnexa. With a current market cap for Vivus already north of $1B, it isn't worth the risk / reward for me to invest on a 50/50 chance of approval based on Qnexa alone. So does Arena stand any better chance of approval than 50/50?

When I last wrote about Arena in September 2011, I recommended buying the stock at $1.25. It had a nice run since then to north of $2 only to retreat back to the $1.80's. With a market cap of $267M, is that a fair price with an upcoming PDUFA for Lorcaserin on June 27th, 2012 and a second Advisory Committee meeting in April or May? There were six items in Arena's 1st Complete Response Letter (CRL) for Lorcaserin that the FDA asked to be addressed prior to approval. With Arena's resubmission the end of 2011, we now have feedback to each item and can form a better opinion to the chance of approval.

Item 1: Provide results of Arena's Phase III BLOOM-DM trial - The results of this trial were very impressive for a diabetic population and the endocrinologists on the upcoming Advisory Committee should view them positively. This is a very difficult population to treat and Lorcaserin again met one of the two available endpoints for weight loss drugs with more than 35% of patients losing 5% body weight and more than double placebo. About 20% of patients lost more than 10% of their body weight, which was almost 4X placebo. Most importantly, Fasting Glucose was improved -27 and HbA1c reduced by .9. Those are in-line with diabetic specific treatments such as TZD's, GLP-1 agonists and Sulfonylureas. There were a higher number of valvulopathy event in this trial so that could be a concern. However, the levels were still less than the rate found in the general population and this study wasn't powered to rule out valvulopathy. I believe the FDA statistician will pool all of the studies together and again state the sponsor had done all they can to rule out valvulopathy.

Item 2: Assessment of margin for mammary adenocarcinoma in female rats - This was the big one for Lorcaserin in 2010 and the concern that caught investors most by surprise. Arena had estimated a safety margin of 17x and the FDA couldn't find a safety margin it was comfortable with because of the uncertainty of tumor classification in Arena's pathology slides. To address this, Arena worked with an independent pathology working group (PWG) to readjuticate these slides and determine a safety margin. The five PWG members were approved by the FDA and went on to determine a 24X safety margin for mammary adenocarcinoma. The FDA likes to see 25X as a standard safety margin, so will 24X be enough? I believe so.

Item 3: Investigation of rat mammary tumor mechanism - This requirement becomes less of an issue with the 24X margin of safety established but is still important to show to ease concerns. Arena performed a number of pre-clinical studies in this regard and demonstrated a prolactin response to form the basis of mammary tumor formation. Dr. Jose Russo helped Arena with these studies and he is one of the foremost breast cancer experts in the world. He also may be one of the experts Arena calls upon for this year's panel.

Item 4: Estimation of brain astrocytoma in male rats - Arena's studies show that humans and rats have a far different amount of drug exposure to the brain. In humans at the clinical dose, the brain is exposed at a level that is 1.7X what is found in the plasma. In rats, it is at least 24X the exposure in the brain than plasma. This item should be addressed, unless the FDA comes up with different exposure levels in their analysis.

Item 5: Refinement of 5-HT Subtype 2 receptor activity - The latest studies Arena completed here demonstrate clear selectivity to the receptor in the brain for satiety and not to the receptor in the heart that would lead to valvulopathy. This is a confirmation of previous studies.

Item 6: Assessment of abuse potential - Arena conducted new abuse liability studies which show Lorcaserin has low-abuse potential and should not be classified as a controlled substance.

Given the promising responses to each item from the CRL, I believe Lorcaserin stands a better chance of making it past its advisory committee and the FDA, than Qnexa does. Of course, we don't know if there will be new issues raised by the FDA that need to be addressed and that is a risk. We do know that the FDA is under pressure to approve and encourage the development of novel weight loss drugs. The only novel drug under review is Lorcaserin.

If I'm the FDA, I'm approving the drug with the lowest risk, not necessarily the greatest weight loss. Among diabetics, Qnexa improved HbA1c by .4 on the high dose compared to Lorcaserin's .9 improvement, even though Qnexa resulted in more weight loss. Qnexa raises heart rate and Lorcaserin reduces it. Qnexa does result in an increase for birth defects and Lorcaserin is now clearly shown to not cause cancer. I believe the FDA will view Lorcaserin as the safest choice to approve. They may approve both or they may deny them both again. However, the risk to reward profile falls in Arena's favor. With a market cap of $267M, the downside is maybe 40% and the upside is unlimited. It remains highly speculative but I believe the chances of approval this year are far greater than they were just 18 months ago. In my next article, I'll revisit the market potential for Lorcaserin if it becomes approved.

Disclosure: I am long ARNA.

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