While two thirds of Americans are overweight, according to the Centers for Disease Control and Prevention more than one-third of U.S. adults (35.7%) are clinically obese. Obesity causes a variety of other diseases, kills hundreds of thousands of people every year and shortens the life span of many more.
According to National Heart, Lung, and Blood Institute obesity-related conditions include heart disease, stroke, type 2 diabetes and certain types of cancer, some of the leading causes of death.
Obesity-related conditions include heart disease, stroke, type 2 diabetes and certain types of cancer, some of the leading causes of death. Medical costs associated with obesity are estimated to be over $150 Billion. Childhood obesity has more than tripled in the past 30 years. Obesity is a growing world-wide problem with many countries facing the same trends as in the US.
Vivus (VVUS) recently obtained a positive outcome from the FDA advisory committee for its obesity drug Qnexa. The strong vote (20-2) was surprising to some as there are concerns about the safety of Qnexa, particularly around cardiovascular disease and birth defects.
There are still questions regarding dosage and restrictions the FDA may place on Qnexa, such as restricted distribution to control access, REMS, and classification as a controlled substance, if the FDA approves it on April 17, 2012.
Arena Pharmaceutical's (ARNA) novel drug, Lorcaserin on the other hand will likely to be approved without any restriction as a non-controlled substance in both the US and Europe (according to a medical doctor who has obese and diabetic patients and follows the Arena story closely).
It's impressive how many medical doctors follow the approval process of Lorcaserin and have taken positions in the company. One of the more vocal proponents of Arena's technology, Dr. Steven Vig, recently told me:
I have not sold a single share of Arena in 3 years, and I use drops in the stock price to pick up additional shares … a couple of years ago I bought Dendreon at $3.68 and sold it for $54 dollars a share … !
Dr. Vig has performed extensive research on Lorcaserin and written several articles including a thorough update (January 2012).
Lorcaserin's eventual application is not only obesity. According to an article published in the Journal of Pharmacology and Experimental Therapeutics on 6/2/2011 Lorcaserin showed efficacy in decreasing nicotine use.
Aside from potential efficacy in smoking cessation Lorcaserin effect on the dopamine reward pathway may address other compulsive behaviors such as drug use, gambling, and sexual addictions.
Arena has met the FDA's categorical requirement for weight loss. In phase III studies, 47.5% of patients who took Lorcaserin lost at least 5% of their weight versus 20.3% for placebo patients. Of those completing the studies, 63.9% lost greater than 5% of their weight, 34.7% lost greater than 10% of their weight, and the top 25% lost over 16.7%. The average completer weight loss was 26 pounds or 8.2%.
It has been scientifically proven that even a 5% drop in weight can result in meaningful improvements in overall health.
Although the only adverse event that showed up more than 5% greater for Lorcaserin than placebo was a transient headache, the FDA had concerns about Lorcaserin's preclinical cancer research with rats. This issue was put to rest by Arena through an FDA approved study which indicated a large safety margin for humans. Malignant breast cancer was seen only at high dose Lorcaserin which was 82 times the human dose; no increase in malignant rat tumors was seen at 24 times the human dose.
Lorcaserin is in a unique position in contrast to Vivus and Orexigen in that there is no evidence that it raises heart rate or blood pressure.
It is very likely based on the discussion at Vivus' Adcom that Vivus will have to do a CV study. Lorcaserin trials already include (favorable) CV data. A slogan in the Arena circles these days is that "Lorcaserin is safer than Diet Coke"!
PHENTERMINE OR LORCASERIN?
In a recent research report Dr. Vig examined the safety profile of Lorcaserin in comparison with Qnexa by looking at the components of each drug in detail. He concluded:
If both Qnexa and Lorqess were available to me, there is no question that I would start with Lorqess in the vast majority of my patients, because of its better safety profile.
Post approval, Arena has a huge advantage over Vivus in that Arena's full manufacturing facilities are already set up (in Switzerland) to provide worldwide supply of Lorcaserin (brand named Lorqess).
These drugs are not necessarily competitors. Lorcaserin is a natural first choice due to its excellent safety profile. However, It is estimated that about 20-25% of doctors will also use Phentermine in conjunction with Lorcaserin, at least for up to 3 months.
I believe Arena's main challenge at the upcoming Adcom (10 May 2012) is communication and presentation. I believe there's plenty of evidence for the safety and efficacy for Lorcaserin but the science is very advanced and Arena needs to do a good job of presenting it in a simplified, streamlined, well organized, well articulated manner so the doctors who have not been following the company can fully understand it.
It is easy for scientists to delve into detail too quickly and lose sight of the big picture which should be presented up front and returned to throughout the presentation, and always come back to the two questions the panel is there to decide: does it work and is it safe, and spell out clearly the reasons why.
The proceedings of the 2010 Arena Adcom resulted in speculation of unfairness and possibly conflict of interest. The speculation that the FDA may have had a negative bias against Lorcaserin is argued in 14 points with the author's conclusion that "I believe the FDA was unfairly biased against Lorcaserin, and unfairly favored Qnexa … " While there are a few errors in this argument, a thorough analysis reveals that at the very least the FDA made the mistake of not having an oncologist on the panel. A review of the transcript of the Adcom indicates that some of the doctors were simply confused by the data because none were oncologists. Had it not been for this confusion the majority would have voted for approval.
Another public citizen voiced his concerns to the FDA in a Letter to Commisioner of FDA, Margaret Hamburg, M.D., asking seven critical questions around conflict of interest.
If we assume the FDA is impartial and Arena lays out clearly why Lorcaserin is safe, a positive vote and subsequent FDA approval is very likely.
The analyst Michael Murphy (Target $24), laid out the case for Lorcaserin's approval in a recent video. He spelled out his 5-Year revenue forecast in a Seeking Alpha article. His arguments are sound and scientific unlike tweets I have seen from Hedge Fund managers which bash Arena without any science to back it.
Arena's 2010 Adcom and allegations of conflict of interest is a painful reminder of Dendreon (DNDN)'s 2007 Adcom where the Adcom approved Provenge despite severe opposition specially by Drs. Maha Hussein and Howard Scher but the FDA went against the recommendation of the panel causing public uproar and accusations of conflict of interest:
Dr. Hussain, like Dr. Scher, should not have been on that panel because she, too, had ties to the Milken-invested Novacea.
Perhaps owing to those ties, both Dr. Scher and Dr. Hussain trashed Dendreon in "confidential" letters to FDA commissioners, letters which immediately were reprinted in a dubious publication called The Cancer Letter, causing Dendreon's stock price to tank, to the profit of those ten hedge fund managers who had had the "foresight" to place big long-shot bets against Dendreon.
Soon after, the FDA told Dendreon that it would not approve its prostate cancer treatment, sending the stock into the single digits, much to the delight of criminal naked short sellers who apparently knew the FDA decision was in the works and sold millions of phantom Dendreon shares in the days just prior to the decision becoming public knowledge.
The end result was that thousands of men died in the period it took Dendreon to perform a new trial and convince the FDA what the Adcom had already been convinced of. Since then the FDA tightened its conflict of interest regulations but are they tight enough? In a day and age when it is legal for hedge fund managers to get stock tips from members of congress, the government has to go the extra mile to ensure its agencies which are supposed to protect the public are not influenced by the interest of Big Pharma, powerful hedge funds, internal politics, favoritism, and advisory committee doctors who are not impartial.
Here's another interesting view on the contrast between Dendreon 2007 and Arena 2010's Adcoms: Reflecting on the Dendreon's Adcom the author wrote:
I believe that FDA learned well from the 2007 failure ... a certain powerfully influential FDA person indeed stacked the Dendreon 2007 Adcom meeting with 3 aggressively negative advocates determined from the outset to influence other panel members towards a negative view and vote regarding Provenge. They did their blatant best ... but alas, unlike with the recent Arena Adcom meeting, other fair-minded and principled FDA persons refused to allow it; in addition they were up against a strong assortment of informed and strong-willed specialists which refused to be influenced by their arguments. Lesson learned: Make sure your FDA 'team' is all on the same negative page ... and make sure you have few or no strong-willed specialists who have the ability or temperament to refute any negative bias or contrived science.
I disagree with the author that the FDA is internally undivided. My perception is that just like most large entities the FDA itself has internal divisions and power plays; where there's people there's politics.
I do believe the FDA has learned through the experience of Dendreon 2007 and Arena 2010 Adcom fiascos and has grown and refined as a organization whose agenda is solely to protect the public.
I also follow Avanir (AVNR) closely and Avanir has gone through its own share of doubters, heavily shorted stock, message board bashers, and even a doctor or two who appear to be batting for the short interest. Avanir did manage to get Nuedexta approved just as I expect Arena will manage to get Lorcaserin approved despite all the naysayers who bet heavily against approval.
Despite approval the naysayers have continued their attacks. Recently, in response to a naysayer, a.k.a. a "basher" a doctor wrote on an Avanir stock message board something which perfectly applies to analysts and short sellers who either do not see or choose not to see that Lorcaserin is both efficacious and safe and that Arena has a very good chance of getting approved on or before June 27, 2012. The doctor wrote:
I am an educator and enjoy enlightening those who cloak themselves hubristically in the bias of the dark ages. And speaking of the dark ages, remember what has been said of them: "an age is called dark not because the light fails to shine, but because certain individuals fail to see it."
I expect a short squeeze for both Arena and Avanir.
HEDGE FUND SHORTS AND THE FDA
Dendeon and Avanir both received approvals despite the very high short interest and negative propaganda against the many doctors who follow the Arena story closely and are well versed in Arena's technology are confident in approval. In a recent email a doctor wrote to me:
I am confident that Lorcaserin will go thru the advisory committee this time and will get full FDA approval on or before 6.27.2012 (the PDUFA date).
With some exceptions, Wall Street on the other hand seems to have either not understood the science, or has decided to ignore it. Mark Allen recently wrote:
It is easier to manipulate stocks than actually pick winners based on the science. If your caught on the wrong side you can call the FDA and request they not approve a drug. Happened with ARNA and MNKD.
Piper Jaffray is optimistic about approval and in a note to clients expressed confidence in the data and cited improvements in the regulatory environment for a variety of reasons including the directive from the Senate Appropriations Committee to the FDA to report on steps to support obesity drug development.
Jefferies' Thomas Wei on the other hand has remained pessimistic. His ridiculously low price target reminds me vividly of Jonathan Aschoff, the Brean Murray's analyst who had a similar target prior to Dendreon's Adcom. In a phone conversation with Ashoff prior to the Dendreon Adcom I asked him if he has clients who are short Dendreon and he said yes. That pretty much explains it!
Another similarity between Arena and Avanir is bearish sentiments by the hedge fund manager Martin Shkreli. A Seeking Alpha article contrasts Shkreli's senseless, disparaging comments on Avanir's patents with statements from several credible sources who oppose Shkreli's views. Nothing has been announced since three months ago when his assistant said he will announce his charity contribution which he promised to donate half of his gains from shorting Avanir (which since then he's covered). I followed up with him and today he emailed me that "this kind of gift requires a large number of lawyers and media groups to work most effectively". Seeing is believing.
In a recent tweet he spoke against Arena and said "i will speak my mind!" which is understood by some to mean he will try to influence the FDA and the Adcom by speaking against Arena's approval. In his email today he said "I will most likely not speak due to other engagements". He's lobbied the FDA in the past against approval. If a short seller lobbies a regulator against approval it's not odd to assume his motive is probably profit!
If Shreli represents the mindset of the shorts in general the good news for Arena's shareholders is that shorts already know safety is not an issue. So shorts are now concentrating on attacking efficacy. Again the good news for Avanir shareholders is that efficacy meets FDA's own guideline. Short sellers can always argue that FDA's guidelines are not correct but that would be a steep long uphill battle. Arena has scientifically proven that Lorcaserin is significantly efficacious (see Efficacy section above). The science is clear and firm.
In his email he bragged about "routinely buy[ing] more than 5% of public companies" (like I routinely buy organic fruits) but he's bet against Arena because he thinks the efficacy is marginal and that "the safety is still unclear". The science is there. Many doctors and scientists who've looked at the data have concluded the efficacy is significant and the safety is very clear. Is Shkreli's team of "several PhD/MD... and 100 years of collective investing experience in the FDA process" must not have figured it out yet which is not strange given how complex the scientific data is.
One key point that short sellers who stop to think about morality miss is that expression of opinion about a short or long position is not always simliar in nature. Short sellers often twist facts. Short selling is not wrong in itself but as one SEC commissioner phrased it "short and distort" is ethically wrong yet it seems to be an essential part of many short strategies as Jim Cramer (Shkreli's former employer) stated:
What's important when you're in that hedge fund mode, is not to do anything remotely truthful, because the truth is so against your view that it's important to create a new truth, to develop a fiction.
What is important for Arena management in their presentation to FDA is to make sure the enemies are called out. Their opening statement should shed light on people like Shkreli who may speak at the Adcom not because of love in their hearts for obese people but because of their desire for profits. That should at least put the hedge funds' statements in perspective. Or shorts may wisen up and cover but given the large short position in both Arena and Avanir that won't be easy without a significant rise in the share price and likely, a short squeeze.
A group of medical doctors and others have created a grass-roots Petition to "Commissioner Margaret Hamburg, Food and Drug Administration: Approve the weight loss drug Lorcaserin on June 27th, 2012". Another extensive Citizens Petition has just been formally filed with the FDA. More petitions are expected from proponents of Arena just as in the case of Dendreon, by patients, those who have loved ones who are patients, doctors, scientists and concerned citizens who have followed the progress, and investors who have supported innovations that bring health and a better life to our fellow humans, at a grass-root level.