Obesity, Heart Disease And Diabetes - A Biotech Triumvirate To Profit From Healthcare Mega-Trends In The Medium Term

Includes: AMRN, ARNA, MNKD
by: Red Acre Investments

Obesity, heart disease and diabetes together constitute a healthcare mega-trend that promises many profitable stock investments for the next 25 years. Our picks in the medium term in this space are Arena Pharmaceuticals (NASDAQ:ARNA), Amarin Pharmaceuticals (NASDAQ:AMRN), and MannKind Corporation (NASDAQ:MNKD).

Arena is by now a household name following the June 27th FDA approval of it's anti-obesity drug candidate Belviq. Arena will face competition in the form of Qsymia from rival Vivus Pharmaceuticals (NASDAQ:VVUS), but our view is that Belviq's better safety profile coupled with moderate weight loss and a strong marketing partner in Eisai will result in a market winning combination. There are two things that many analysts have not factored in to their published projections:

  1. The increased efficacy that doctors can dial in for specific patients by co-administering phentermine with Belviq. This has not been tested in clinical trials but that won't stop obesity doctors from initiating those kinds of trials. Look to the likes of Dr. Ed Hendricks, who sat on the FDA advisory committee, and Dr. Najarian, the inventor of Qsymia, as early adopters of a BelPhen combo.
  2. The diabetes implications of Belviq. In the BLOOM-DM trial, diabetics who took Belviq not only lost weight, but also saw dramatic reductions of 0.9% in glycated hemoglobin or Hba1c. This performance is more than double the result from weight loss alone and is on par or better than many of the oral anti-diabetic medications currently in use. Doctors we've interviewed who know the space suggest that Belviq will eventually become the best second-line treatment for diabetes after Metformin. ARNA is clearly aware of the diabetic implications of Belviq, as evidenced by the fact that they are presenting a talk entitled "Lorcaserin: Anti-Obesity Drug? and Anti-Diabetes Drug Candidate" at the 10th Annual Discovery on Target Symposium on Diabetes Drug Discovery (pdf). Given that Eisai is starting its marketing efforts with specialty doctors and endocrinologists we expect rapid uptake in the diabetic community. Shares are undervalued by at least 100% in our view based on a 12 month time horizon.

Amarin is developing AMR101 for treatment of very high triglycerides and eventually for high triglycerides as well. AMR101 is a highly purified formulation of Eicosapentaenoic acid (EPA) derived originally from fish. Glaxo (NYSE:GSK) has a competing product, Lovaza that is a blockbuster status drug; however, Glaxo's drug can raise LDL cholesterol levels whereas AMRN's drug does not do so. AMRN's drug will have an expanded label compared to Lovaza once the ANCHOR trial results (in high triglyceride patients) are accepted by the FDA. The real prize for AMRN however, is the REDUCE-IT trial. This trial aims to show superiority of ARM101 in terms of cardio-vascular outcomes. The REDUCE-IT trial was designed based on a similar trial in Japan called JELIS which showed superiority of EPA in preventing cardio-vascular events. If this trial turns out positive, AMRN might just be the biotech stock of the decade as the sales potential would surpass Lipitor. This Seeking Alpha article provides a great overview of Amarin's drug candidate. ARMN has an FDA approval decision on July 26th. We do not recommend trying to get in to ARMN until after the decision unless you can catch a bear-raid in progress. The likely selling pressure from momentum players exiting the stock after the decision will offer a great entry point. In the medium term, if AMRN can land a marketing partner, they will do well.

There is much speculation regarding a possible buyout of AMRN which could fuel the share price going forward; however, there is potential downside here as well. In 2010 Savient (OTC:SVNT) tried the strategy of suggesting that a buyout was their go-forward commercialization plan. After approval of their gout drug, Savient stock soared to $20 per share fueled mainly by buyout speculation. When SVNT finally announced that they would be marketing the drug themselves, the share price got cut in half in a single day and has gone downhill ever since, recently trading for 52 cents. We hope AMRN management will not announce a go-it-alone strategy for AMR101. Look to the post-approval conference call for initial details on their go-forward plan.

Mannkind had a lead product candidate called Afrezza, which is an inhalable ultra-rapid-acting insulin. Afrezza is not remarkable because it is inhaled, but rather because the pharmacokinetics of the drug mimic the insulin response of a healthy non-diabetic person. The insulin from Afrezza peaks about 15 minutes after dosing, and is cleared from the body within 90 minutes. This makes a huge difference in quality of life for diabetics. Not only does it reduce the number of insulin shots they have to take, but their meal planning can be simplified (Al Mann predicts that carb counting will become unnecessary once doctors learn how to prescribe Afrezza correctly) and risk of hypoglycemic events will also be reduced. For a primer on mealtime (postprandial) insulin response, see this link.

MNKD has fumbled their NDA approval process in the past by trying to switch devices mid-stream where they used one inhaler for the clinical trials and tried to get approval to go to market using another, more efficient design. The FDA dope-slapped the company and told them to do clinical trials on the inhaler they will actually market - primarily because the new device uses 30% less Afrezza insulin powder than the old device. Since the active drug is insulin, nobody expects the trials to fail; but, the interesting point is that MNKD has one of the clinical trails geared to demonstrate superiority over existing standard insulin therapy. Afrezza is a game changing technology and the new clinical trials could possibly make it a first-line therapy for insulin naive type 2 diabetics who have been allowing their blood sugar to go uncontrolled because they don't want to take injections. Furthermore, the technosphere drug delivery platform, once approved with Afrezza, is an attractive asset as its new dosage form with improved pharmacokinetics can potentially breath new life into many patent expiring drugs in the pipelines of big pharmaceutical companies. This blog keeps pretty good track of all of the Afrezza developments.

The primary headwind for the company is that they do not have enough cash to last until their likely FDA approval date in late 2013 or early 2014. Shorts have been piling on ever since the last CRL (FDA rejection); however, betting against Al Mann is a foolish idea. Mann is a billionaire who successfully developed and sold a previous diabetes related biotech company, Minimed - a maker of insulin pumps, as well has having founded several other companies. Earlier this year one of his companies, Stellar microelectronics, was sold to Flextronics with the transaction completing in April of 2012. Terms of the deal were not disclosed but Stellar has annual revenues of some $100 million so clearly Alfred Mann has some new liquidity which could be a recipe for disaster for MNKD shorts if he decides to extend a further line of credit to MNKD.

We recommend scaling in to a position in MNKD over the next 3 months. When MNKD does announce a secondary or other financing, the stock will slide possibly to under $2 per share. This should be viewed as a buying opportunity just as it was for ARNA. On the flip side, waiting for the financing to buy-in carries the risk that MNKD announces a partnership for Afrezza that has a significant milestone payment which gets them through to approval. Such an announcement would lead to an immediate multi-bag upswing in the stock price. We see the MNKD stock chart of late 2013 to early 2014 being a replay of the ARNA chart from earlier this year.

Disclosure: I am long ARNA, MNKD.

Additional disclosure: Author may initiate a long position in AMRN within the coming week.