Cramer has set the stock of Orexigen (NASDAQ:OREX) a-percolatin' with his opinion that the FDA will approve its weight-loss drug Contrave. On Tuesday night, he was stumped by a question about this small pharma, and then as he promised, he (and, presumably, his team) did his research and came back Thursday night with this call.
Cramer's basic summary of the case for obesity drugs is fine, and I agree that Contrave's chances for approval are excellent. But for ages I have been arguing that there is little point in putting all your money on one late-stage weight-loss drug when there are three good candidates to choose from, all due to submit NDAs for FDA approval within about six months of one another: OREX's Contrave, Arena Pharmaceuticals' (NASDAQ:ARNA) lorcaserin and Vivus, Inc.'s (NASDAQ:VVUS) Qnexa.
Incidentally, why Cramer or anyone else would think that Contrave is getting to an NDA before anyone else, rather than last as the three companies are all saying, is a mystery. Believe this guy who says he just heard of the company on Tuesday, or believe me who's been paying attention to it for a couple of years. (However, Cramer is lots richer and more famous than me, so you could argue he must be doing something right.)
Approval risk is highly unpredictable and not to be underestimated, particularly in the case of small pharma companies whose fortunes often rise and fall on the fate of a single drug.
For example, take Savient Pharmaceutical's (OTC:SVNT) late-stage gout drug candidate Krystexxa. Like obesity -- or, for that matter, Cramer -- gout, a joint inflammation, is yet another baby boomer demographic play. Gout is on the rise due to an aging and increasingly overweight population, but Krystexxa would have an orphan designation.
On June 16, a non-binding but important FDA advisory panel voted 14-1 to approve Krystexxa. The share price leapt from almost $6 in early June to $15.59 on July 31.
Let's recap what analysts were saying about Krystexxa as it headed toward its FDA decision (the technical term for this is "PDUFA," pronounced "Puh-DOO-fuh") date in late July:
Cowen & Co. gave Krystexxa a 70% to 80% chance of approval, which would have been roughly in line with the 18% short interest at the time, except that the other 20% to 30% was assigned to a complete response letter "needing maybe a couple of months" to address. "Although investors have learned to exercise caution ahead of most regulatory milestones, we see little downside in SVNT shares."
Wedbush Morgan simply noted that since the FDA has missed more than 60% of its targeted decision dates, any minor delay would trigger a buying opprtunity if the stock price then declined. In other words, basically, no significant downside. They projected $400 million in peak annual Krystexxa sales, a likely acquisition, and an acquisition price upwards of $20 a share.
These comments were in the WSJ here, and in Reuters under the headline: "Marketing, not approval, a worry for Savient gout drug." Well, maybe that was the headline writer's fault, but it still is a bold statement -- overly bold, as it turned out.
On August 2, SVNT received not the expected approval, but a letter from the FDA including concerns that when manufactured in larger quantities for marketing, the product could differ from that made in smaller batches for the clinical trial. The company plans to resubmit its application in early 2010, and hopes for a decision two to six months later.
Most investors counted all that as closer to a year delay than "a couple of months," and sent the stock back down to $12.80 per share -- hardly the dog house, which would have been back around $6, but still not close to that $20 per share either.
The point, again, is that approval risk is highly unpredictable, particularly in the case of small pharma companies. Even when approval is simply delayed, that gives competitors more time to get to market.
I think Contrave is a great drug, I've always liked Orexigen management, and I fully expect to see OREX submit an NDA for Contrave in the first half of 2010 and receive approval ten months or so (the FDA is, indeed, missing a lot of its target dates) later.
But why take my word for it, or Cramer's for that matter? FDA is not likely to ask our opinions. A better risk-adjusted strategy is to put together a basket of late-stage weight-loss drugs: OREX's Contrave, Arena Pharmaceuticals' (ARNA) lorcaserin and Vivus, Inc.'s (VVUS) Qnexa.