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  • Arena's Potential is Still a well-kept Secret 9 comments
    Jul 23, 2010 5:29 PM | about stocks: ARNA, VVUS

    Since the July 15th Advisory Committee meeting to review Vivus’ Qnexa weight loss drug, the market has started to reevaluate the other two biotechs in the space with their own weight loss drugs going through the FDA.  Whereas the Street was previously blinded by Qnexa’s impressive weight loss, the Market now recognizes what we have been saying all along, that the most important aspect of a weight loss drug is Safety.  Arena’s impressive trials with 7,000 patients, echocardiograms and 2-year data set should be what the Advisory Committee set to review Lorcaserin on September 16th is looking for, along with the FDA.

    Lorcaserin has ‘modest’ weight loss with the average being 17lbs or 8% of body weight.  For many patients that will be plenty but it is still way less impressive than Qnexa’s high dose weight loss of 37lbs or over 14% of body weight.  Granted, it is unfair to compare the two because they were completely separate trial designs with separate patient profiles.  However, the Street typically doesn’t look at the details, just the Headlines.   Now keep in mind that Lorcaserin had similar weight loss to Qnexa mid-dose and superior weight loss to Qnexa low-dose.  Qnexa’s key weight loss component was the Phentermine part of the combination.

    Once approved, Lorcaserin as a mono-therapy will be what most prescribers give their patients.  If is very safe, tolerable, a single-agent and has good efficacy.  This will be exactly what a majority of patients will need.  What about those morbidly obese patients that may need lose a lot more weight?  The same type of patient that would be a target for Qnexa high-dose?  After all, a whopping 9M patients undertake bariatric surgery every year!

    That is where a likely Lorcaserin-Phentermine (LorPhen) combination will come in.  Think of LorPhen is a very safe version of the famous FenPhen diet pill.  Lorcaserin is the first selective class of serotonin 2C receptor agonist, which is closely tied to feeding behavior and satiety.  Fenfluramine, the Fen part, was a non-selective serotonin agonist which also affected the 2B receptor found in the heart.  This led to heart valve damage and is why it was pulled from the market.  Lorcaserin is 100X more selective for the 5HT2c receptor than the 5HT2b receptor that causes heart damage.  To scientifically prove that Lorcaserin does not cause heart damage, Arena undertook the largest echomonitoring study ever conducted for a weight loss drug and proved that Lorcaserin does not raise the risk of valvulopathy.  This will be a key discussion point in Arena’s September panel.

    So what kind of efficacy could one expect with a LorPhen combination?  Well, nobody knows for sure but it would be a good hypothesis to conclude that it would have at least as good of weight loss as FenPhen had, which was over 31lbs.  In fact, I expect when physicians start prescribing low-dose Phentermine with Lorcaserin, you will see greater weight loss than Qnexa high-dose because of Lorcaserin’s selectivity of 5HT2c.   The key to a LorPhen combination is that it will bring about huge weight loss quickly, but a patient will be able to transition to a strictly Lorcaserin single agent for maintenance.   In practice, you may see a physician start with just Lorcaserin, add on low doses of Phentermine in the morning for a few weeks to speed weight loss then back to just Lorcaserin for maintenance.  Some patients will need to be on Lorcaserin for the rest of their lives to keep the weight off if they are not able to adequately change their eating habits.  When a patient hits a wall in their weight loss, the physician would begin to add Phentermine for a number of weeks again.

    Arena in fact has performed tests of the combination on rats with very impressive results and owns the patent for a Lorcaserin and Phentermine combination.  The drawing below from a patent filing show graphically the impact to feeding on rats after taking Lorcaserin-alone (called Compound in the patent,)  Phentermine-alone or a LorPhen combo.

    Patent on LorPhen

    You can see the impact of the combination is approximately 6X more potent than Lorcaserin alone.  In practice, that would indicate an average weight loss of 40-50lbs!  Far more than the average person will need to lose.

    The key to this is Lorcaserin on its own is a great drug.  It will take off enough weight for the majority of patients.  It improves a number of health indicators such as BMI, Waist Circumference, Cholesterol, Blood Pressure, Heart rate and glucose.  This is all that most patients will need.  Others may need a LorPhen combination for some period of time.  That patient can then go back to Lorcaserin to ensure they keep the weight loss off.

    The value of Lorcaserin is mind-boggling.  As Time Magazine reported in a cover story entitled “The New Miracle Drug?” they state that "Just three months after the introduction of Redux, doctors are writing 85,000 prescriptions a week."   You cannot underestimate the demand in America, in fact the World, for a Safe and effective weight loss drug.  18M prescriptions were written for FenPhen combinations in 1996 prior to it being pulled.  The market acceptance will be fast and furious. 

    I created a valuation model as a demonstration previously that you can read on Seeking Alpha here:  seekingalpha.com/article/205082-is-arena...

    I have not updated it to account for the Eisai partnership and royalties.  However, for a quick and simple revenue estimate, lets me show some numbers based on FenPhen sales alone.

    Each patient will take 2 pills of Lorcaserin a day if on it as a mono-therapy.  How a physician prescribes Phentermine is up to them and will not impact Locaserin sales.  Mid-range estimate per pill is $1.50, which equals $3 per patient per day.  365 days a year x $3 = $1,095 per patient.

     

    Using 18M prescriptions for FenPhen were written in 1996 but that equates to about 6M patients.

    6M x $1,095 = $6.57B in potential annual sales very quickly after launch.

     

    Using the 85K new prescriptions a week scenario to calculate market adoption:

    85,000 x 52 wks ($1,095) = $4.8B in sales within 18 months of launch with a similar adoption rate.

    The total market is really a guess.  There are at least 68M overweight Amerians and there are 17M Type II Diabetics.  As evidenced by FenPhen's quick success in the maket, the adoption of Lorcaserin and LorPhen will be quite fast. 

    The market is finally starting to recognize the potential for Lorcaserin.  I believe ARNA could reach $10 a share prior to their September panel, which is a similar market cap to VVUS before their panel.  A positive vote by the panel will send it to the high teens and then FDA approval into the 20’s.  The revenue potential is mind boggling.  Eisai made an excellent deal with Arena and the reward will be great for both companies.  If Arena reaches anywhere close to the same success as FenPhen had in the market, Longs will be richly rewarded.



    Disclosure: Long ARNA
    Stocks: ARNA, VVUS
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  • in4thelonghaul
    , contributor
    Comments (313) | Send Message
     
    Outstanding article.

     

    A post on the YHOO ARNA board has indicated that if one assumes only $ 9 billion in sales, instead of the possibly $18 billion alluded to in the article, this would be roughly $3.25 billion in revenue to Arena's bottom line. If one then considers that Celgene @ $53 p/sh, with sales of near $3 billion and over 450 million shares out, compared to Arena's 100 million - one could then roughly extrapolate a comparable sh/pr for ARNA of around $200.

     

    Of course this isn't exactly 'apples to apples', as CELG has roughly $6.50 in cash, but it is close enough to realize how undervalued Arena shares are at $6, and what the true potential for share price appreciation, assuming Lorcaserin approval, is eventually for Arena; again this is based on just $9 billion in sales, not the $18 biillion alluded to in the article.

     

    Assuming no major setbacks and successful Lorcaserin adoption in the marketplace, I can see shares of ARNA easily racing past $60 after a few years on the market...even exceeding $200 if Arena stays independent and Lorcaserin proves as popular as phen-phen was at one time.
    23 Jul 2010, 06:31 PM Reply Like
  • John Tucker
    , contributor
    Comments (400) | Send Message
     
    I think the key question here is how to best extrapolate from historic Fen-Phen prescription rates (18M/year) and more recent phentermine prescription rates (2m/year) to lorcaserin sales.

     

    The 85% or so drop in sales experienced by phentermine since 1996 has at least two possible explanations:

     

    1. Patients decided if they could not have the extra weight loss associated with the two drug combo, they were not going to use any weight loss product at all. They will rush back to weight loss drugs as soon as they are able to reproduce the Fen-Phen combo without the heart valve issues, and we will once again have 10% of the US population on weight control drugs.

     

    2. Patients and physicians have become much less casual about taking prescription drugs in the aftermath of the highly-publicized cardiac safety issues with Fen-Phen, suicidiality issues with antidepressants, increased cardiovascular risk with Vioxx, Avandia and hormone replacement therapy, etc, and only the most extreme obesity cases are now being treated pharmacologically. The market for lorcaserin will consist of the 50% or so of current phentermine users who are interested in adding a second weight loss drug.

     

    The reality almost certainly lies between these two extremes, but I suspect it is a lot closer to #2 than #1.
    24 Jul 2010, 10:15 AM Reply Like
  • Aaron Parker
    , contributor
    Comments (99) | Send Message
     
    John Tucker, prescriptions for Phentermine have dropped off in my opinion for a 3rd reason - because after the FenPhen debacle the FDA put a much stricter label on the Phentermine box. The label indicates Phentermine should be used as a Monotherapy, for patients with BMI over 30, and I quote "short term therapy (a few weeks)" and also says in the warnings that they cannot rule out heart valve problems such as PPH and VHD. This is much more strict than it was before FenPhen was pulled in 1997.

     

    But now the FDA looks prepared to approve Qnexa, which is a long term Phentermine plus Topiramate combination pill. How will the FDA handle this dichotomy where Phentermine has an indication for monotherapy, and an indication limited to short term use, but in Qnexa suddenly combination therapy is allowed for years? If they don't update the label they at least create a credibility gap and the door opens a little wider to more frequent Phentermine use.

     

    Yes doctors are more concerned about giving prescription drugs and so too are the patients, but if you look at the obesity support groups you will find many patients are upset that their doctors are limiting the use of Phentermine - they want to take more of it. The doctors are the ones primarily limiting it. But with 2 or 3 new drugs on the market in the next year or so, we will soon see more specialists and more clinics devoted to personalized weight loss treatment, and from there these techniques will spread to the GPs in time.

     

    In summary I think the author here has it 100% right. Opening the door to long term Phentermine use with Qnexa will also open the door to cyclical Phentermine use with Lorqess. Doctors will see the safety profile of Lorqess and offer long term Lorqess use while also cycling Phentermine on and off: Lorqess for long term weight loss and maintenance, and Phentermine to push the weight loss as needed when a loss plateau is achieved. The key here is cycling Phentermine on and off as needed on top of Long Term Lorqess treatment, and I believe this is a safer, more tolerable and more responsible treatment modality than long term Qnexa could hope to be.
    12 May 2012, 05:08 PM Reply Like
  • in4thelonghaul
    , contributor
    Comments (313) | Send Message
     
    Response to John Tucker, PhD -

     

    Of course 'best' case scenario is roughly the 10% US population you alluded to, all on Lorcaserin - however, that would be over 30 million scripts, which I think is a stretch; considering the percentage of obese Americans, maybe not though.

     

    Obesity rate among US children is apparently 17%, and I am not certain whether Lorcaserin will be approved for use by those under 18 yrs of age. I agree that, and wisely so, the US population may have become much more cautious regarding taking drugs in general; so overall adoption may be lower, and rate of adoption may be slower than some are expecting.

     

    Statistics seem to indicate 34% of US population is obese, but instead of roughly 110 million, lets back out say 17 million children, which leaves us around 95 million obese adults. Further, to be conservative, let us say the adult obese population in America is only 90 million - this is a figure I have run across in the past I believe.

     

    It seems reasonably conservative, that once approved and marketed for awhile, Lorcaserin could expect to capture maybe 10% of this target population in any given year. This would be approx. 9 million prescriptions per year. I doubt Lorcaserin will be available for less than $70 per month - the author projects a monthly prescription price of approx. $90. Here alone we have between $7.5 billion and $9.7 billion in sales - Arena is to receive 31.5% of Eisai’s annual net product sales, and the purchase price will increase on a tiered basis to 36.5% on the portion of annual net product sales exceeding $750 million. So we have over $2.5 billion coming to Arena if we go with the more conservative figure of $70 per month for Lorcaserin.

     

    Figuring roughly 25 million adult Americans with diabetes, of which approx 50% are obese (50% of men, and 70% of women), and of course under the care of a physician - one can assume the physicians treating these individuals will be especially motivated to propose Lorcaserin relatively quickly following approval - here we have a target population of over 12 million Americans for whom Lorcaserin use may become the standard of care. These people aren't just obese, but they are obese diabetics who are well aware of the serious nature of their disease and cognizant of the increased health complications their obesity entails.

     

    Then there are the roughly 90 million Americans who aren't technically obese, but are 'just' overweight. All things considered, including the epidemic nature of obesity in America and the resultant associated medical costs involved - 15 million scripts per yr. doesn't seem unreasonable. At a conservative $70 per month, 15 million prescriptions equates to roughly $12.5 billion in sales. At the higher figure of approx. $90 per month, the yearly sales are roughly $16.5 billion. Per Eisai partnership agreement, this equates to somewhere between roughly $4.5 billion and $6 billion to Arena's bottom line. Even if these figures are 50% too optimistic, we have from $2.25 to $3 billion in sales to Arena just from U.S. sales - of course there is the potential for sales to the rest of the world yet to be considered.

     

    Any way one looks at it, shares of Arena at $6 still represent one of the few easily recognizable potential 10-baggers out there right now. As per my earlier comment, if one just extrapolates the current share price of CELG, with a bit under $3 billion in sales, to Arena with $3 billion in sales - one could assume a share price for Arena of somewhere in the vicinity of $200.
    24 Jul 2010, 05:31 PM Reply Like
  • John Tucker
    , contributor
    Comments (400) | Send Message
     
    ITLH, I wish you luck and hope you are right.

     

    I agree that lorcaserin has the best shot on goal for approval at this point, and think its odds are better than even. The decision to run huge clinical trials for 2 years is looking pretty brilliant at this point. Its commercial prospects have picked up considerably now that Qnexa is unlikely to be approved in the US (I never thought Qnexa had a chance in the EU, where the EMEA has pulled phentermine off the market). I think they got a pretty good licensing deal too. ( I don't think that ARNA management really cared about getting money upfront, as they will go bankrupt in any case if Lorcaserin is not approved).

     

    I think my argument for a more modest market penetration than you and the author propose comes down to the following points, which I am sure you have already considered and reached a conclusion different than my own. 1) Modest efficacy, 2) Lack of reimbursement, 3) Less than outstanding annual sales for Meridia, which until the SCOUT trial results were announced this year, was considered pretty safe also, 4) an increasingly negative public perception of the risk/reward ratio of pharmaceuticals, and 5) (This may sound petty), I'm not aware of any $5B per year drugs that require BID dosing. My best guess for annual sales is something on the order of $750M, but its a real crap shoot at this point and the analyst estimates are all over the place. I felt that the author's argument that the ability to combine this drug with phentermine will drive sales into the 6M patient range was unsupportable given that phentermine is available now and only about half a million patients are using it.

     

    The other issue that has kept me from buying in is the large number of outstanding warrants and relatively high debt of the company ($90M to Deerfield and $160M in "financing obligations" in the footnotes to their balance sheet that revolve around a set of real estate financing deals that I don't entirely understand. Obviously one's concern with these will be highly dependent on one's expectations for lorcaserin sales, and in my scenario, the debt eats up the first 2 years's royalty payments.

     

    Good luck with your investment. I hope it works out.
    24 Jul 2010, 07:50 PM Reply Like
  • PhillyDan
    , contributor
    Comments (418) | Send Message
     
    @Dr. Tucker

     

    The debt to DF is paid off in installments and will be completed in July of 2013. The real estate financing deals is where Arena sold some of their real estate to a Commercial Real Estate leasing company and leased back those that real estate (land and buildings) for an extended period of time.

     

    In addition, what is overlooked is the carry forward losses that Arena has accumulated and that will be used to offset any U.S. taxes on earnings for at least 5 to 7 years. They also will receive preferential tax treatment from Switzerland for their manufacturing facility.

     

    Remember that 25% of the top responders in the Bloom and Blossom studies lost 16.4% of their weight, with the average being 35 pounds. The top 35% lost 10% or more of their weight. In my opinion that is significant weight loss.

     

    Who said there will be lack of reimbursement? That is still to be determined. When the Bloom-DM results are announced and published, I predict they will show very good improvements in a number of secondary endpoints for type II diabetes patients. Remember Bloom-DM has 604 patients enrolled, all with type II diabetes. Although Ed Sussman, Medical Writer for Medpage is
    only one data point, he lost over 52 pounds and stopped taking several of his type II diabetes meds and HBP meds due to his weight loss. He was in the Bloom-DM study and one of the early completers.

     

    My point is that Arena will file a supplemental NDA for the Bloom-DM studies which has been communicated with the FDA when the study started. In that NDA, they will ask for approval of Lorcaserin for the indication of treating type II diabetes. Certainly, if that second indication is approved, reimbursement in my opinion will not be a problem.

     

    Regarding safety, the Bloom study design was done in part by the renowned Dr. Neil Weissmann, and expert on Valvulopathy, Pulmonary Hypertension and Echocardiographic studies. In his 1997 study of Fen-Phen(DEX) with over 1200 patients, those who developed valvulopathy issues did so within 3 to 6 months of taking Fen-Phen (Dex). The DSMB did not detect any "V" issues in patients in the Bloom study after 12 months. We know that the Bloom study went for two years. The second year also showed no "V" issues compared to placebo. In addition we know the Blossom study confirmed that and in fact that study did not exclude patients with "V" problems. The Bloom-DM study also did not exclude patients with "V" problems.

     

    My projection is that Lorcaserin, once approved will over a three to four year period will develop into a one billion plus sales obesity drug in the United States and will do over $600M+ in the ROW.
    28 Jul 2010, 06:43 PM Reply Like
  • John Tucker
    , contributor
    Comments (400) | Send Message
     
    PhillyDan, your comment regarding the tax loss carryforwards is an excellent one.

     

    At $1B US sales and $1000 per year per patient I come up with 1M patients US or about 4M prescriptions per year. Meridia is a reasonably safe drug (was thought to be very safe until recently), but generates about 100K prescriptions per year, about 1/40th of what lorcaserin needs to sell in order to make $1B per year.

     

    What are your thoughts on this?
    29 Jul 2010, 02:09 AM Reply Like
  • John Tucker
    , contributor
    Comments (400) | Send Message
     
    Apologies Dan, the previous post should read 400K prescriptions per year for Meridia, which is 10% of what lorcaserin would need to achieve.
    29 Jul 2010, 01:49 PM Reply Like
  • Aaron Parker
    , contributor
    Comments (99) | Send Message
     
    I agree with PhillyDan, and believe after approval ARNA will work on a larger Type 2 Diabetes maintenance trial, perhaps something in the order of 3 arms - borderline patients, full fledged patients, and placebo. The goal here would be to see a) can we keep a larger enough % of people who are borderline from crossing over to T2D, b) can we revert a large enough population of T2D patients back to normal and/or off other meds (considerable savings, even though the FDA supposedly doesn't consider cost in its decision making process "curing" diabetes for some is a very important life saving goal).

     

    The talk of LorPhen is exciting, but I do not think ARNA will jump right into this kind of trial. I think doctors will do it - they will stick closely to the Phentermine Label, with the slight exception of layering it on top of Lorqess for a few weeks every few months as needed to push the wt loss envelope.

     

    As PhillyDan noted, Lorqess is very effective in the top 25% of people who take it. I suspect but don't know for sure that these top responders are the highly motivated people,people who are working wt loss programs like Jenny Craig, Weight Watchers and Nutrisystems etc and doing their exercise or similar diet/exercise regimens along with Lorqess.

     

    So I suspect that the advent or Lorqess will see a renewed boom (it is already booming!) in the entire wt loss industry. Get on a diet program, join a gym, take Lorqess and then for the truly needy take a little Phentermine on and off as needed.

     

    I truly think this drug will be a blockbuster.

     

    And if a T2D label expansion is added, it will likely receive drug insurance reimbursement and blow the market potential open to tens of millions of additional patients. I don't really want to guess at how many people will take it or what the sales will be but at its peak (which was cut short) AHP's version of FenPhen did 200,000 scrips a week. This does not count all the additional generic combinations also sold at the time. The market is bigger now, and I think the demand is higher not just because obesity rates have climbed but because the entire wt loss industry has grown to include more gyms and more food service companies to complement these new medications.
    12 May 2012, 05:29 PM Reply Like
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