Arena's Edge in the Obesity Drug Race

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Includes: ARNA, OREX, VVUS
by: Beacon Asset Managers

As the U.S. obesity epidemic grows ever bigger–pardon the pun–with aging Baby Boomer and Generation X waistlines expanding and record numbers of obese Gen. Y children burgeoning into adulthood, three companies are vying to become first to market with potential blockbuster-status weight loss drugs. Arena Pharmaceuticals (NASDAQ:ARNA), Orexigen Therapeutics (NASDAQ:OREX) and Vivus Inc. (NASDAQ:VVUS) are in play with weight loss drugs in late stage clinical trials, but all face hurdles in their quest for regulatory approval and it remains unclear whether a “blockbuster” victor may emerge.

While we believe that ARNA and OREX are heading to a photo-finish for regulatory approval, ARNA should have the edge based on safety. Meanwhile VVUS, which will likely cross the line for regulatory approval for its compound, faces the biggest stretch in making it an actual commercial winner.

Finding a weight loss drug that safely sheds pounds without causing dangerous or embarrassing side effects has long been a holy grail for many drug developers due to the potential for astronomical profits. Several weight loss drugs have been approved over the years for sale by the U.S. Food and Drug Administration (FDA), but their numerous side effects and limited weight loss gains have precluded any of them from gaining anything close to blockbuster status.

Orexigen on July 20 released results from three Phase III clinical trials of its weight loss drug Contrave that met its primary goals and surpassed FDA requirements for efficacy. The company reported that roughly 50 percent of the patients in the 56-week trials reported weight losses of at least 5 percent and that the mean weight loss was around 8 percent. While OREX said the data showed that Contrave is safe, side effects included two cases of gallbladder infection, two seizures, a report of heart palpitations, a case of poor circulation, and one of vertigo. Commonly reported side effects were nausea, constipation and headache.

Despite the side effects, investors bid the stock price up as much as 65 percent during the week, reaching a high of $9.32 before settling in at $8.33 at Friday’s close. Investors‘ confidence was boosted by the fact that Contrave met a key benchmark for regulatory approval. All weight-loss drug candidates must meet at least one of two benchmarks set by the FDA, and Contrave had missed meeting the other benchmark in another late stage trial, causing the stock price to plunge after those results were released in January.

Arena Pharmaceuticals released Phase III results in late March on its drug, “lorcaserin,” and while it met one of the key FDA benchmarks and showed hardly any signs of side effects, the resultant weight loss might not be enough to garner FDA approval, and perhaps not enough to make the drug a commercial success.

While ARNA executives played up the results and suggested they were good enough for eventual FDA approval, investors were not convinced and pushed the stock price down about 30 percent after the results were released. Company executives have also expressed confidence that a larger Phase III study will also prove safe and efficacious enough for eventual FDA approval when the results are released in September.

Vivus is expected to release results from its second Phase III study on “Qnexa,” a combination of two existing approved drugs, in the fourth quarter. Results of its first Phase III study released in January were trumpeted by VVUS management, but considered lackluster by investors, who bid the shares down as much as 30 percent after that release. Many analysts question Qnexa’s commercial viability, as the two drugs that make up the new compound are already available in generic form. The FDA is also reportedly concerned about the compound’s potential to cause mood-altering side effects.

Arena will likely be the first to face the FDA, as it plans to submit its new drug application (NDA) to the FDA by the end of the year. Orexigen’s management has stated that they plan to submit their NDA in early 2010, and Vivus executives have indicated that they plan to apply in the first half of 2010.

All three companies are looking for partnerships with bigger pharmaceutical companies, but most analysts believe that potential partners will want to wait until all Phase III results have been reported before stepping in with offers. Both Arena and Orexigen have recently raised cash through public offerings of their stock, OREX this past week after releasing its stock rising results, and ARNA in with a stock price rise in June, after reporting that patients on their drug were keeping the weight off one year after the study’s conclusion.

While Orexigen’s drug appears to be the most efficacious, Arena’s seems to have the safest profile with the fewest side effects. Vivus’s drug has potential “mood altering” side-effect problems and has not been as effective at taking the pounds off as OREX’s Contrave. All three companies claim that they have met or will meet FDA thresholds for approval. When it comes to approval the FDA considers safety first, and that is where Arena has the edge. And if the september results of Arena’s large Phase III trial meet or exceed the results of earlier Phase III trials, that edge will grow even sharper.

Whichever company gains the edge in this race for approval, and we believe it will be Arena, will likely be met with a lucrative partnership with a big pharmaceutical company, or an outright takeover at a premium price. In either case Arena’s stock price should rise as the company pushes closer to submitting its NDA, and, absent a takeover, we would consider taking profits in the $10 to $15 range ahead of the FDA’s ultimate approval decision.

Disclosure: Long Arena