Playing VVUS, OREX, ARNA through FDA Adcomm and Qnexa PDUFA

Over the past several months, these three companies, with their respective late-stage anti-obesity drug candidates, have experienced a considerable increase in volatility and share price, due in part to new regulatory revelations regarding clinical pathways to regulatory approval. We believe there will continued volatility leading into the upcoming FDA advisory committee and into April for VVUS’s PDUFA for Qnexa.

Our short-term investment thesis is that all three stocks will likely rise in price after the upcoming FDA panel. More notably, we feel that VVUS will continue to rise into it’s two PDUFA events in April, and rise significantly after approval. We feel that a Qnexa approval, will also remove significant risk-related discounts to valuation for both OREX and ARNA, resulting in a short-term rise in PPS.

Our long-term investment thesis is only bullish on VVUS, we expect VVUS to rise into the run-up and continue to rise after approval. We view any short-term pop in PPS for OREX or ARNA as a potential opportunity to lock in gains from a short-term long strategy, or an opportunity to initiate a long-term short strategy.

Our Previous Coverage:

VVUS – Initial Report – 12/16/11
VVUS – Quick Update – 01/09/12
VVUS – Understanding the AdComm – 02/20/12
VVUS – Vivus PDUFA Trading Strategy – 03/15/12

Resources from Briefing Documents:

[lightbox color=”#1589FF” type=”iframe” title=”Webcast Information” link=” http://www.fda.gov/downloads/AdvisoryCommittees/CommitteesMeetingMaterials/Drugs/EndocrinologicandMetabolicDrugsAdvisoryCommittee/UCM297238.pdf?iframe=true&width=80%&height=80%”]Webcast Information[/lightbox]
[lightbox color=”#1589FF” type=”iframe” title=”FDA Briefing Information” link=” http://www.fda.gov/downloads/AdvisoryCommittees/CommitteesMeetingMaterials/Drugs/EndocrinologicandMetabolicDrugsAdvisoryCommittee/UCM297240.pdf?iframe=true&width=80%&height=80%”]FDA Briefing Information[/lightbox]
[lightbox color=”#1589FF” type=”iframe” title=”Errata to FDA Briefing Information” link=” http://www.fda.gov/downloads/AdvisoryCommittees/CommitteesMeetingMaterials/Drugs/EndocrinologicandMetabolicDrugsAdvisoryCommittee/UCM297241.pdf?iframe=true&width=80%&height=80%”]Errata to the FDA Briefing Information[/lightbox]
[lightbox color=”#1589FF” type=”iframe” title=”Draft Questions” link=”http://www.fda.gov/downloads/AdvisoryCommittees/CommitteesMeetingMaterials/Drugs/EndocrinologicandMetabolicDrugsAdvisoryCommittee/UCM297235.pdf?iframe=true&width=80%&height=80%”]Draft Questions[/lightbox]

The market expects the FDA to reject obesity drugs, We disagree.

We believe that the market currently interprets the FDA as unwilling to approve a drug for obesity. After the combination of Fenfluramine and Phentermine were withdrawn from the market in 1997, many investors have felt that the FDA would be reluctant to approve another anti-obesity drug without serious question. The FDA stepped-up it’s regulatory authority later in the mid-2000’s when it required Abbott to produce cardiovascular outcomes data on Sibutramine, the trial was dubbed SCOUT, which at first demonstrated a reasonable safety margin, even in high-risk patients. A later, larger study demonstrated a modestly increased risk of cardiovascular outcomes, which prompted the withdrawal of Sibutramine. Given this history, investors have long viewed anti-obesity drug candidates as pipe-dreams.

We believe the market is overly discounting the FDA, and we view this as an opportunity to exploit any upward movement when the FDA Advisory Committee paints a clear path forward with regards to cardiovascular outcomes and subsequently when Qnexa is approved.

FDA Advisory Committee, huge overhang on obesity stocks.

The purpose of the upcoming committee is to determine the appropriate regulatory hurdles that the FDA will impose for anti-obesity drug candidates. At the heart of the matters (get the pun) are cardiovascular outcomes data. Currently the Guidance to Industry does not require a pre-approval cardiovascular outcomes trial. But given that several historic post-approval outcomes trials demonstrated unreasonable increases in cardiovascular outcomes, some investors believe that the FDA could mandate pre-approval cardiovascular outcomes data.

To predict the outcomes from the upcoming FDA Advisory Committee, we examined perspective and opinion pieces from several prominent medical and public health journals. Furthermore we examined the outcome of a similar advisory committee meeting for diabetes drug candidates.

With regards to investigational diabetes therapies, the FDA Advisory Committee decided that companies would have to submit pooled cardiovascular outcomes data from their phase 2 and phase 3 data. Furthermore, the committee proposed that they would set an upper limit for the hazard ratio to the pooled data as an important regulatory pre-approval safety measure. The committee also proposed and voted for mandating post-approval outcomes data.

In the end, the FDA in it’s guidance to industry did not mandate large pre-approval studies, unless there was a clear signal towards undue risk, as they felt this would unfairly hinder industry and likely prevent efficacious therapies from being researched. It was clear that the FDA played a balancing act.

Our assessment is that the FDA will play the same balancing act with regards to weight-loss therapies. Their goal will be to simultaneously act as a protector of consumer interest but not overly impede research and development. We believe that this Advisory Committee will act in a similar fashion to the diabetes Advisory Committee. We believe that the committee will outline a cardiovascular outcomes analysis of pooled Phase II and Phase III data, with a threshold hazard ratio, as a requirement for approval. We believe they FDA will continue with it’s precedence and require more rigorous full cardiovascular outcomes data, in the post-approval setting.

Overall we believe that the upcoming Advisory Committee and any proposed changes to the Guidance to Industry will remove any overhang on all three stocks. Thus we see PPS increasing for all three stocks following this AdComm.

Arena, Orexigen price will advance with positive news for Vivus’s Qnexa

We believe the market is beginning to re-assess approvability for anti-obesity drugs, and with that removing the risk-related penalties to PPS valuations. Although VVUS’s Qnexa is a direct competitor to OREX’s Contrave or ARNA’s lorcaserin, we feel that an approval for Qnexa will signal to investors that the FDA is ready to approve weight-loss therapies. We believe that all three stocks rise on approval for Qnexa.

Beyond April, Long-term Strategies for VVUS, OREX, ARNA

Long-term our group is bullish only on VVUS. VVUS has two PDUFA target dates in April. We are projected that both Qnexa, and Avanfil will be approved. Given that Vivus has not yet partnered any product candidates, we feel that approval, upcoming European partnerships, and marketing efforts in the US will sufficiently re-value the company significantly to upside.

Overall we feel that ARNA’s Lorcaserin and OREX’s Contrave will gain regulatory approval, but that trading these stocks successfully will be about timing. Although we feel that in the next several month these companies will enjoy a reasonable rise in PPS, we feel that soon after VVUS’s PDUFA will be a good time to exit any long positions and/or consider a short position.

Other Resources:

[lightbox color=”#1589FF” type=”iframe” title=”Guidance to Industry” link=”http://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/Guidances/ucm071612.pdf?iframe=true&width=80%&height=80%”]Guidance to Industry[/lightbox]
[lightbox color=”#1589FF” type=”iframe” title=”NEJM: Lorcaserin” link=”http://www.nejm.org/doi/pdf/10.1056/NEJMoa0909809?iframe=true&width=80%&height=80%”]NEJM: Lorcaserin Phase III[/lightbox]
[lightbox color=”#1589FF” type=”iframe” title=”NEJM: Drug Management of Obesity- Efficacy versus Safety” link=”ttp://www.nejm.org/doi/pdf/10.1056/NEJMe1004076?iframe=true&width=80%&height=80%”] NEJM: Drug Management of Obesity- Efficacy Vs. Safety [/lightbox]
[lightbox color=”#1589FF” type=”iframe” title=”Quintiles: CVOT Assessment” link=”http://www.quintiles.com/elements/media/experts/current-regulatory-landscape-cardiac-and-cardiovascular-safety-assessments-part-ii.pdf?iframe=true&width=80%&height=80%”]Quintiles: CVOT Assessment[/lightbox]
[lightbox color=”#1589FF” type=”iframe” title=” NEJM: Assessing Cardiovascular Outcomes for Diabetes Therapies ” link=”http://www.nejm.org/doi/pdf/10.1056/NEJMp0805758?iframe=true&width=80%&height=80%”]NEJM: Assessing Cardiovascular Outcomes for Diabetes Therapies[/lightbox]
[lightbox color=”#1589FF” type=”iframe” title=”NEJM: Sibutramine — Another Flawed Diet Pill ” link=”http://www.nejm.org/doi/pdf/10.1056/NEJMe1007993?iframe=true&width=80%&height=80%”]NEJM: Sibutramine- Another Flawed Diet Pill [/lightbox]
[lightbox color=”#1589FF” type=”iframe” title=”NEJM: on Cardiovascular Outcomes in Overweight and Obese Subjects” link=”http://www.nejm.org/doi/pdf/10.1056/NEJMoa1003114?iframe=true&width=80%&height=80%”]NEJM: Sibutramine on Cardiovascular Outcomes in Overweight and Obese Subjects[/lightbox]