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Preview of Arena Pharmaceutical's upcoming PDUFA date
Introduction
This Wednesday, June 27, 2012 is the Prescription Drug User Fee Act (PDUFA) date for Arena Pharmaceuticals' (ARNA) weight loss drug lorcaserin. The FDA will approve, delay, or reject the drug for marketing approval in the U.S. This highly anticipated event could have a dramatic impact on Arena's stock. Competitors Vivus (VVUS) and Orexigen Therapeutics (OREX) could also see volatility. Below we will review lorcaserin, its regulatory history, and provide trade ideas based upon possible outcomes.
Lorcaserin Info
Lorcaserin is intended for weight management, including weight loss and maintenance of weight loss. The CDC estimates that more than one-third of U.S. adults were obese in 2009-2010. A weight loss of 5-10% of body weight has been shown to improve cardiovascular health and quality of life, and reduce the risk of type 2 diabetes. There are currently few pharmaceutical treatment options to help patients lose weight. Lorcaserin acts as a selective serotonin 2c receptor agonist. The serotonin 2c receptor is expressed in the brain and is involved in the control of appetite and metabolism. Lorcaserin has been evaluated for safety and efficacy in 19 clinical trials, including three Phase 3 double-blind, randomized, placebo-controlled trials: BLOOM, BLOSSOM, and BLOOM-DM.
NDA Submissions
Arena submitted a New Drug Application (NDA) to the FDA in December 2009, incorporating data from BLOOM and BLOSSOM. In October 2010 the FDA issued a Complete Response letter (CRL) for a number of reasons, including what appeared to be an increase in the rate of mammary tumors in rats, increased rates of heart valve problems, and uncertain evidence of efficacy. Arena resubmitted the lorcaserin NDA in December 2011 with additional data and analysis that were not incorporated in the original NDA, including the results of BLOOM-DM. In January 2012 lorcaserin was assigned a PDUFA date of June 27, 2012 and granted a review by the Endocrinologic and Metabolic Drugs Advisory Committee on May 10, 2012.
Endocrinologic and Metabolic Drugs Advisory Committee Meeting
Arena went to great effort to address safety issues at the Advisory Committee meeting. The largest concern from the CRL involved the incidence of malignant mammary adenocarcinoma or fibroadenoma in rats given various doses of lorcaserin. The initial submission data showed an increased incidence of malignant mammary adenocarcinoma (relative to placebo) with greater doses of lorcaserin. Placebo treated rats had a tumor rate of 43.1%, whereas rats treated with 10, 30, and 100 mg/kg/day of lorcaserin saw rates of 52.3%, 53.9%, and 80.0%, respectively. There appeared to be a clear connection between lorcaserin and mammary tumors. For its resubmission Arena convened a pathology working group, or PWG, that consisted of five independent veterinary pathologists to re-evaluate the female rat mammary tumor diagnosis. The PWG report showed placebo treated rats to have a tumor rate of 40.0%, as seen in the previous study, however, the 10, 30, and 100 mg/kg/day lorcaserin treated rats showed tumor rates of 32.3%, 36.9%, and 68.0%. The PWG concluded that increased rates of malignant mammary adenocarcinoma were only associated with the highest dose, far more than any person would ever realistically take. This was a key point in gaining the panel's favor.
The inclusion of BLOOM-DM data in the resubmission also helped ease a number of other efficacy and safety concerns. The FDA has a set of guidelines, outlined in a document named "Developing Products for Weight Management," that are used in evaluating weight loss drugs. Regarding efficacy, the guidelines suggest that a weight loss drug must show that (1) the difference in mean weight loss between the active-product and placebo-treated groups is at least 5% and the difference is statistically significant, or (2) the proportion of patients who lose at least 5% of baseline body weight in the active-product group is at least 35%, is approximately double the proportion in the placebo-treated group, and the difference between groups is statistically significant. A pooled analysis that included the BLOOM-DM data was found to satisfy the second efficacy criteria. Additionally, the increased rate of heart valve problems was found to be within the FDA's safety guidelines after the incorporation of BLOOM-DM data in a pooled analysis.
After a full day of intense debate the panel voted 18-4 in favor of approval.
The Case for Approval
There are a number of reasons to believe lorcaserin will be approved. Arena has made a strong case that the drug is both safe and effective. Being overweight has been shown to have serious health implications and there are no other approved weight loss drugs on the market. While the placebo adjusted mean weight change (the difference in the average percentage of weight lost between the treatment group and the placebo group) was not shown to be higher than 5% in any of the trials, the percentage of patients losing 10% or more of their body weight was consistently 10 to 20 percentage points higher for lorcaserin than for placebo. The drug seems to work well for some and not for others. It would be possible for a doctor to quickly discontinue treatment if it does not appear to be working, thus minimizing the potential health risks. If viewed as tool in a doctor's repertoire of obesity management strategies an approval seems likely. These sentiments were expressed at the FDA panel, whose 18-4 vote bodes well, though the FDA is not obligated to follow the panel's advice.
The Case for Rejection
The most likely reason for rejection is of course safety. While Arena addressed many of the safety issues noted in the CRL, concerns involving mammary tumors and heart valve issues are likely to remain. Lorcaserin does not appear to increase the rate of malignant mammary adenocarcinomas, however, it clearly increases the rate of benign mammary fibroadenomas. It is uncertain if this will be a cause for concern to the FDA. With more than one third of all U.S. adults considered to be overweight it is possible the FDA will be extra-careful in granting approval. Recall, in 1997 a popular weight loss drug combination, often referred to as Fen-Phen, resulted in abnormal heart valve findings in nearly 30% of users. The FDA surely does not want to repeat the mistake of allowing another dangerous weight loss drug to reach the market. Another concern is Vivus's weight loss drug Qnexa. While Qnexa has its own set of safety issues, it appears to be more effective than lorcaserin. Qnexa received a 20-2 vote in favor of approval and had its PDUFA date extended by three months after the submission of new data to the FDA, often viewed as a signal of eventual approval. It is possible the FDA may only want to approve the best weight loss drug under review, which some would argue is Qnexa.
Where Arena Stands Now
Shares were hovering around $2.00 prior to the March, 2012 announcement of acceptance of its Marketing Authorization Application by the European Medicines Agency. The stock traded up to $3.00 and hovered in a range until the panel meeting on May 10, 2012. The strong panel result sent shares soaring over 100% to $6.50, where again the stock settled into a range. On June 8 the stock broke through resistance and steadily rose nearly another 100% over the next few weeks. On June 22, 2012 the stock sold off sharply on heavy volume from 52-week highs of $12.40, losing nearly 20% in what was mostly likely profit taking.
The stock has a sizable short interest, with nearly 40 million shares (approximately 22% of float) short as of May 31, 2012.
Projected Outcomes and Trade Ideas
One of three events will happen on or before lorcaserin's June 27, 2012 PDUFA date. Lorcaserin will 1) receive approval, 2) have its PDUFA date extended, or 3) receive a Complete Response letter. Below we will speculate the possible outcome of each event and suggest possible actions one might take:
Approval:
Shares would most likely see immediate gains on approval. Returning to at least the 52-week highs of $12.40 would be a safe bet. How high shares could go is uncertain. Beating Qnexa to the market and being the only approved weight loss drug for at least a month would be viewed as a strong positive. How well Arena would be able to sustain any gains is highly questionable, however. A number of factors could lead to a sell off after an initial pop following approval.
First, Arena is already highly valued. An $11.00 price values Arena at nearly $2 billion. While the market for a weight loss drug is huge, reaching over $2 billion in sales would be a challenge if past weight loss drug sales are used as a rough guideline. On top of this, Arena is only due to receive approximately one third of lorcaserin sales revenues, the other two thirds of which go to its marketing partner Eisai. While it is certainly possible lorcaserin sales could take off, one would not expect to see this reflected in the price until sales data becomes available over the course of the year.
Second, Arena shareholders will be looking to take profits. Shareholders have endured a sizable amount of pain, having watched the stock drop from around $8.00 to below $2.00 in September of 2010 and stay there for over a year and a half. Those who have managed to hold on through the stock's recent resurgence will be looking to take some profits if the drug is approved.
Arena certainly feels like a classic "buy the rumor, sell the news" story. If long into approval, it would make sense to take some shares off the table. If flat into approval and looking to make a play we would suggest selling out of the money calls, buying near or at the money puts, or simply shorting the stock after allowing the stock to gap up.
Three month delay of PDUFA date:
A three month delay would cause the most confusion for Arena shareholders. While some view delays as an eventual sign of approval that is not always the case. In fact, most delays are simply standard procedure following the submission of additional data to the FDA. The explanation for the delay will be critically important. One already known problem with a delay would be that Qnexa would beat lorcaserin to the market by approximately two months if approved. We would not take any action in this scenario as the outcomes are too unpredictable.
Complete Response Letter:
If lorcaserin receives a Complete Response letter for safety or efficacy issues the stock will surely take a devastating hit. Lorcaserin is Arena's only drug beyond Phase 1 trials and is responsible for nearly all of the stock's value. While European approval would still be possible, a decision is not expected from regulators until early-to-mid-2013. Shares would return to the $2-3 range if not lower. If looking to make a play in anticipation of a CRL we would suggest simply shorting the stock or buying out of the money puts.
Impact On Other Companies
It's difficult to predict how an approval or rejection would impact competitors Vivus and Orexigen Therapeutics. Clearly an approval for Arena would mean increased competition in the marketplace and be seen as a negative. On the other hand, an approval would signal the FDA's willingness to approve weight loss drugs despite concerns regarding efficacy and safety, both of which are issues for Qnexa and Orexigen's drug Contrave. Opposite arguments could be made in the case of a rejection: less competition would be favorable for Vivus and Orexigen, but the FDA's unwillingness to approve lorcaserin may have broader implications towards the potential approval of other weight loss drugs. If looking to make a play, buying shares of Vivus on any weakness seems like the best bet given it's 20-2 panel vote and the strong efficacy of Qnexa.


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