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The Skinny on ARNA's Lorcaserin
Highlights include Arena Pharmaceuticals, Inc. (ARNA - Analyst Report), Vivus, Inc. (VVUS - Analyst Report), Orexigen Therapeutics, Inc. (OREX - Snapshot Report) Merck & Co., Inc. (MRK - Analyst Report) and Johnson & Johnson (JNJ - Analyst Report.
Arena's Lorcaserin Approvable, But No Blockbuster
On March 30, 2009, Arena Pharmaceuticals (ARNA - Analyst Report) released the much-anticipated results of the 2-year BLOOM clinical trial studying 10mg BID lorcaserin vs. placebo. Full data will be presented at the American Diabetes Association (ADA) meeting in early June 2009.
The results are mixed, in our view. To put things in perspective, we will analyze the data stand-alone based on the FDA’s guidelines for approvability. FDA guidelines say that one of the below two endpoints must be met:
1) The drug must demonstrate a mean categorical weight loss of 5% in greater than 35% of the study participants, and these results must be twice that of the placebo group.
The BLOOM clearly passes this required endpoint. After one year, 47.5% of the patients taking lorcaserin lost at least 5% of their body weight vs. only 20.3% for the placebo. The results were also statistically significant and clinically meaningful at the 10% hurdle, 22.6% vs. 7.7%.
2) The drug must demonstrate a placebo-adjusted weight loss for the entire study population greater than 5%.
The BLOOM data unfortunately fails this endpoint. Data from BLOOM show that patients taking lorcaserin lost a statistically significant amount of weight (ITT) vs. placebo, 12.7 lbs (5.8%) vs. 4.7 lbs (2.2%), respectively, but the placebo adjusted total of 8.0 lbs (3.6%) did not eclipse the 5% hurdle.
Therefore, based on the FDA guidelines and the data from BLOOM, we believe lorcaserin is a drug that is clearly approvable. However, Arena will not compete in a vacuum for obesity market share.
Along with phentermine already on the market, there are two other phase III drugs, Vivus’ (VVUS - Analyst Report) Qnexa and Orexigen’s (OREX - Snapshot Report) Contrave, under development at similar-sized biotechnology companies, along with several phase II candidates that could potentially move into phase III prior to lorcaserin approval.
It is important to note that there is clearly more to a weight loss drug than just pure efficacy. If efficacy were the only hurdle, Wyeth’s (WYE) Phen-Fen would still be on the market. The ECG data showing the rates of valvulopathy clearly shows no increased risk from lorcaserin.
Management noted that adverse events of depression, anxiety and suicidal ideation were infrequent and reported at a similar rate in each treatment group, and no seizures were reported. At this point we do not believe that lorcaserin will be held up by safety concerns.
Therefore, our conclusion is that lorcaserin is a safe, although not a powerfully effective drug for weight loss. Unless the BLOSSOM data show a dramatic improvement in weight loss after one year, or other late-stage agents such as Qnexa or Contrave fail their respective ongoing phase III programs, we believe that physician use and patient demand for lorcaserin will be low.
We simply fail to see how the drug will gain significant use offering such lackluster efficacy of only mean 3 – 4% placebo-adjusted weight loss after one full year of treatment. We think peak sales worldwide are $500 million.
Investors have long known that Arena must partner lorcaserin for commercialization. A partnership has been expected since after the phase IIb program ended over three years ago. However, the lack of a partnership on lorcaserin so far has been frustrating.
In 2004, Arena had only 25 million shares outstanding. Massive dilutive offerings have ensued, including the most recent 14.8 million commitment (5.7 million sold so far) to Azimuth Opportunity, and we expect that Arena will exit 2009 with over 80 million shares outstanding, a 220% dilution for shareholders than purchased Arena’s stock after the promising phase IIb data. The deal with Azimuth is a telling sign in our view – it means "don’t expect a partnership anytime soon."
Management has two interesting earlier stage collaboration programs, one with Merck (MRK - Analyst Report) and another with J&J (JNJ - Analyst Report), as well as another mid-stage candidate for cardiovascular disease and two IND-ready preclinical candidates.
At $3 per share, Arena is getting down to a valuation where the stock is becoming attractive. Factoring in the offerings to Azimuth, Arena is trading with a market capitalization of only $240 million. If we are correct, and lorcaserin is an approvable $500 million drug, along with the rest of the early-stage and mid-stage pipeline, Arena should find a floor at $200 million market cap ($2.50/share).
At some point Arena will become a Buy based on expectations for lorcaserin hitting reasonable levels – a $500 million drug – and Merck and J&J lingering in the background considering their existing relationships and Arena’s early-stage pipeline. We think this level is around $2.50. That’s where we would look to establish a position in the name.
Arena's Lorcaserin Approvable, But No Blockbuster
On March 30, 2009, Arena Pharmaceuticals (ARNA - Analyst Report) released the much-anticipated results of the 2-year BLOOM clinical trial studying 10mg BID lorcaserin vs. placebo. Full data will be presented at the American Diabetes Association (ADA) meeting in early June 2009.
The results are mixed, in our view. To put things in perspective, we will analyze the data stand-alone based on the FDA’s guidelines for approvability. FDA guidelines say that one of the below two endpoints must be met:
1) The drug must demonstrate a mean categorical weight loss of 5% in greater than 35% of the study participants, and these results must be twice that of the placebo group.
The BLOOM clearly passes this required endpoint. After one year, 47.5% of the patients taking lorcaserin lost at least 5% of their body weight vs. only 20.3% for the placebo. The results were also statistically significant and clinically meaningful at the 10% hurdle, 22.6% vs. 7.7%.
2) The drug must demonstrate a placebo-adjusted weight loss for the entire study population greater than 5%.
The BLOOM data unfortunately fails this endpoint. Data from BLOOM show that patients taking lorcaserin lost a statistically significant amount of weight (ITT) vs. placebo, 12.7 lbs (5.8%) vs. 4.7 lbs (2.2%), respectively, but the placebo adjusted total of 8.0 lbs (3.6%) did not eclipse the 5% hurdle.
Therefore, based on the FDA guidelines and the data from BLOOM, we believe lorcaserin is a drug that is clearly approvable. However, Arena will not compete in a vacuum for obesity market share.
Along with phentermine already on the market, there are two other phase III drugs, Vivus’ (VVUS - Analyst Report) Qnexa and Orexigen’s (OREX - Snapshot Report) Contrave, under development at similar-sized biotechnology companies, along with several phase II candidates that could potentially move into phase III prior to lorcaserin approval.
It is important to note that there is clearly more to a weight loss drug than just pure efficacy. If efficacy were the only hurdle, Wyeth’s (WYE) Phen-Fen would still be on the market. The ECG data showing the rates of valvulopathy clearly shows no increased risk from lorcaserin.
Management noted that adverse events of depression, anxiety and suicidal ideation were infrequent and reported at a similar rate in each treatment group, and no seizures were reported. At this point we do not believe that lorcaserin will be held up by safety concerns.
Therefore, our conclusion is that lorcaserin is a safe, although not a powerfully effective drug for weight loss. Unless the BLOSSOM data show a dramatic improvement in weight loss after one year, or other late-stage agents such as Qnexa or Contrave fail their respective ongoing phase III programs, we believe that physician use and patient demand for lorcaserin will be low.
We simply fail to see how the drug will gain significant use offering such lackluster efficacy of only mean 3 – 4% placebo-adjusted weight loss after one full year of treatment. We think peak sales worldwide are $500 million.
Investors have long known that Arena must partner lorcaserin for commercialization. A partnership has been expected since after the phase IIb program ended over three years ago. However, the lack of a partnership on lorcaserin so far has been frustrating.
In 2004, Arena had only 25 million shares outstanding. Massive dilutive offerings have ensued, including the most recent 14.8 million commitment (5.7 million sold so far) to Azimuth Opportunity, and we expect that Arena will exit 2009 with over 80 million shares outstanding, a 220% dilution for shareholders than purchased Arena’s stock after the promising phase IIb data. The deal with Azimuth is a telling sign in our view – it means "don’t expect a partnership anytime soon."
Management has two interesting earlier stage collaboration programs, one with Merck (MRK - Analyst Report) and another with J&J (JNJ - Analyst Report), as well as another mid-stage candidate for cardiovascular disease and two IND-ready preclinical candidates.
At $3 per share, Arena is getting down to a valuation where the stock is becoming attractive. Factoring in the offerings to Azimuth, Arena is trading with a market capitalization of only $240 million. If we are correct, and lorcaserin is an approvable $500 million drug, along with the rest of the early-stage and mid-stage pipeline, Arena should find a floor at $200 million market cap ($2.50/share).
At some point Arena will become a Buy based on expectations for lorcaserin hitting reasonable levels – a $500 million drug – and Merck and J&J lingering in the background considering their existing relationships and Arena’s early-stage pipeline. We think this level is around $2.50. That’s where we would look to establish a position in the name.