Event - Investors will have to wait before getting fat on obesity products

While millions of people struggle in their daily battles to lose weight, the pharmaceutical industry has found it equally hard to come up with new and novel treatments for obesity that would help them increase sales and put some serious weight on their share prices. The high profile problems associated with some of the existing and pipeline products such as Sanofi-Aventis’s Acomplia and Merck & Co's taranabant, which were both linked with serious psychiatric side effects, has left only a handful of smaller, brave companies continuing with development.

Of those still in the race, the market’s attention has turned to Arena Therapeutics’ lorcaserin, Vivus’ Qnexa and Orexigen’s Contrave, all of whom could potentially have products on the market by next year. Phase III data due in the third quarter from all the groups are the next eagerly awaited events in the sector and could reveal the clear winner in the closely contested competition for efficacy. For all three companies the data is critical as not only is it expected to massively inflate the share prices if positive, it could be the trigger for licensing deals, or as some in the market predict, potential take outs.

Phase III anti-obesity agents WW royalties ($m)
Product Generic Name Pharmacological Class Company Launch 2010 2011 2012 2013 2014
 Qnexa  phentermine & topiramate  Anti-obesity agent  VIVUS  Dec - 2010  12  59  133  194  256
 Contrave  bupropion & naltrexone  Anti-obesity agent  Orexigen Therapeutics  Jun - 2011  -  40  87  153  219
 Lorcaserin  lorcaserin  5HT2C (serotonin) agonist  Arena Pharmaceuticals  Dec - 2011  -  35  83  146  209
 Hoodia gordonii extract  -  Anti-obesity agent  Phytopharm  Dec - 2010  -  -  -  -  -
 ATL-962  cetilistat  Lipase inhibitor  Alizyme / Takeda  Dec - 2011  -  -  -  -  -

Odds on favourite

At present Vivus’ Qnexa is the clear favourite, having demonstrated the most amount of weight loss in patients so far. The tipping point for the drug will be the read out from the 56-week phase III data from the Equip and Conquer trials expected in the third quarter. Interim 28 week data from the Equate trail in December was very encouraging with patients on the higher dose of the drug losing an average 9.2% of their body weight compared with placebo weight loss of only 1.7%.

The drug, which is forecast to generate royalties of $256m by 2014, combines two previously approved products, topiramate and phentermine, to employ a dual mechanism to treat obesity. It is thought that the topiramate part of the drug, which was used to treat epilepsy, works on the addiction centres of the brain, curbing food cravings.

It is expected that the validation of Qnexa in trials could cause the company, which has two other phase III products in development, including sexual dysfunction drug, avanafil, $188m in cash on the balance sheet and a market capitalisation of only $393m to bypass marketing talks and instead be taken out by a bigger player.

The stock by any means looks undervalued given its assets, which according to EvaluatePharma’s NPV Analyzer are worth a whopping $1.01bn, with Qnexa accounting for $1bn of that. Given the high risks in the obesity space and the difficulties of getting these drugs past regulators, companies have wisely held off and might even wait until approval is finally in the bag before making a move.

Fundraising for the future

This option was not a luxury for Arena, which earlier this week announced that it would be raising $52.1m from a placing of 12.5m shares in the market at a roughly 11% discount. Last month, it secured a $100m loan from Deerfield Management.

Arena is determined to take its drug lorcaserin all the way through to registration, but disappointing results in March (Arena prospects looking slimmer after data, March 31, 2009) could make attracting a partner harder, unless the data from the second pivotal trial due in September come up with the goods.

Approval would be transformational as lorcaserin is potentially worth $937m to Arena, a figure much higher than the group’s market cap of $321m. Lorcaserin is expected to be filed by the end of the year, and the money raised in the recent fundraising activities should help get to this point and if necessary at least a good part of the way to the market if no partner bites.

Risky single product strategy

Like Arena, Orexigen’s Contrave will be the make or break for the group, especially as the company announced last December that it would be taking the risky move of placing all its eggs in one basket and solely focusing on the development of the obesity drug.

Cash conservation was the big motivating factor, but the markets were made nervous by the fact that some of the cost savings came in the form of cutting several of the senior management (Orexigen sharpens focus on obesity but rattles investors, December 8, 2008).

The fact that the space has become a minefield for developers over the last few years will not have helped. Many of the larger pharma groups have recently opted to abandon the trouble-laden space, following problems with marketed and pipeline drugs, the most high profile casualties being Sanofi-Aventis’ Acomplia and Merk & Co’s taranabant (Fewer opportunties for companies to get fat off obesity products, October 24, 2008).

Contrave is another combination drug, whose individual elements, an anti-depressant and anti-addiction drug, are already generic, meaning that it should have an easier time at the regulator, given what should be a large amount of safety data for both products.

Consensus royalties for Contrave are currently sitting at $219m by 2014, and a licensing deal is expected if the results are positive.

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