Orexigen: The Best Bet In Obesity for 2013

Orexigen Therapeutics (OREX) will be the last of three leading weight-loss drug developers to enter the large potential market for new obesity treatments, and biotech investors are already making big bets on OREX’s competitors: Vivus, Inc. (VVUS) and Arena Pharmaceuticals (ARNA). Despite a very slow start for VVUS’ Qsymia product and that ARNA’s Belviq has yet to launch, market capitalizations for the companies behind these two products currently top $1.15 billion and $1.99 billion, respectively. With a current market valuation of just $416 million, OREX has the potential to rise 3-4 fold upon approval of its own diet drug candidate Contrave, which is anticipated late next year or in early 2014. The market is likely to begin closing the valuation gap between OREX and its closest competitors as value creating catalysts play out, and as Contrave approaches commercialization. The first key catalyst occurs Tuesday, December 18th when the company will host its Analyst Day to review Contrave’s favorable clinical efficacy and safety profile, update investors on the progress of the cardiovascular safety trial required by FDA for approval, speak to the NDA re-submission of Contrave, and importantly, review Contrave’s market potential. We believe shares of OREX will trade up into the Analyst Day, and should the company announce an earlier-than-expected NDA filing for Contrave, further share price appreciation could occur. With several clinical and regulatory catalysts over the next few quarters, a significantly discounted valuation relative to peer companies, and the muscle of a noteworthy commercial partner, Takeda, preparing to launch Contrave with a large-scale effort, OREX shares have the greatest potential for appreciation among the diet-drug manufacturer stocks in 2013. Analyst price targets call for the shares to double in 12 months (an average of ~$10 per share), which implies an $800M market cap. Based on the valuations of other leading diet drug companies just after FDA approval, OREX has potential to exceed analyst price targets once Contrave receives its blessing from U.S. regulators.

Analyst Day will highlight the key reasons to own OREX. With $130M in cash expected to be on the balance sheet at year-end, OREX is well-capitalized to deliver on its business plan. Therefore, investors can focus on the key drivers of the stock story without the distraction of potential dilution from a money raise. OREX has no less than seven potential value creating catalysts in 2013, and one this week. Orexigen’s Analyst Day tomorrow will offer new detail on a number of compelling facets of the Contrave story. In and of itself, the visibility of the stock drivers should boost the shares. Upside surprise from this event could come from management indicating an earlier-than-expected NDA filing for Contrave and/or faster-than-expected progress on the LIGHT Study, the cardiovascular outcomes trial (CVOT) required by the FDA for the drug’s approval. The LIGHT Study has been enrolling much faster than expected, given demand for the new diet drug, and key results are expected to be released in 2Q 2013 (vs. initial expectations of 2H 2013). Positive results are required for FDA approval, and the company is likely to update investors on a potential “rolling NDA submission” allowing OREX to submit components of its application to U.S. regulators prior to the LIGHT trial results. The faster trial enrollment and rolling NDA submission, if allowed, could shave up to 6 months off of the original review clock for Contrave approval, suggesting that the drug could be approved and ready for launch by this time next year. This would be well ahead of expectations for a 2014 launch, and with some analysts still predicting a 2015 debut of the drug, upside exists for OREX shares.

Positive LIGHT trial results expected to unlock further value in 2Q. The LIGHT study focuses on Major Adverse Cardiovascular Events (MACE) in 9,000+ patients, and seeks to demonstrate Contrave’s safety given the FDA’s prior concern that the combination pill may raise blood pressure and heart rate in certain patients. We note that the design of the LIGHT study requires that patients experiencing elevated blood pressure within 16 weeks of treatment with Contrave discontinue therapy. As a result, it’s likely that patients staying on the drug (with no early blood pressure signs) will not have an elevated risk for MACE vs. placebo. This trial design gives us confidence that the LIGHT study will have a successful outcome. The results from LIGHT will become available when the number of cardiovascular events in the trial reaches 87 (OREX enrolled sicker patients, so the endpoint is expected to be reached sooner than later). The data release will be important for OREX shares, and anticipation of the LIGHT trial results should drive the stock higher in early 2013. The data are not only important for U.S. FDA approval, but European regulators have expressed that determining cardiovascular risk is a key barrier to approval of any new diet drug. In fact, VVUS’ Qsymia is not expected to gain approval in the EU until cardiovascular outcomes data are generated for the drug, and Vivus’ study is just beginning. As a result, OREX expects to file for EU approval after the LIGHT trial results are released, and the company will seek a European marketing partner for the drug once it has filed for approval. This is another key catalyst for OREX, and makes the results from LIGHT that much more important.

Many catalysts leading up to FDA decision for Contrave. Assuming all of the approaching events play out favorably for the company, the most meaningful catalyst for OREX is anticipated U.S. approval of Contrave at the end of 2013 or in early 2014. Below is a list of events that are expected to drive trading in OREX shares over the next several quarters.

  • Company announces FDA allowance of rolling NDA submission – late 2012/early 2013
  • Re-submits NDA on a rolling basis – late 2012/early 2013
  • Light Study reaches 87 events; favorable safety results reported – 2Q13
  • Submits final components of NDA re-submission to FDA – mid-2013
  • PDUFA date set for end of 2013/early 2014
  • Submits Contrave application for EU approval (MAA)
  • Secures European partner in mid-2013
  • Contrave receives FDA approval; OREX and Takeda Launch – 4Q 2013/1Q 2014
  • EU approval and launch – 2014

Given FDA’s very favorable treatment of Qsymia with regard to fewer restrictions on who can use the drug, we believe Contrave’s approved label will be largely unencumbered, especially given that the two ingredients in the pill, bupropion and naltrexone, have been on the market and used widely for many years. Like the other approved diet drugs, we would expect Contrave’s label to specify that patients must achieve a certain amount of weight loss within a certain period of time, otherwise the drug should be discontinued. Additionally, blood pressure is also likely to be monitored, and patients experiencing high results on Contrave should also discontinue treatment, similar to the LIGHT trial design.

Contrave’s competitive advantages will be visible at Analyst Day. At its Analyst Day Tuesday, the company plans to present details from an extensive market analysis conducted this year, which surveyed 1,000 physicians and some 6,000 potential diet drug patients. A glimpse at the data already indicated a preference for Contrave in the primary patient population, but details will be presented on Tuesday. The results should highlight the market for Contrave relative to its recently approved competitors. Management sees room for all three players, but patient preference will be important in determining peak sales for Contrave; analysts already forecast that the drug can achieve $1B at peak on a global basis.

As mentioned above, Contrave is a combination of two compounds, naltrexone SR (sustained release) and bupropion SR, which together, reduce appetite and increase metabolism while dampening the reward system in the brain that causes food cravings. Bupropion is a widely prescribed antidepressant, and we note that this quality makes it an ideal treatment for patients suffering from obesity, who, beyond their weight problem, often suffer from depression as well. Both drugs have been on the market for some time (bupropion for more than 30 years) and are familiar products to physicians and regulators. As neither ingredient is a controlled substance, the combination that makes up Contrave is not expected to be a controlled substance itself, avoiding Drug Enforcement Agency (DEA) oversight. Both Qsymia and Belviq are controlled substances, giving Contrave the edge as no quotas will be imposed, refill prescriptions will be easier to obtain, and there will be a perceived safety benefit for Contrave vs. other diet pills given the lack of a controlled substance warning. Note that the DEA has yet to assign the exact controlled substance designation for Belviq, and this issue has delayed the drug’s market debut by 6 months.

Most important to Contrave’s success in the market is the company’s large and well-positioned North American marketing partner, Takeda. Takeda has experience launching and building products that address large markets into lasting brands. In particular, Takeda has a major footprint in the diabetes treatment segment with its blockbuster drug, Actos. Given that many diabetics are also obese and have symptoms of depression, Takeda is expected to focus on this market segment during the early commercialization ramp up of Contrave. Orexigen is likely to speak more about future marketing efforts behind Contrave at its Analyst Day, but the chatter is that Takeda could commit up to 1,000 sales reps to launch Contrave, versus only 150 behind Qsymia and an expected 200 reps initially selling Belviq. Because no specifics have been given yet by either Takeda or Orexigen on the resources expected to back Contrave, investors and analysts will be highly focused on any information offered at Tuesday’s meeting. OREX’s management will need to address the poor early launch ramp for Qsymia, and of course why Contrave won’t follow the same fate. Unlike Qsymia, it is unlikely that Contrave will be required to go through mail-order only, and the significant resources deployed by Takeda should pull through significant demand such that health insurance companies will be likely to place Contrave on formulary more willingly. Orexigen has yet to secure an ex-North American commercial partner, but that is the plan as the company positions Contrave to become a large global brand.

OREX has significant potential upside; VVUS and ARNA not so much. Among the three companies with new and promising diet drugs, OREX may be the best bet, as Contrave could be the most successful obesity product, and the stock is not currently pricing in assured success, like VVUS and ARNA. Expect OREX shares to strengthen into and through the company’s Analyst Day on December 18th, with more upside in 2013.

In connection with OREX, PropThink has taken a long position.