The news that a panel of experts voted 20 to 2 that a new obesity drug, Qnexa, should be approved is the kind of moment that makes the biotechnology business so dramatic. If approved by the FDA's decision deadline of April 17, it will be the first new obesity-fighting medicine in 13 years. Shares of maker Vivus exploded, and are currently up 92% to $19.80.
Qnexa actually combines two ingredients: the stimulant phentermine, used for weight loss, and topiramate, the active ingredient in Johnson & Johnson's Topamax, a drug used for epilepsy and migraine that can cause birth defects, suicidal ideation, and problems thinking. Together, they are among the more effective weight loss pills in clinical trials. Although the FDA committee was concerned about the long-term heart safety of the medicine, it thought that the benefits to obese patients were worth making the drug available and doing a big heart safety study after approval. In the words of Cedars-Sinai Medical Center's Sanjay Kaul, one of the panelists, the fact that the combination is relatively effective "shifts the balance in terms of requiring a post-approval study rather than a pre-approval study.”
So what's next? I think investors should be wary.
Wall Street analysts seem almost unanimous in their expectation that Qnexa could become a blockbuster, generating more than $1 billion in annual sales. The argument was made pretty clearly this morning by Simos Simeonidis of S.G. Cowen. He had been betting that Vivus would have to conduct an expensive heart safety study before Qnexa could be approved. He started his note to clients by saying, "We were wrong."
Then he went on to make the case that, even though he is Neutral on the stock, the drug is likely to be a big seller. With just 1.5% market penetration in the U.S. and 1% in the European Union, at a relatively inexpensive $1,200 a year, Qnexa would be a $2.2 billion drug. Moreover, he thinks Vivus might be a target to be acquired by a large pharmaceutical company, but he warns that if the small biotech insists on selling its drug alone, there remains "a lot of execution risk," keeping him on the sidelines.
I'd add a few more notes of caution.
First, remember the REMS: Qnexa might not have been approved were it not for the advent of the Risk Evaluation and Mitigation Strategy (REMS), a relatively new way for the FDA to control how medicines are used once they are on the market. Sale of the medicine will be restricted to 10 mail-order pharmacies, with the goal of preventing women taking it from becoming pregnant and of telling people who don't lose at least 3% of their weight during their first three months on the drug to stop. Investors should watch the actual structure of the REMS closely, because it could slow adoption of the drug.
Moreover, while it's easy to come up with gargantuan sales estimates – one analyst told Bloomberg Qnexa could be the next Lipitor – no obesity drug has ever been a $1 billion seller. Not Xenical, the only approved weight loss drug, nor Meridia, from Abbott Laboratories, which had to be withdrawn. Patients don't stay on them long-term, and although it is tempting to imagine lots of people taking them, this has simply never happened. Right now there is huge pent-up demand for an obesity treatment, and that could lead to an amazing launch for Qnexa – if the REMS doesn't slow it down – but then sales might come back down. It's true, though, that there are more obese people than there used to be.
One other factor should make investors nervous: much of the value of FDA approval may be baked in. It's not impossible, in the wake of a short squeeze, that Vivus stock is closing in on what will be its peak. FDA approvals, though great news, make bad stock catalysts because they are often widely expected. Approval results in a gradual rise in a share price, rejection a sharp drop. I'm not saying to short Vivus, but I do hope fans of the company are taking some profits today.
What does this mean for the other companies developing obesity drugs? Both Orexigen and Arena Pharmaceuticals have also been trying to get FDA approval for their own obesity drugs. Orexigen's approach, like Vivus', combines to existing medicines: bupropion, an antidepressant that is used for smoking cessation, and naltrexone, used to treat alcohol and opiate addiction. On paper, that combination sounds a lot more pleasant than Qnexa, but bupropion raises blood pressure, and Orexigen has committed to doing a large heart safety study before approval. The odds of the drug getting approved depend on whether or not you think there will be a cardiovascular risk. Certainly, they have gone up after this decision.
The FDA is holding a meeting in late March on how obesity medicines should be tested for heart risk; Orexigen and Vivus investors should certainly be watching that.
Arena is a tougher case. Its drug, lorcaserin, looked relatively safe in clinical trials, but it is similar to another weight loss drug that cause heart valve problems. The FDA advised Arena to rule out a 50% increase in risk due to heart valve problems – the results, as presented at an FDA panel, just missed this. When results for a new trial, in patients with diabetes, are included, they actually get worse. Arena also has to deal with questions of whether tumors in rats given lorcaserin should present a worry for humans. An FDA panel will meet to discuss lorcaserin in the second quarter of this year.