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Orexigen Finds A Cautious Partner
Big Pharma is certainly no longer in a big rush to partner up with biotech companies working on obesity drugs. Stung by catastrophes like Wyeth's ill-fated partnership with Interneuron in the 1990s, Sanofi's (NYSE:SNY) failure with rimonabant, disappointment from Roche's (Nasdaq:RHHBY) Xenical and Abbott's (NYSE:ABT) Meridia, and a generally unwelcoming FDA, many companies have backed away from this space entirely.
Consequently, Orexigen's (Nasdaq:OREX) announcement of a partnership deal with Takeda for OREX's weight loss drug Contrave needs to be seen in the context of a grudging buyer's market.
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The Best Deal Available?
On the surface, Orexigen's deal with Takeda does not look great. Takeda is offering only a $50 million milestone payment (which may be the only guaranteed money Orexigen gets). That said, the back-end of the deal is favorable if Contrave makes it to the market and achieves good sales. Takeda will be paying tiered royalties that reach into the 35% range, as well as potential future milestones that could be worth up to $1 billion.
Interestingly, the companies are also going to be sharing development costs. Orexigen will be responsible for pre-market studies, while Takeda will take on the bulk of post-market and follow-on studies. That could be relevant in this case. The FDA is extremely skittish these days about the risk-benefit trade-off for obesity drugs, and it is not unreasonable to think there is a chance that the FDA will order an additional study before granting approval or require a post-approval study.
Arena Got Largely the Same Deal
All things considered, it looks like Orexigen got the going rate for an obesity drug. A few months ago, would-be rival Arena Pharmaceuticals (Nasdaq:ARNA) announced a partnership deal for its anti-obesity drug lorcaserin with Japan's Eisai. Here too there was an upfront payment of $50 million, additional milestones tied to approval ($90 million in Arena's case) and sales, and generous-looking double-digit royalty rates. Considering that Arena will be manufacturing the drug, factoring in those costs suggests that the effective royalty rates in these deals are very similar.
While Arena does not have to shoulder the development costs that Takeda is insisting Orexigen share, Eisai is arguably an inferior partner. Takeda has a solid reputation in metabolic drugs (include best-selling anti-diabetes drug Actos), while Eisai's biggest U.S. success has been in Alzheimer's and the synergies with Eisai's Aciphex (for chronic heartburn) are uncertain. All in all, then, these really do look like effectively identical deals.
Where to from Here?
With Vivus (Nasdaq:VVUS) having been laid low by the FDA in an unfavorable panel meeting, Arena is the next contestant on the stage. Unfortunately for Arena, the company's panel meeting will follow a panel meeting focusing on whether to remove Abbott's drug Meridia from the market - so it may be fair to assume that panelists will be keenly focused on safety. While lorcaserin has shown a solid safety profile, the data is not absolutely incontrovertibly clean and the relatively modest efficacy of the drug throws a kink into the risk-reward analysis.
For Orexigen, their panel meeting comes in January of 2011 and investors should have a pretty good idea whether Contrave will be the last shot on goal for obesity drugs for a few years. Unfortunately, while Contrave's efficacy is superior to lorcaserin, the safety and side-effect profile is less favorable. With Contrave generally thought of as the least-promising of the three would-be obesity drugs, Vivus's failure has weighed on Orexigen's stock. On top of that, there is an interesting dilemma for Orexigen shareholders to consider - if Arena's drug gets the thumb down, that reduces the odds of a Contrave approval, but greatly increases the expected sales upon approval; on the other hand, a lorcaserin approval may raise hopes of Contrave's approval, but it effectively guarantees competition in the market.
The Bottom Line
It increasingly looks like biotech investors would do well to steer clear of companies focused on obesity and Alzheimer's - the efficacy record of Alzheimer's drugs is terrible (likely due to how poorly-understood the disease still is) and the FDA is loathe to approve a potentially risky drug for a lifestyle disease that can be reversed without pharmaceuticals (diet and exercise *do* work). For Orexigen shareholders, though, this is a bit of good news in what has been an increasingly hard slog. If the FDA meeting goes well, the rewards could still be large, but this is still a risky proposition even with a partner on board. (For more, see The Ups And Downs Of Biotechnology.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
Consequently, Orexigen's (Nasdaq:OREX) announcement of a partnership deal with Takeda for OREX's weight loss drug Contrave needs to be seen in the context of a grudging buyer's market.
IN PICTURES: Eight Ways To Survive A Market Downturn
The Best Deal Available?
On the surface, Orexigen's deal with Takeda does not look great. Takeda is offering only a $50 million milestone payment (which may be the only guaranteed money Orexigen gets). That said, the back-end of the deal is favorable if Contrave makes it to the market and achieves good sales. Takeda will be paying tiered royalties that reach into the 35% range, as well as potential future milestones that could be worth up to $1 billion.
Interestingly, the companies are also going to be sharing development costs. Orexigen will be responsible for pre-market studies, while Takeda will take on the bulk of post-market and follow-on studies. That could be relevant in this case. The FDA is extremely skittish these days about the risk-benefit trade-off for obesity drugs, and it is not unreasonable to think there is a chance that the FDA will order an additional study before granting approval or require a post-approval study.
Arena Got Largely the Same Deal
All things considered, it looks like Orexigen got the going rate for an obesity drug. A few months ago, would-be rival Arena Pharmaceuticals (Nasdaq:ARNA) announced a partnership deal for its anti-obesity drug lorcaserin with Japan's Eisai. Here too there was an upfront payment of $50 million, additional milestones tied to approval ($90 million in Arena's case) and sales, and generous-looking double-digit royalty rates. Considering that Arena will be manufacturing the drug, factoring in those costs suggests that the effective royalty rates in these deals are very similar.
Where to from Here?
With Vivus (Nasdaq:VVUS) having been laid low by the FDA in an unfavorable panel meeting, Arena is the next contestant on the stage. Unfortunately for Arena, the company's panel meeting will follow a panel meeting focusing on whether to remove Abbott's drug Meridia from the market - so it may be fair to assume that panelists will be keenly focused on safety. While lorcaserin has shown a solid safety profile, the data is not absolutely incontrovertibly clean and the relatively modest efficacy of the drug throws a kink into the risk-reward analysis.
For Orexigen, their panel meeting comes in January of 2011 and investors should have a pretty good idea whether Contrave will be the last shot on goal for obesity drugs for a few years. Unfortunately, while Contrave's efficacy is superior to lorcaserin, the safety and side-effect profile is less favorable. With Contrave generally thought of as the least-promising of the three would-be obesity drugs, Vivus's failure has weighed on Orexigen's stock. On top of that, there is an interesting dilemma for Orexigen shareholders to consider - if Arena's drug gets the thumb down, that reduces the odds of a Contrave approval, but greatly increases the expected sales upon approval; on the other hand, a lorcaserin approval may raise hopes of Contrave's approval, but it effectively guarantees competition in the market.
The Bottom Line
It increasingly looks like biotech investors would do well to steer clear of companies focused on obesity and Alzheimer's - the efficacy record of Alzheimer's drugs is terrible (likely due to how poorly-understood the disease still is) and the FDA is loathe to approve a potentially risky drug for a lifestyle disease that can be reversed without pharmaceuticals (diet and exercise *do* work). For Orexigen shareholders, though, this is a bit of good news in what has been an increasingly hard slog. If the FDA meeting goes well, the rewards could still be large, but this is still a risky proposition even with a partner on board. (For more, see The Ups And Downs Of Biotechnology.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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