Arena Pharmaceuticals (NASDAQ:ARNA): Upgraded to Overweight at J.P. Morgan

Arena Pharmaceuticals (NASDAQ:ARNA) is getting surprisingly positive comments from several firms after the FDA’s Endocrinologic and Metabolic Drugs Advisory Committee (EMDAC) panel narrowly voted against approval of Vivus’s Qnexa for obesity (10-6).

- J.P. Morgan notes that investors had been focusing on VVUS for some time, but now they expect greater attention to quickly shift to the other two late-stage players, ARNA and OREX. On that note, JPM believes there are some broad yet valuable takeaways from Thursday’s deliberations. First, they believe the need and desire for obesity drugs was clearly acknowledged by the panel and the FDA. Second, the panelists were concerned about the size of the potential consumer base; this is a concern both ARNA and OREX must address. Third, this patient pool means safety is absolutely of paramount importance. Efficacy seems like a distant second. Finally, despite FDA guidelines calling for 1-yr clinical trials, the panel would clearly like to see longer data for these chronic therapies. Taking these factors and all of their work in this field into account, they have altered their outlook on the late-stage obesity assets and now believe lorcaserin has the best shot at approval:

ARNA: Patients may not lose a lot of weight, but clean safety and robust trial design give lorcaserin best shot at approval, in our view; upgrade to OW from N and increase PT to $6. ARNA’s lorcaserin is next in the regulatory queue, with a panel on Sep 16 (PDUFA is Oct 22).

While we are still not moved by the modest efficacy, we have long been comforted by lorcaserin’s seemingly benign safety and impressed by ARNA’s recent execution (partnership, publication). Importantly, in the context of today’s panel discussion, we believe the drug is relatively well positioned with two years of controlled safety data, no clear adverse safety signal, and a robust clinical trial design. Moreover, the preapproval partnership with Eisai and publication in the prestigious New England Journal of Medicine both provide a degree of validation (not to mention a boost to management credibility). To be clear, we still have some issues with ARNA, including the high warrant coverage. Nevertheless, we believe the kneejerk reaction to sell ARNA upon the Qnexa vote (off ~9% and much more from the day’s highs) was overdone. Indeed, based on
what we heard today, we believe lorcaserin has the best shot at regulatory success. Our new YE10 PT of $6 (was $5) is based on a 65% probability of approval.

(J.P. Morgan is downgrading VVUs to Neutral from Overweight, price target is lowered to $6 from $15).

- Cowen notes that today, investors will debate what this denial means for the other two obesity drugs currently being reviewed by the FDA, Arena Pharmaceuticals lorcaserin and Orexigen Therapeutics' Contrave. Investors will weigh the demise of a competitor against yet another datapoint suggesting the bar is high for the approval of obesity pharmaceuticals. One of firm's obesity physician consultants attended yesterday's panel, and has provided us with her initial impression:

She perceives no increased risk for Arena's lorcaserin, and believes that this is now the best positioned for approval. She has consistently said that lorcaserin has the most benign safety profile, and yesterday's panel only emphasized for her the paramount importance of a clean safety profile to getting an obesity drug approved. Furthermore, she perceived three of the panel's bigger objections to Qnexa's approval as its adverse cardiovascular effects, teratogenecity, and the small number of patients on Qnexa for two years. Not only does lorcaserin not have adverse cardiovascular findings, but it produced trends or statistically significant improvements in several cardiovascular risk factors compared to placebo including blood pressure, total cholesterol, LDL cholesterol, triglycerides, and heart rate. Lorcaserin's pivotal program also included a reasonably high proportion of patients with cardiovascular risk factors, including 21% with hypertension, 33.5% with dyslipidemia, although only 0.2% with diagnosed cardiovascular disease. Lorcaserin also has not been associated with teratogenicity. Because of the requirement that lorcaserin's effects on valvulopathy be assessed over two years, lorcaserin has the highest number of patients on therapy for two years of the three agents. In BLOOM, 573 patients stayed on therapy for a second year, and 426 completed a full 24 months of dosing. Therefore, as the firm believes that there is little increased risk to lorcaserin's application following yesterday's panel, but that its competitive positive will benefit from the demise of Qnexa, they perceive the panel as a positive for lorcaserin. Cowen remain at Outperform on ARNA.

- Piper Jaffray (the eternal bull on ARNA) saying they are buyers of ARNA shares today arguing that the clean safety profile and proven efficacy of Lorcaserin are approvable.

Lorcaserin Efficacy is Sufficient for Approval. The pooled analysis presented at ADA on >6,000 patients showed that 47.1% of patients lost at least 5% of their body weight on Lorcaserin vs. 22.6% on placebo. This clearly meets the FDA defined approval guidelines requiring at least 35% of patients lose at least 5% of their body weight and that this is approximately double the placebo rate. The efficacy of Lorcaserin was seen across multiple demographic subgroups including sex, age and ethnicity.

Qnexa Panel Proves that Safety is Key to Success. Piper reiterates their view that the clean safety profile of Lorcaserin is the key factor for FDA approval and ultimately physician uptake. Lorcaserin is the safest of the 3 new obesity agents in their view with the most common side-effects of upper respiratory infections, headache, dizziness, nasopharyngitis and nausea. The incidence of depression was only slightly higher with Lorcaserin and incidence of suicidal thoughts was 1.3% in both groups. The company has performed extensive cardiac echo analysis to rule out an increased risk of valvulopathy with Lorcaserin. In all, they expect a positive advisory panel vote for Lorcaserin on September 16th.

Reits Overweight and $10 target on ARNA.

Notablecalls: Well it looks like the traders that shorted ARNA on Vivus' negative panel announcement failed to account for the safety part of the decision.

Lorcaserin is not as effective as Qnexa, but is more safer to use. Considering the market size, the FDA decided to play it safe and not recommend Qnexa, which leads the analysts to believe they will approve ARNA's lorcaserin.

ARNA traded as high as $5.70 before the Panel announcement, only to crash to $3.60 2 hours later. The stock rebounded to $4.50 in after hours trading.

I suspect we may see $5+ levels again today on short covering and new longs initiated ahead of the Sept 16 Advisory panel.

PS: TheStreet.com's very own druglord Adam F. has the following comments on ARNA:

Arena Pharmaceuticals(ARNA) looks to be the default winner from Thursday's negative decision on Qnexa.