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Expert Financial Analysis and Reporting

Going Over the Outlook with the New CEO, Mike Narachi (OREX, $5.32)

I have met numerous times with CFO, Graham Cooper. This was an opportunity to meet with the new CEO, Michael Narachi, who comes from Amgen. I am extremely impressed by his operational expertise and strategy. He should be an excellent CEO to lead the company into its commercial phase.

Overview

I am of the opinion that of the three obesity drugs that have completed or are completing phase III-Contrave of Orexigen, lorcaserin of Arena and Qnexa of Vivus- that Contrave is the best of the three drugs. The chances for approval of Contrave are extremely high as it has met the endpoints of four phase III trials with strong statistical significance. Because we have talked extensively in previous meetings about pharmacology of Contrave and the clinical trials, I will not repeat those comments in this note.

The company’s expressed strategy is to find a worldwide partner that will pay a big upfront milestone, co-market Contrave in the US and market Contrave in all markets outside the US. At least, this is what the company is telling the Street. However, with considerable enthusiasm, Mike lays out a scenario in which Orexigen with only 50 representatives could achieve US sales for Contrave of $300 to $500 million within three years or so. This would be done by targeting 5500 high prescribing obesity specialists. The company believes that it can achieve profitability when it reaches $100 million of sales. The company will probably target this physician universe with its own sales force and strike a deal with a larger company to co-promote Contrave to a wider audience in the US and to exclusively market the drug overseas.

There are two significant catalysts coming up in the fourth quarter. The full results of the phase III Contrave trials will be reported at The Obesity Society meeting in late October. There should be some positive information coming out on the favorable effects of Contrave in conditions that usually accompany obesity such as diabetes and cardiovascular problems. The company is hinting strongly that Contrave improves HbA1c which is a strong marker for improvement in diabetes and that it also reduced lipids and triglycerides which are accepted as being strong predictors of improvement in cardiovascular outcomes. Contrave can cause a slight increase in blood pressure and pulse rate which is a known side effect of one of its two principal agents, buproprion. As a reminder, Contrave is a combination of two generic drugs; the anti-depressant agent buproprion and the naltrexone, a drug used to treat drug addiction.

An important phase IIb trial for Orexigen’s second obesity drug, Empatic should be reported shortly. I think that there is a good chance that the results will be positive. At this point, Empatic does not figure much in the stock price.

One of the concerns with Contrave is that because it is a combination of two generic drugs some doctors might just prescribe the two generics. Arguing against this is that the generics are not available at the same dosage strength and that Contrave uses a proprietary sustained release formulation for each. The company also claims that the two generic drugs would cost about $6.00 per day, which is in line with what premium priced brand name drugs like Contrave would sell for. The company also has patents covering the use of these two drugs in combination for obesity that last until 2022.

At the end of the meeting, I asked Graham about the financial situation of the company and his financing plans. He said that the company should have about $100 million in cash at year end, which is about two years of cash. The NDA will be filed in 4Q, 2009 and this should result in a PDUFA date of around July to September of 2010. He anticipates that a partnering deal will be signed in 2010, before or after the PDUFA date. This should bring in an upfront fee of $50 to $100 million. He will probably do a large equity raise if Contrave is approved.


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