Expert Financial Analysis and Reporting

Investment Opinion

Orexigen’s (OREX) anti-obesity drug Contrave has been given new life as the FDA reversed a previous position that would have required a cardiovascular outcomes trial involving 60,000 to 100,000 patients and which might have taken four to six years to complete in order to gain US approval for Contrave. In a press release yesterday, Orexigen stated that the FDA in a letter had agreed to a trial design that would involve less than 10,000 patients and could lead to approval in 2014. This signals a dramatic change in FDA’s position and one which is similar to the proposal that Orexigen made to FDA that was initially rejected by the agency. It is not clear what led to the reversal of the agency’s position.

This is very positive and unexpected news for Contrave as there is now a clear path forward and the trial can be completed in a reasonable time frame. I think that most of the positive reaction of the stock to this good news will immediately occur. After that, there will be over two years before we hear any news on the trial that could be a catalyst for the stock. During this time, the company could reach a partnering agreement to market Contrave in Europe, but this would not be a major stock catalyst. I would also expect that there would be little chance for positive news on other drugs in development as all resources will be focused on Contrave.

The company has not provided specific financial guidance, but I believe that the company will have about $45 to $50 million of cash on hand when it begins the cardiovascular outcomes trial in 2Q, 2012. I think that the costs of the trial could be $50 to $75 million in total, but somewhat less to reach the key interim analysis time point. Orexigen under its agreement with its US marketing partner Takeda is currently responsible for these clinical trial expenses. There is a potential to partner Contrave in Europe to raise money. In addition, the company is eligible to receive $100 million of milestones from Takeda between approval and launch. It may be able raise capital using these milestone payments as collateral although I am not sure how this would be done. There seems a high probability that they will need to raise equity capital although management says there are no immediate plans.

I anticipate a spike in stock price based on this news. After that, I don’t see an opportunity because of the lack of meaningful catalysts for over two years. I am neutral on the stock. However, the odds of Orexigen becoming a successful commercial company have dramatically improved.

Background

In an August 8, 2011 press release, Orexigen’s CEO Mike Narachi stated that the company was continuing the dispute resolution process with the FDA to try to reach an agreement on identifying a patient population for its anti-obesity drug Contrave in which the risk to benefit profile justifies approval. The company halted spending on Contrave until it could reach an agreement on a path forward that would allow Orexigen to conduct a reasonably sized outcomes trial, in which interim results might allow for resubmission of the Contrave NDA.

On December 7, 2010 the FDA’s Endocrinologic and Metabolic Drugs Advisory Committee voted 13 to 7 that available data adequately demonstrated that the potential benefits of Contrave outweighed the potential risks when used long-term in a population of overweight and obese individuals and supported approval. The Committee also voted 11 to 8 that a dedicated study to examine the drug's effect on risk for major adverse cardiac events should be conducted as a post-approval requirement versus pre-approval.

The FDA ignored the advisory committee recommendation and issued a complete response letter to Orexigen last January 31, 2011 for Contrave citing a signal of cardiovascular risk seen in the phase III programs in which there was a slight increase in blood pressure and pulse rate. Because of this, the FDA asked Orexigen to propose and then conduct a cardiovascular outcomes study.

Orexigen responded with a proposal for a trial that would be slightly more rigorous than 2008 FDA guidelines for assessing cardiovascular risk in diabetes drugs. Orexigen proposed a three to four year cardiovascular outcomes trial that would involve 12,000 to 15,000 patients. This trial proposal called for an interim look in 2013 and if there was no safety signal at that time it might allow Contrave to be marketed in 2014 in a subset of patients who had moderate cardiovascular risk. The trial would then be allowed to continue for several more years to assess the risk in a broader population.

The FDA informed Orexigen on June 2, 2011 that approval of Contrave would require a much larger cardiovascular trial than proposed by Orexigen. The FDA proposal would essentially require that the trial be large enough to rule out cardiovascular risk. Because the typical Contrave patient is a 40 to 50 year old woman in whom cardiovascular risk is low, this would have required a 60,000 to 100,000 patient trial according to Orexigen. This would have been prohibitive from both a cost and time frame standpoint.

New Agreement with FDA

In a September 21, 2011 press release, Orexigen said that following a recent meeting with senior FDA officials, the company had received written correspondence detailing the requirements for a cardiovascular outcomes trial for Contrave that would address the Complete Response Letter received in January 2011. Orexigen and its US partner Takeda believe that these design requirements can be reasonably met and provide the certainty necessary to proceed with a new cardiovascular outcomes trial.

In a formal letter, the FDA stated that if the interim analysis meets specified criteria that would rule out unacceptable increased cardiovascular risk, Contrave could be approved. FDA will convene a public advisory committee meeting on obesity drug development early next year to discuss issues important for the development of anti-obesity drugs. The FDA said that the outcome of that meeting will not countermand the advice provided in this letter and the FDA will honor the agreement regardless of the obesity meeting outcome.

Details of New Phase III Trial

Orexigen and its US partner Takeda are confident that the commitments made by FDA and its clearly stated requirements for resubmission of the Contrave NDA allow for the conduct of a cardiovascular outcomes trial that potentially could lead to approval sometime in 2014. Orexigen and Takeda have already assembled an expert steering committee to assist with design and execution the trial, including Dr. Steve Nissen from the Cleveland Clinic. Dr. Nissen, based on findings in retrospective studies, was central in raising concerns about cardiovascular risk with the anti-diabetes drug Avandia. This spilled over to causing concerns about all anti-diabetes drugs and also the anti-obesity agents.

The cardiovascular outcomes trial design outlined by FDA requires that the trial be powered based on intent to treat analysis. It also has specific criteria for interpreting the results at interim and final analyses that are similar to those that are applied to diabetes drugs. As is outlined in the diabetes drugs guidance, successful results at the interim analysis would support approval with the trial continuing to run in the post-approval setting to reach the final analysis.

Specifically, the FDA advised that the trial enroll a population of overweight and obese patients with an estimated annual event rate for major cardiovascular events of 1% to 1.5%. Correctly identifying this population group may be a challenge. This risk level is characteristic of the middle ground obesity patient currently on anti-obesity therapy according to Orexigen. For comparison, the risk seen in diabetes cardiovascular outcomes trials is usually on the order of a 3% annual event rate. The trial will try to mirror real life usage of the drug. Before patients go into the trial they must first respond to Contrave by experiencing meaningful early weight loss. Also, patients who experience significant increases in blood pressure would also not be enrolled in the study.

In this population, the upper bound of the 95% confidence interval should exclude a hazard ratio of 2.0 and 1.4 at the interim and final analyses, respectively. Both FDA and Orexigen estimate that such a study would require approximately 87 total events by the interim analysis to enable resubmission of the NDA for approval. Orexigen estimates that the entire study would require less than 10,000 patients and less than two years from study start to the interim analysis.

Financial Issues

Orexigen ended the second quarter with $70 million in cash. The company has provided no cash burn guidance, but as a guess, it may burn about $6 to $8 million in each of 3Q, 2011, 4Q, 2011 and 1Q 2012 and then start the trial in early 2Q, 2012. If so, the company would have $45 to $50 million of cash when it starts the trial. Orexigen is responsible for all clinical trial expenses for Contrave so that the cost of conducting the trial will fall on Orexigen. While the company has provided no specific guidance on how much the trial will cost, I am guessing that it would cost about $5,000 to $7,500 per patient or $50 to $75 million for the whole trial. The cost to get to the point of the interim analysis could be less.

I think that $40 to $45 million at the beginning of 2Q, 2012 will fall significantly short of what the company will need to conduct the trial and fund operations. There will be a need for more cash. The company has not yet partnered Contrave in Europe and could raise some cash from this. It also is eligible to receive up to $100 million in milestones between approval and launch. It may be able to raise capital using these milestones as collateral. However, it would seem probable that the company will have to issue equity also.