"Oral Enbrel" Gets a Positive Vote
On May 9th, Pfizer's (PFE) tofacitinib -- a first-in-class inhibitor of Janus kinase 3, or JAK3 -- received a favorable FDA advisory panel recommendation (by an 8-to-2 vote) for the treatment of moderate-to-severe rheumatoid arthritis (RA). I expect tofacitnib to receive final FDA approval in August.
The treatment choices for RA -- a progressive, inflammatory joint disease -- has expanded dramatically over the past 15 years, and now includes multiple types of biologic therapies as well as a handful of older medications. Amgen's (AMGN) Enbrel and Abbott Laboratories' (ABT) Humira -- both of which are inhibitors of an inflammatory cytokine called tumor necrosis factor, or TNF -- are by far the most frequently used biologics due to both drugs' combination of solid efficacy and reasonable safety. (Fun fact: due to generic competition for Pfizer's cholesterol-lowering drug Lipitor and Sanofi and Bristol Myers' blood-thinner Plavix, Humira will be the world's best selling drug this year.)Due to some questions about an increased incidence of malignancy among tofacitinib recipients, the FDA may restrict the drug's use to later lines of therapy (after patients have tried other biologics.) I don't think this will prove an issue over time, since most TNF inhibitors also carry a slightly increased risk of cancer, but it could make for a slower-than-expected launch. Either way, Pfizer doesn't disclose detailed sales for smaller products, so Wall Street will have to read between the lines of management commentary for a sense of how the launch is going. Assuming no dramatic change in the safety profile post-launch, I think tofacitinib has two big advantages over other biologics. First, JAK inhibition is a new mechanism-of-action and thus avoids being perceived as a late arriving "me too" TNF inhibitor. Second, and more importantly, tofacitinib is a pill in a market dominated by injectable drugs. This makes for an easy, sound bite-friendly marketing pitch -- Hey doc, it's oral Enbrel! Tofacitinib's sales -- which I think could eventually reach $2.5 billion -- don't really move the needle much for Pfizer's $169 billion market capitalization and roughly $60 billion revenue base. Nonetheless, the favorable panel vote keeps investors on board with CEO Ian Read's "invest (in R&D) and divest (non-core assets)" corporate strategy. For now, sentiment matters more than sales. With a still-modest 10-times multiple on 2012 earnings, I still like Pfizer as a core portfolio long. As long as the company continues to execute, and I think it will, Pfizer shares should continue to grind higher. An additional tailwind will come from the company's recent $11.9 billion sale of its nutritionals business to Nestle -- well above Wall Street expectations -- which should enable additional share repurchases. It's not the most exciting investment, but Pfizer investors also collect nearly a 4% dividend. In today's near-zero interest rate environment, that's not bad. The Long Weight is Almost Over Sometimes, I'm just wrong. A month ago, I never would have expected Arena Pharmaceuticals (ARNA) to get a decisively favorable FDA advisory panel recommendation for the company's weight-loss drug lorcaserin. Yet after reading the panel briefing documents on May 8th, I publicly changed my mind. Clearly, the FDA had no major objections. The vote was Arena's to lose. To management's credit, the company did a great job answering the panel's questions, particularly those on safety. (I've seen many a company fumble a seemingly low-risk panel.) It's now clear to me that Lorqess, the proposed brand name for lorcaserin, will receive final FDA approval. Although I don't think it matters much for the drugs' longer-term commercial prospects, Vivus' (VVUS) weight loss drug Qnexa may actually reach the market before Lorqess despite having a later PDUFA date (July 17th to Arena's June 27th). I think Lorqess' approval will be pushed back by three months, to give the FDA more time to craft an effective Risk Evaluation and Mitigation Strategy, or REMS. I would strongly prefer that society spend money and effort on overhauling the food system -- by far a more effective long-term solution to the obesity crisis -- but Americans like seemingly easy drug-based solutions, the politics of the food system are extremely challenging, and there is no denying that both Lorqess and Qnexa produce modest weight loss. (Qnexa seems to be the more effective of the two.) One key question remains: how large is the market? Despite the obviously big problem (pre-emptive strike by the pun pen!), Forbes writer Matthew Herper recently noted that no obesity drug has ever topped $1 billion in sales. Arena and Vivus might re-write that statistic, but I doubt it will be easy. I think the easy money has been made and investors should look elsewhere.
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