Biotech Stock Mailbag: Amarin, Spectrum, Arena

Updated with additional information on Spectrum Pharmaceuticals (second item.)

BOSTON ( TheStreet) -- Happy new year! The Biotech Stock Mailbag enters its sixth year. Thanks for coming along for the ride.

Before I get to your emails and tweets, a housekeeping item: I'm holding a special biotech stock live chat on Monday, Jan. 9, at 7:30 p.m. ET. Note the evening time slot. I'll be in San Francisco all next week reporting from the J.P. Morgan Healthcare Conference so I hope to share with you some of the good, insidery-type stuff I learn at the biotech investors' meeting. Please join me and bring your biotech investing questions. Here's a preview of the J.P. Morgan conference.

Via Twitter, @mikeyc2113 asks, "Do you buy Amarin ( AMRN) here?"

I never offer specific investment advice but let me tell you about a conversation I had this week with a health-care hedge fund manager -- a biotech investing pro who I've known and trusted for a long time. This investor is even more cynical than I am. He loves to short biotech stocks, so I took special notice when he told me that he just started buying Amarin.

On Tuesday night, Amarin announced a debt offering of $150 million. Before the Wednesday open, my investor friend dumped his brand new $500,000 position in Amarin.

This fund manager started buying Amarin because his research made him comfortable that the FDA would ultimately grant New Chemical Entity (NCE) to the lipid-lowering drug AMR101. He also believed Amarin would eventually win longer intellectual patent protection for AMR101, which makes it a potential billion-dollar blockbuster (if marketed by a competent Big Pharma partner).

Amarin doesn't need to raise more money before AMR101's approval decision date so when the company announced this debt offering Tuesday, my fund manager source drew up the following hypothesis to explain the deal:

1. Amarin's management team is so delusional and stupid to actually think they could achieve, through marketing themselves, anything more than a small fraction of the annual sales and market penetration that a large pharmaceutical company could.

2. Management, in their heart of hearts, realize No. 1, so the convertible offering represents a blatant misunderstanding of the financial markets and disregard for shareholder value. The debt offering is effectively a secondary at $8.81 per share if things go well with the downside of debt if things go poorly -- all merely as a hedge on the chance that they actually end up pursuing No. 1.

3. Management did their last financing in January 2011 before the second AMR101 data set at a price of around $7 per share. Then management didn't raise any money when their stock was $15 to $18 for many months! How stupid are they?

My investor source's bottom line:

A. Something is going really badly here from a fundamental perspective (which we haven't figured out yet); or

B. Amarin does have a very good opportunity in front of them, but we will look back on this just as we looked back on Fred Price's misadventures and needless Orapred-related dilution at BioMarin Pharmaceuticals several years ago: A really awful management team robbing biotech investors of a portion of what turned out to be home run longer term.

Either way, he bailed on Amarin.

Paolo M. writes: "You said a lot about Spectrum Pharmaceuticals' ( SPPI) current cancer drugs, but I haven't seen you write about what is more important to the company, which is the pipeline products with trial results this year. What about these drugs? Are they growth opportunities for Spectrum? I think so."

Spectrum has two drugs in late-stage studies: belinostat for peripheral T-cell lymphoma (PTCL) and apaziquone (Eoquin) for non-invasive bladder cancer. Results from these pivotal studies are expected this year.

I'll discuss belinostat today and save apaziquone for a future Mailbag.

The pivotal phase II "BELIEF" study of belinostat enrolled 120 patients with PTCL that has failed to respond to at least one prior therapy. All patients in the study are being treated with belinostat -- there is no control arm. The primary endpoint of the study is overall response rate. Spectrum plans to seek approval for belinostat using the data from this study when it's completed.

Spectrum conducted a previous, small phase II study of belinostat in patients with PTCL and cutaneous T-cell lymphoma (a related cancer.) In the PTCL subgroup of 20 patients, the overall response rate to belinostat was 25% with a median duration of response of 5.2 months.

Another study conducted by Spectrum partner Topotarget of 19 PTCL patients yielded a 32% response rate and a median duration of response of 9 months.

If belinostat yields a similar 25-30% response in the pivotal phase II study, will that be strong enough for FDA approval?

Possibly. Celgene's ( CELG) Istodax, which, like belinostat, is an HDAC inhibitor, was approved for patients with advanced PTCL in June 2011 on the basis of a single-arm study with an overall response rate of 26% and a median duration of response of 12 months.

Response rates to cancer drugs observed in small studies tend to decrease in larger studies, so I'd be a bit concerned about belinostat being able to maintain a mid-20% response rate in the "BELIEF" study. Spectrum hasn't disclosed whether its agreement with FDA notes a specific response rate that the agency deems approvable.

Since belinostat is not being compared to any other treatment, FDA also considers duration of response to be an important measure of drug efficacy. The five-month response duration seen in belinostat's small phase II study may be too short -- below what, I'd say, is a six-month minimum response duration that the FDA likes to see. (Although to be fair, there is no set threshold.)

Allos Therapeutiucs' ( ALTH) Folotyn is also approved for PTCL, with an overall response rate (per the drug's label) of 29% with a median duration of response of 10 months. The Folotyn pivotal study was also a single-arm design.

Belinostat stacks up well or not so well against Istodax and Folotyn from an efficacy perspective dependent on which small phase II study you look at. The Spectrum drug may be safer or more easily tolerated, which might work in its favor.

Commercially, belinostat, if approved, is entering a crowded and smallish PTCL market. Folotyn sales totaled only $35 million in the nine months of 2011 ended in September. Istodax sales were $21 million for the same period.

@andu28trader tweets: "Adam still trying to work ARNA to BK I see, you obviously can't interpret the positive data ARNA just released."

By BK, I think "Andu" means bankruptcy. No, I'm not trying to push Arena Pharmaceuticals ( ARNA) into bankruptcy. I am unimpressed with the lorcaserin rat tumor data released this week. It's not going to be enough to persuade U.S. regulators to approve the weight-loss drug later this year.

Arena argues that lorcaserin causes elevations in levels of the hormone prolactin, which is believed to cause mammary tumors (both benign and malignant) in rats but not in humans. The data Arena released this week is designed to convince FDA that the lorcaserin-prolactin link is the cause of the rat tumors and that lorcaserin isn't causing abnormal cell growth through some other unknown mechanism.

Arena conducted three-month rat studies that relied on biomarkers of mammary tumor growth to prove its case. The FDA asked Arena to conduct 12-month rat studies, which would provide more definitive proof. When is it a good idea to ignore the FDA's recommendations?

If you want to better understand FDA concerns about the role lorcaserin may play in tumor growth, you can check out the agency's presentation from Arena's advisory panel in September 2010. In particular, look at slide 17, which shows how d-fenfluramine raised prolactin levels in rats more than lorcaserin. D-fenfluramine and lorcaserin are similar drugs. However, as the FDA points outs, d-fenfluramine did not produce mammary tumors in two-year rat studies.

This suggests lorcaserin may be causing mammary tumors in rats through some mechanism other than by raising prolactin levels. That's why FDA asked Arena to run longer animal studies. Without those data, I don't see how the FDA is going to be confident enough in lorcaserin's safety to approve.

Outside of the rat tumor issue, lorcaserin may also cause heart valve defects, according to data from a follow-on study of the drug when to treat obesity in diabetics. The FDA will be reviewing these data from the diabetes study for the first time since they were not included in Arena's original submission. The cardiovascular risk of lorcaserin is probably a bigger problem than rat tumors, but it's something the company and its supporters tend to brush under the rug.

The FDA approves drugs when the benefits outweigh the risks. We already know that the FDA considers lorcaserin's weight-loss benefit to be "marginal" yet the safety risks are significant. For Arena, that's not a winning formula.

--Written by Adam Feuerstein in Boston.

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Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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