It took awhile, but Orexigen Therapeutics ( OREX) finally convinced FDA to approve its obesity pill Contrave. The approval announcement was made Wednesday night, and on Thursday, Orexigen shares fell 8% to $5.43
Here, in no particular order, are four reasons for the Orexigen sell off:
1. The Contrave label is 47 pages long, prompting a friend to quip, "You burn calories just reading it." The FDA-mandated Contrave label is topped by a black-box warning alerting doctors about the risk of suicidal thoughts and other psychiatric adverse events related to the antidepressant bupropion component of the combination therapy. The label goes on to discuss how Contrave can also cause seizures, high blood pressure and an increased heart rate. None of these safety risks tied to Contrave were unknown prior to the approval. In fact, Orexigen's path to get to FDA approval for Contrave was delayed for years precisely because regulators wanted more safety data. There are no surprises here. With that said, a 47-page label doesn't happen every day.
2. Short the launch. You're not surprised, I hope. The competing obesity pills from Arena Pharmaceuticals ( ARNA) and Vivus ( VVUS) have been monumental commercial flops. While there are legitimate reasons to believe Orexigen and its marketing partner Takeda can do better with Contrave, investors aren't going to fully believe without seeing real sales.
3. Contrave's approval was fully expected. This is an amalgam of reasons 1 and 2, but "sell the news" is an old Wall Street saw which probably applies here, too.
4. Orexigen post-approval expenses are considerable. The FDA wants the companies to conduct a second cardiovascular outcomes study of Contrave, in addition to the ongoing "LIGHT" study. Orexigen is responsible for the first $60 million in post-approval expenses. After that, the costs are split equally between Orexigen and Takeda. I should note that Orexigen will be receiving $100 million in milestone payments from Takeda, which helps offset the new post-approval costs.
Why be bullish at all about Contrave?
Off all the obesity pill pushers in the market today, Orexigen has the best partner in Takeda. The Japanese pharmaceutical giant is putting 900 sales reps on the Contrave launch, way more than 600 reps Eisai uses to peddle Belviq for Arena. Vivus has 150 sales reps. Takeda will also be able to leverage its marketing prowess selling the diabetes blockbuster Actos towards also selling Contrave. The diabetes-obesity connection is key.
Contrave is the goldilocks of obesity pills, sitting right between Vivus' Qsymia and Arena's Belviq in terms of efficacy and safety. The cardiovascular outcomes studies are a cost burden but when they're completed and if successful, Orexigen and Takeda may have data showing a reduction in heart attacks or other heart-related safety effects favoring Contrave. That could be a very powerful marketing message that competitors can't match.
Orexigen and Takeda still have a shot at getting Contrave approved in Europe, where competing drugs have been shot down.
Orexigen's market cap is still lower than Arena's!