Therapeutics, Inc. (OREX) received what many have called a surprising rejection from the FDA yesterday. The government cited a need for more studies due to potential cardiac side effects and the drugs unfavorable risk/reward profile. The stock opened up more than 70% lower after the news and remained in that area for the rest of the day. Extremely heavy volume that more than quadrupled the entire amount of shares outstanding and dollar volume that matched the previous market cap of close to $500 million caused quite a bit of volatility on the day, but no clear trend was established either way. About 5 million shares were held short as of January 14, which means those betting against the company could have bought all their borrowed shares back for around $12.5 million. Institutions held 40% or 19 million shares, and insider ownership is at around 20 million shares. This means that the majority of the 188 million shares that exchanged hands was the result of computerized programmatic trading on a volatile stock. The lack of a clear trend, however, also implies that there is likely a lot of people initiating new short positions, and a lot of people betting that the stock is now a bargain. The risk/reward profile for bargain hunters, however, may be even worse than the risk/reward profile of the drug itself. The company has said it will need additional funding for what is expected to be a multi- million dollar study that the FDA wants, but money may not be the company's only Achilles heal going forward. Time will also play a pivotal role in the company's survival, and right now, it's not on their side. Cardiac studies take years, and with Orexigen essentially being sent to the back of the line, there seems to be a good chance of highly dilutive financing in the near future. Dilution had been kept to a minimum thanks to a collaboration agreement with Takeda Pharmaceuticals (TKPYY.PK) in September that infused $50 million immediately. Future funding from Takeda is dependent upon regulatory approval and actual product sales, however, and it is unclear as to what changes will take place with the agreement, especial given the now premature timing of it. The company currently has twice as many shares authorized than they do issued. Two other companies have recently had their diet drugs rejected, Vivus (VVUS) and Arena (ARNA). Arena's drug was rejected in October because of tumors seen in rats, and the company has said that it will reapply for regulatory clearance by the end of 2011. Vivus' diet drug was also rejected in October. Their problem is potential birth defects, including cleft lip. The FDA has said it wants Vivus to run tests on existing data tied to the drugs main ingredient. With one drug expected by the end of the year, and another one working on existing data, the chances of Orexigen making it to the finish line first have diminished substantially. The company will almost certainly continue to pursue Contrave, as well as another diet drug even further from approval, because of the multi-billion dollar potential of such a drug. Wyeth's (WYE) Fen-Phen saw tremendous success initially before it was pulled from the market in 1997 for cardiac side effects. The obesity rate has swelled even further since then, and a successful miracle diet drug could turn the pharmaceutical industry on it's head as shrinking waistlines would be consuming less and less of other drugs (perhaps another impediment in and of itself). This miracle status may not even be achievable, however, at least not in the next decade. Remember, Conclave was seen as having the best chance of approval, however, clinical trials resulted in just four out of ten people losing 5% of their body weight in one year. The FDA wants a broader study, as the first one did not include many elderly or other high risk individuals. This implies that a new study would include more people that would have a harder time losing weight, and have a higher risk of cardiac problems. Conclave is a combination drug just like all of the other diet drugs, including Fen-Phen. Orexigen is using a combination of anti-depressants, a slightly different, but so far ineffective cocktail. Betting that this company will be worth half a billion dollars once again anytime soon just seems like quite a stretch. Even if they get approved in a year or two, it will take a couple more years to reach profitability, assuming the drug is a smashing success. If Takeda comes through with more funding, dilution may not be the concern, but future profit share will. It just seems like there are better places for your money to sit for the next five to ten years. |
 | |  | |  | |  | |  | |  | |  | |  | |  |
|
Orexigen Therapeutics: 75% Off is no Bargain
|
|
|