Investors sent shares of diet drug makers soaring Wednesday, one day after an FDA advisory panel recommended approval of Orexigen Therapeutic's weight loss drug Contrave.
While the FDA is not bound by the panel's decision, the recommendation marks a critical hurdle in the approval process, one that is seen increasing the chances the drug will be approved in the new year.
Shares of Orexigen more than doubled, but the Contrave vote also boosted shares of rivals Vivus and Arena Pharmaceuticals , which saw their drugs rejected in October over potential side effects.
Investors now see regulators more inclined to work with the diet drug makers toward approval, in part because of the urgent need for a drug to effectively treat obese patients.
"I am struck by the epidemic of obesity," said advisory panel member Dr. Allison Goldfine discussing her vote to recommend approval of Contrave despite concerns that the pill caused elevated blood pressure in some patients.
"Health care providers have to have something" to help obese patients, Dr. Goldfine explained following the vote. "So, I have a greater threshold for accepting a tolerable risk."
FDA advisory committee members voted 13 to 7 that the diet pill's benefits outweigh the risks. The panel also recommended Orexigen conduct a new trial investigating the side effects, but did not stipulate the trial as a condition of approval.
Jefferies & Co. analyst Corey David says the majority of the committee seemed convinced another pre-approval study would be too long, expensive and impractical.
"It seems panelists finally saw the forest for the trees, and accepted post-approval was better than no study, no drug, and no increased experience in pharmaceutical obesity treatment," Davis wrote in a note to clients.
Diet Drugs: A History of Risks
Two-thirds of Americans are overweight or obese. Contrave marks the first new obesity drug FDA advisors have recommended in over 10 years. In the interim, a number of weight loss drugs have been pulled from the market for adverse health risks. The most notorious case may have been Fen-Phen, which was pulled in the 1990s after causing heart valve damage in some patients.
Though Fen-Phen was not mentioned during Tuesday's vote, some committee members voiced concerns about approving Contrave with the long-term impact of side effects still not fully understood. One panelist warned the FDA risks eroding public confidence if it once again must pull a diet drug off the market.
"The biggest adverse effect is another drug failure," said advisory panel member Dr. Jules Hirsch, professor emeritus of The Rockefeller University, who voted against approval. "This is the very likely outcome of this."
The FDA denied approval of two other diet drugs in October over health risks. The regulators rejected Arena's weight loss drug Lorcarserin, asking for more data after studies showed the drug may have caused tumors in rats.
New Hope For Diet Drug Makers?
The FDA also rejected Vivus' Qnexa, over data that showed a potential for the drug to cause birth defects and elevated heart rate, which could indicate a cardiovascular risk in some patients.
"Right now both those companies are in discussion with the FDA about what to do next," says Needham biotech analyst Alan Carr.
Carr believes all three drugs could ultimately win approval, if the risks are addressed. He says one thing working in Vivus' favor is studies show Qnexa produced much greater weight loss results than the competing diet drug candidates, an average of 10 percent compared to 5 percent for Contrave and 4.2 percent for lorcarserin.
The demand is so great, a new obesity drug could easily reach a $1 billion in annual sales, Carr says. That's part of the reason he believes the drug makers and regulators will have to spell out strict rules and labeling for prescribing these drugs.
"That's what I think the FDA and these companies have to be very serious about—that these are used properly."
The next key milestone for Orexigen will be after the new year. The FDA is expected to make a decision on Contrave by January 31st.