Investor Edge: GSK's Avandia "As Good as Dead" and Vivus Shares Go on a Crash Diet

The FDA panel ruling on Avandia captured headlines and weighed on shares GlaxoSmithKline PLC this week, but a more decisive panel ruling on Vivus Inc.'s obesity drug Qnexa more than halved its stock price.

A U.S. Food and Drug Administration advisory panel voted to keep GlaxoSmithKline (NYSE: GSK) Avandia (rosaglitazone) type 2 diabetes medication on the market, but with a revised label and “possible restrictions.” Twelve of 33 panelists voted in favor of outright withdrawal, while 10 voted for continued marketing with restrictions.

Avandia’s safety was initially called into question by a 2007 study in the New England Journal of Medicine that found the drug raises the risk of heart attacks. An FDA panelist also issued a scathing review of GSK’s RECORD report, an in-house study that some have claimed “excluded deaths among patients taking Avandia from the study that would have shown that the drug increased the risk for heart attacks.”

Forbes magazine senior editor Robert Langreth called Avandia “as good as dead as a commercial product,” but UBS analyst Gbola Amusa praised the move as “good for the market,” as they were expecting a worst-case-scenario liability of more than $6 billion.

It wasn’t just GSK’s Avandia that got an iffy vote of confidence. GSK’s management were embarrassed after 11-year-old internal documents showed the company knew about the cardiovascular risks of Avandia and the company, then SmithKlineBeecham, was involved in a cover up.

Meanwhile, GSK this week settled most of its outstanding Avandia-related litigation for $460 million, and said it will write down $2.4 billion altogether in legal costs. In early trading Friday, GSK’s American depositary shares closed Friday at $36.42.

GSK wasn’t the only company on the FDA’s hot seat this week.

Vivus Inc. (NASDAQ: VVUS) shares plummeted more than 55% after an FDA endocrinologic and metabolic drugs advisory panel rejected its experimental weight-loss drug Qnexa, amid concerns about the drug’s long-term side effects.

Earlier in the week, Vivus stock closed as high as $12.44 after the panel said Qnexa resulted in "significant" weight loss. But on Thursday, panel members ultimately rejected the drug, saying they want to see more long-term data before voting for approval due to concerns about birth defects and uncertainty about the drug’s cardiovascular risk. Vivus shares plunged 55.9 percent on the news.

Qnexa isn’t “as good as dead”; there’s still a chance the FDA will approve the weight-loss drug. After all, there were some positive findings in the discussion and the initial panel vote was relatively close at 9 to 7 (before one “yes” panelist switched his vote at the last-minute, making the final vote 10 to 6). The FDA is scheduled to make a decision on Qnexa on Oct. 28, though an approval is highly unlikely until Vivus supplies the agency with longer-term safety data.

Still, the rejection prompted JPMorgan Chase &Co. to cut its investment rating on Vivus to "neutral" from "overweight." The company's rating was also downgraded a number of other firms. by a Vivus shares closed at $5.41.

Orexigen Therapeutics Inc. (OREX), which has its own weight-loss drug up for approval, sank with Vivus, down more than 10 percent to close at $4.53.

But a third rival, Arena Pharmaceuticals Inc. (ARNA), saw its shares jump more than 20 percent in early trading after JP Morgan & Co. raised its investment rating on the stock to “overweight” from “neutral.” An FDA panel is considering Arena’s weight-loss drug lorcaserin today, and since the company has more than two-years of safety data, with few worriesome signs of side effects, the prospects look good. The FDA’s approval decision is due Oct. 22.

JPMorgan upgraded its investment rating on Arena to "overweight" from "neutral." Arena’s shares closed at $4.66.

Elsewhere in the sector, shares of Canada’s AEterna's Zentaris Inc. (NASDAQ: AEZS) rose more than 8 percent after its U.S. collaborator, Keryx Biopharmaceuticals Inc. (NASDAQ: KERX), was granted orphan-drug designation by the FDA for perifosine, its treatment for cancer of the nervous system in infants. Orphan drug designation gives drug makers special tax breaks and exclusive licensing rights for seven years to develop treatments for rare conditions -- “rare” meaning fewer than 200,000 individuals in the U.S. have it. Keryx shares closed at $3.70, while AEterna shares were at $1.11.

In other market moving news:

Peregrine Pharmaceuticals Inc. (NASDAQ: PPHM) saw its shares slump more than 7 percent after the drug developer posted a fiscal fourth-quarter loss and revenue that were lower-than-expected. Its shares closed at $1.75.

Paradigm Capital Inc. started coverage of Oncolytics Biotech Inc. (NASDAQ: ONCY) was started with a “buy” investment rating, and a share price target of C$8.50 (US$8.11). On Monday, Oncolytics said it received a "no objection" letter from Health Canada to conduct a Phase III trial of reolysin drug to treat patients with head and neck cancers. The trial has already been green-lit by regulators in the U.S., the U.K. and Belgium. Oncolytics shares closed Friday at US$2.61.