ETRM popped up on my options screener last weekend. Despite my previous post, I couldn’t contain my curiosity and decided to investigate. The high implied volatility is due to the upcoming release of phase III study results from the ReCharge trial. Here is a quick summary of my thoughts:
- ETRM is proposing VBLOC therapy for the treatment of obesity. Electrodes attached to the vagus nerve produce a high frequency electrical signal that disrupts communication between the brain and the gastrointestinal system. This leads to early satiety (feeling full sooner) and weight loss. The exact mechanism of action is unknown.
The first phase III trial (EMPOWER) failed because the treatment was not statistically significantly different from the control; the control demonstrated unexpected efficacy. Interestingly, the control was not a true placebo of zero electrical signal; instead, the control group received a low frequency signal as a substitute for the treatment group’s high frequency signal. In the trial’s postmortem, the investigators hypothesized that the low frequency signal was responsible for the efficacy seen in the control group. Their hypothesis seems plausible for four reasons:
- The control group experienced weight loss (16% EWL) above historical norms for placebo-controlled weight loss trials (8% EWL, which I corroborated by calculating %EWL for the ARNA and VVUS placebo arms).
- The control group demonstrated a dose-dependent effect. While a dose-dependent placebo response is not unheard of, in my opinion it adds circumstantial evidence for low-frequency efficacy.
- The control group’s low frequency signal is similar to the signal used to stimulate the vagus nerve in the treatment of epilepsy. I am not an electrophysiologist, but I am guessing that whether you’re stimulating (epilepsy) or blocking (VBLOC) the vagus nerve, you’re altering the natural course and overriding the original electrical signal. If low-frequency signaling is effective in epilepsy, then it’s plausible it could have an effect on obesity as well.
- Topiramate is an anti-epileptic drug that is also a component of VVUS’ anti-obesity drug QNEXA. One of the proposed mechanisms for topiramate in epilepsy is the blockage of voltage-dependent sodium channels, which I presume hinders neural signaling. Although topiramate and VBLOC’s mechanisms of action are unknown, my hunch is that they’re both blocking the same signal in the nervous system, which causes the efficacy in weight loss.
Thus, ETRM’s rationale for conducting the ReCharge trial seems sound. In ReCharge, the control group will receive a true placebo of no electrical current. As with EMPOWER, trial results will be communicated as %EWL (excess weight loss). EWL = total weight loss / (total body weight – ideal body weight), where ideal body weight is the theoretical weight that would yield a BMI of 25. The primary endpoints for the ReCharge trial are:
- Observe a 10% greater EWL from randomization with the Maestro System after 12 months of VBLOC Therapy compared to control by BMI method.
- Observe clinically meaningful responder rates in the treatment arm of 20% and 25% EWL from implant at 12 months (not statistically based).
Regarding the first endpoint, the treatment group experienced 17% EWL in the EMPOWER trial. A subsequent refinement of the electrical algorithm led to 22.7% EWL. Thus, a 10% EWL difference compared to 8% EWL historical placebo standards should be expected in ReCharge, assuming the investigators have properly diagnosed and addressed the cause of efficacy in the EMPOWER control group. For the second end point, 22% of the treatment group in EMPOWER achieved 25% EWL, rising to 41% if subjects in the treatment arm used the device for > 9 hours. This endpoint technically cannot fail in ReCharge because it is not a statistical comparison.
How do these endpoints relate to the FDA guidance on weight loss products? The FDA sets minimum efficacy standards in terms of absolute percent weight loss, not excess weight loss. A treatment must meet either of the following conditions:
- The difference in mean weight loss between the active-product and placebo-treated groups is at least 5 percent and the difference is statistically significant
- The proportion of subjects who lose greater than or equal to 5 percent of baseline body weight in the active-product group is at least 35 percent, is approximately double the proportion in the placebo-treated group, and the difference between groups is statistically significant
We need to translate between EWL and absolute percent weight loss to compare EMPOWER/ReCharge results with the FDA guidance. All calculations below are based on an average 5’4″ female with a BMI of 35 entering the trial. A 5’4″ female with a BMI of 35 weighs 204 lbs; a BMI of 25 weighs 145 lbs. The percentages are approximately the same regardless of specific height and BMI because they are normalized by the BMI calculation.
Regarding the first FDA efficacy measure, in the EMPOWER trial, the treatment group experienced 17% EWL. A 17% EWL corresponds to a 4.9% absolute weight loss. An 8% EWL typically seen in other placebo trials corresponds to a 2.3% absolute weight loss. A difference of 5% over placebo historical norms is 7.3% absolute weight loss, which corresponds to a 25% EWL. With a normal placebo response, the EMPOWER trial would not have met the first FDA requirement for efficacy.
Given the later improvement in the electrical algorithm to 22.7% EWL, it’s possible to achieve the first criteria of 25% EWL, but only if the subjects are compliant and use the device for more than 9 hours a day. In the EMPOWER trial, there was a dose dependent effect where 22% of the treatment group achieved 25% EWL, but this increased to 41% if subjects in the treatment arm used the device for > 9 hours. Subjects must use the device for most of the day for it to have an effect.
- Regarding the second FDA efficacy measure, a 5% drop in absolute body weight equals 17.2% EWL. In the EMPOWER treatment group, 58% of subjects who used the device for > 9 hours a day experienced 15% EWL, while only 27% of subjects who used the device < 9 hour a day experienced 15% EWL. With the improvement in the electrical algorithm, it’s certainly possible to meet the FDA’s second efficacy criteria, but again, the subjects need to be compliant and actually use the device.
As a comparison, the VVUS clinical trial experience demonstrated 29% EWL in the treatment group and 6% EWL in the placebo group. The ARNA clinical trial experience demonstrated 20% EWL in the treatment group and 8.6% EWL in the placebo group.
The company has set the bar pretty low for the ReCharge trial. They will probably succeed and announce positive top-line results. The key assumptions are:
- They have properly diagnosed the causes of efficacy in the control group of the EMPOWER trial and ReCharge placebo efficacy returns to historical norms.
- They implemented the improved electrical algorithms.
- Subjects are more compliant and used the device for longer periods of time than they did in EMPOWER.
However, meeting their self-imposed endpoints means nothing if they have not satisfied the FDA’s requirements. So while the company might announce positive results, here are the two key points to examine in detail:
- If the control group shows 8% EWL, then the treatment group needs 25% EWL to satisfy the first requirement. If placebo EWL is higher, then adjust the treatment EWL accordingly for a 5% difference in absolute weight loss over placebo.
- OR the trial needs to show >35% of treatment subjects with >17% EWL. The percentage of treatment subjects who achieved 17% EWL must be double the percentage who achieved >17% EWL on placebo and the difference must be statistically significant.
If either of these requirements are met, then hang on for the ride. Lap-band at one time was worth $1B to Allergan, although that data may be somewhat dated. This treatment should similarly be worth $1B since it’s minimally invasive. ETRM has a current market cap of $125M, so this could be an 8x return if everything works out properly over time. If the probability of the trial succeeding is >12.5%, then the expected value is in your favor.