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Arena Could Dip If Lorcaserin Fails Again

April 22, 2012 | About:

While obesity rates keep on rising both in the U.S. and on a global level, many pharmaceutical companies find themselves in a neck-and-neck race in attempts to find a better cure that will manage to cease this epidemic. Today, one can find two types of U.S. FDA approved medication - medication for the short term treatment and medication for the long term treatment of obesity.

Despite the fact that obesity poses a large health concern and is considered to be one of the main causes of many disorders and diseases such as heart disease and diabetes, the FDA has not approved a new drug for treatment of obesity for over a decade. Currently, available weight-loss drugs that are approved by the FDA are for short term treatments only. These short term treatments only last for a few weeks up to a few months and results are usually limited, or users start gaining again after the short term treatment is over.

At the moment there is only one weight-loss prescription drug that works as a fat absorption inhibitor available on the market for the long term treatment of obesity. Orlistat, also known as Xenical, developed by Swiss global health-care company Roche. As of recently, this drug can also be found as OTC drug by the name of Ally. Studies have shown that Orlistat is only moderately effective. Therefore, the overweight public is practically desperate for an FDA approval of another more effective drug that can treat obesity.

Regardless of the failure to get an approval by the FDA for its anti-obesity drug Lorcaserin in 2010, Arena Pharmaceuticals (NASDAQ:ARNA) is preparing for a rematch scheduled for May 10th, when the company's drug will be facing advisory panel.

In late March, Arena Pharmaceuticals also announced that the European Medicines Agency (EMA) has accepted its Marketing Authorization Application for Lorcaserin. If this would go through, it would mean that this drug maker will be in the position to market its anti-obesity drug on European soil as well. On the same day as this announcement came out, investors and potential buyers had plenty to see on the market as Arena's stock climbed about 30% and reached its highest score since 2010. Arena's current market cap is over $560 million with its stock currently trading around $3 per share.

There are currently several clinical trials in progress for drugs that may combat and/or treat obesity with success. For instance, Qnexa, a blockbuster drug developed by VIVUS (NASDAQ:VVUS), is one of the top candidates for a long-awaited FDA approval so far. However, the final verdict from FDA was supposed to be delivered by April 17th but was postponed for mid July this year. The FDA informed the drug maker VIVUS that it needs more time to review the company's risk evaluation plan for Qnexa, to make the final decision. After the delay was announced, the company's stock went down for more than 6% and is currently trading around $21 per share.

Orexigen Therapeutics (NASDAQ:OREX) is another competitor in the race for the development of a new drug that treats obesity. Orexigen is a smaller but emerging California-based biotech company that focuses on developing drugs that treat obesity. The company's leading star product is Contrave, but it also has another backup product for obesity treatment in its pipeline called Empatic. Contrave was another anti-obesity drug in line to be rejected by the FDA last year. Orexigen is a small cap biotech with the current market cap around $270 million. When comparing it to its competitors, I would say it looks promising but it's time still has to come as this company still has to grow and prove that its drug has more than a moderate effect on people who are overweight and that it doesn't pose a risk of heart attacks.

The announcement that the FDA has pushed back the approval decision date for Qnexa has raised many concerns. Some believe this is a clear sign that Arena's Lorcaserin just gained the advantage over its main competitor Qnexa, while others believe this is a good sign that Qnexa will be the first weight management drug to be approved after more than a decade and that the company just wants to make sure it definitely passes the test. I must say that a very favorable vote (20-2) by the FDA advisors, which meant Qnexa's benefits outweigh its risks, gave me food for thought too. I think that VIVUS, with its current market cap of around $2.25 billion, has a good chance to win the round this time.

So, what's the prognosis for Arena Pharmaceuticals?

What I've noticed when it comes to companies dedicated to development of weight-loss and anti-obesity drugs is that as soon as there is even the slightest chance that the drug will get an approval, their market value starts going rapidly up. If the drug gets approved, investors are able to get good returns at the start. Yet, there is a big chance that the drug will prove to cause some unexpected health concerns, and that a decline is inevitable. Therefore, if you are interested in investing in pharmaceutical companies that produce anti-obesity drugs, it's very important to keep in mind that your gains may not last for long.

About the author:

I'm mostly interested in income investing using dividends, preferred stocks and other debt instruments, and pair trading.

I fundamentally analyze every business from the top down.

In my personal life, I have a strong Jewish faith and enjoy playing Scrabble and entrepreneurship.

Visit StockCroc's Website

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