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On the face of it, the FDA's approval of Arena Pharmaceuticals' (ARNA) Lorcaserin as an effective obesity drug is a buy signal. More so because this is the first obesity drug that the FDA has approved in 13 years, excluding Qsymia from Vivus (VVUS). Apparently there are plenty of ifs and buts regarding the safety of drugs that target brain chemicals, neurotransmitters, and metabolic systems.

Does Lorcaserin really hold that much promise for ARNA and its stock performance as is being talked up in the media? Here's a contrarian view.

Some Background

Obesity in United States has reached alarming proportions. The statistics are mind boggling, as revealed by a new federal report. The rates of obesity-linked type 2 diabetes have hit record highs. However, obesity is a preventable disease, except in a very few cases. But the fact of the matter is that drug companies look at it differently -- the massive demand for obesity drugs has a potential for providing massive profits to developers, manufacturers, marketers and investors.

The FDA did not approve an anti-obesity drug for 13 long years for a very definite reason. Although obesity drugs have been a priority with researchers, the inherent risks of these drugs have been instrumental in their rejection and keeping them out of pharmacies. It is only now that the FDA has accorded approval to Arena Pharmaceuticals and Vivus for two drugs: Lorcaserin (trade name Belviq) and Phentermine (trade name Qsymia), respectively. These two newcomers join Orlistat (trade name Xenical, marketed by Roche in most countries), the only other effective obesity drug.

Safety Issues

Lorcaserin is a drug that was rejected by the FDA only two years ago, but has now been approved. During the approval process, it raised some issues that were very similar to the ones raised by the EMA. Some of these issues were concerns about heart valve problems and cancer, the major reason it was rejected in 2010. At the FDA panel hearing in May, which ultimately voted 18 to 4 in favor of approval, "some panel members continued to express concerns that the drug may cause breast tumors or heart valve problems," according to WebMD.

According to a Reuters report, the FDA was under tremendous pressure to approve an anti-obesity drug. The report quotes Cowen and Co. analyst Simos Simeonidis:

It appears that the agency's view has officially shifted toward 'not treating obesity [as] a risk in and of itself, so we're willing to put drugs in the market in order to help people lose weight, even if there's risk associated.'

The FDA has told Arena to conduct six post-market follow up studies, including a long-term study of whether Lorcaserin/Belviq increases risks of stroke and heart valve problems. It is not a rosy picture. Yet, based on second-hand reports of scientific studies, people tend to believe things they should do more research on.

Our problem is that we tend to take scientific studies as sacrosanct, which they actually are not. Here is what medical science had to say about Lorcaserin, its side effects, and the why it was rejected in 2010:

Two years ago, the FDA had rejected Lorcaserin on the grounds that Lorcaserin is a non-genotoxic carcinogen inducing multiple tumor types in rats' and caused 'mammary neoplasms [to] occur near clinical exposure and the tumorigenic MOA remains unresolved. (Source: "Lorcaserin Carcinogenicity Assessment in Rats and Mice.")

It is now being argued that carcinogenicity of Lorcaserin was species-specific, as tumors were seen in rats and not in mice. This probably formed the basis of conclusions by independent pathologists that cancerous tumors were not likely in humans. However, the 2010 report had put a big question mark on specificity as well when it mentioned that "highest drug exposure in mice nearly equaled lowest drug exposure in rats; species specificity of tumor response is questionable."

If no tumors were seen in mice, it was because of a low dose and not because of species specificity.

According to experts, Belviq is unlikely to be recommended for approval by EMA's Committee for Medicinal Products for Human Use in the near future. EMA is known not to follow USFDA. In the case of Lorcaserin, it has more issues than only tumors in rats. As per Arena's admission in the earnings call, the EMA was concerned with the drop in the rate of studies and coagulopathy (clotting disorder and bleeding disorder) as well.

A large element of doubt still exists regarding the safety of Lorcaserin, which will be put to test in the market. If all goes well, ARNA will be a killer stock to buy now; if the drug market reacts negatively or some of the safety concerns become a reality, the stock will hit rock bottom.

Other Concerns

An obesity drug manipulates pathways that control body weight, which can have long-term effects on cardiovascular health and other metabolic systems. This necessitates that drug developers set a high bar for clearing the safety of such drugs.

A lot about Lorcaserin is not being highlighted. The package insert that describes what physicians prescribing Belviq should know does not mention tumors found in rats. Another worry is that the prescribing information does not mention echocardiograms for testing heart valve problems, despite the finding that effect of Belviq on cardiovascular morbidity and mortality has not been established. Lorcaserin is a serotonin 2C receptor agonist. According to the FDA, it works by raising serotonin levels in the brain, which may help a person eat less by promoting a feeling of satiation even after eating smaller amounts of food.

Serotonin is the same neurotransmitter that was the target of fenfluramine, which was part of the notorious anti-obesity medication Fen-Phen. Fenfluramine was introduced in U.S. in 1973 and later withdrawn in 1997 after reports of heart valve disease. The other part of the combination drug Fen-Phen was phentermine, another appetite suppressant used in combination with topiramate in Vivus' Qysmia.

It is now being suggested that Lorcaserin is selective and instead of targeting serotonin directly, it affects serotonin receptors to suppress hunger. There are also issues with side effects of Lorcaserin (Belviq). It is an established medical fact that prolonged use of a drug enhances risk of drug side effects. According to the New England Journal of Medicine, during trials one in five users who took Lorcaserin for one year lost 10% more body weight than one in 14 placebo users. Only those who continued with Lorcaserin were able to maintain weight loss better as compared to those who switched over to a placebo. This suggests prolonged use if body weight is to be maintained.

The most common adverse reactions (read: side effects) in non-diabetic patients are headache, dizziness, fatigue, nausea, dry mouth, and constipation. In diabetic patients it may cause hypoglycemia, headache, back pain, cough, and fatigue.

There is also a risk of developing serotonin syndrome, a potentially life threatening drug reaction caused by overdose and/or inadvertent drug reaction. The safety of co-administration with other serotonergic or antidopaminergic agents has not been established. Lorcaserin reacts with a number of other drugs including SSRIs (antidepressant drugs block the reuptake of serotonin so that more serotonin is available to act on receptors in the brain) and MAOIs (a class of medications that are particularly effective in treating atypical depression).

ARNA Financials

Third-quarter revenue was down by more than 50% compared to the third quarter of 2011 (down from $3.5 million to $1.5 million). There was an increase in its revenues for the nine months ending Sept. 30, 2012, as compared to the same period in 2011 (up from $10.6 million to $25.7 million). However, the increase was mainly due to the $20 million milestone payment received from Eisai, the company ARNA is collaborating with for the competitive edge it needs for marketing Belviq.

At the same time, there was an increase in interest and other expenses -- $27.4 million in the nine months ended Sept. 30, 2012, compared to $21.1 million in the same period in the prior year. ARNA's net loss allocable to shareholders for nine months 2012 comes to $67.0 million, or $0.35 per share, which is less than the $0.64 per share loss for the corresponding period in 2011.

Conclusion

Seeing America's obsession with weight-loss pills -- FDA-approved prescriptions, complementary and alternative medicine, over-the-counter slimming pills, appetite suppressants, etc. -- one would wonder what happened to good old exercise and a healthy diet. It is just like smoking -- everyone knows that you reap immediate benefits by quitting smoking, but still people find it hard to quit. (Mark Twain found it easy and apparently quit smoking 100 times.)

Arena has a lot riding on the success of Belviq. The demand is there as obesity has assumed epidemic proportions in United States; even Europe is worried. The company and investors are assuming that Belviq might prove to be a savior for ARNA's dwindling EPS. The risk evaluation, in my opinion, is tentative. Belviq may either be rejected by the EMA or it may take several years. Losing the European market will have an impact on revenues from Belviq.

In the U.S., will specialty doctors and primary physicians start prescribing Belviq once it is launched, or will they prefer to play it safe as they did in the case of Qsymia? There is a great possibility that doctors might vote for safety against taking a risk, no matter how small. The possibility is even greater if the EMA does not approve Lorcaserin. In addition, Lorcaserin is not as effective as Qysmia.

We have seen what happened to VVUS stock when sales of Qysmia dropped because doctors became wary of writing prescriptions due to safety concerns. Also, many patients did not get their prescriptions filled knowing that they must pay a large percentage of the cost from their own pocket.

If I was to invest in ARNA on the basis of FDA approval, I would play it safe and monitor Belviq sales, and invest only after I am sure of the market's response. I may be late in entering the stock, but as they say it is better to be safe than sorry. Alternately, I would ride the sentiment and make my money, but try not to be greedy and dump it at the first sign of trouble.

Source: The Contrarian View: Let's Not Put All Our Money On Lorcaserin Just Yet