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On the heels of some very positive news regarding a cardiovascular study last week, Orexigen Therapeutics (OREX) has now announced a proposed $100 million Senior Convertible Note offering. At the time Orexigen announced the positive data on its Light Study, which is a precursor to a possible FDA approval application, I categorized the development as positive, but that it was perhaps a "sell the news" situation. Now that seems exactly what the short-term investment play was. With the announcement of this $100 million offering, the equity is down 6% to about $6.40.

Orexigen is essentially a third player in the prescription anti-obesity space, though it does not yet have Contrave approved. Its drug, Contrave, is a combination of two existing drugs that, in the opinion of many falls in between Arena Pharmaceuticals' (ARNA) Belviq and Vivus's (VVUS) Qsymia in terms of safety and efficacy. Orexigen is partnered with big pharma company Takeda.

The new offering is slated to be senior convertible notes due 2020 and will be a private offering to qualified institutional investors. The offering will also have a 13-day window in which these investors can purchase an additional $15 million worth of these notes.

The good news is that such an offering gives Orexigen the liquidity to get to a point of FDA and perhaps even European approval of Contrave. The bad news is that convertible shares can be an anchor of sorts on an equity down the road. Depending on the structure, the conversion price, and the timing, these notes could be something that becomes a frustration point down the road.

Orexigen carries a market cap of $600 million. That makes this offering pretty substantial in the grand scheme of things. With these notes being Senior, they will take precedence over typical common shares. In addition, there are often covenants in such notes that investors will want to be aware of. As yet, these details are not available to assess.

In my last article, I stated that Orexigen can be an interesting play, but that investors need to have a level of caution with regard to approval likelihood as well as the overall sector. If you are already invested in Orexigen, or even looking at it as a potential investment, it would serve you well to monitor the progress of Arena's Belviq, Vivus's Qsymia, as well as how the insurance industry covers anti-obesity drugs. On one hand, Orexigen is the last player to get to the field of play. On the other, the regulatory and insurance work done by Arena and Vivus could make the path to sales much easier and less expensive for Orexigen.

In my opinion, Orexigen is still a "wait and see" play. For the sector, I see January and February of 2014 as a key time period. Arena and its partner Eisai should be ramping up a more aggressive ad campaign that should bring consumer awareness, and insurance companies should be adjusting formularies on obesity treatment. Consumer traction combined with better insurance coverage could be a powerful catalyst for the whole sector.

Source: Orexigen Announces $100 Million Offering

Additional disclosure: I have no position in Vivus or Orexigen