Short Squeeze Potential in Arena as Vivus Panel Date Looms

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Includes: ARNA, OREX, VVUS
by: Ruthanne Williams Roussel

As expected, and as management discussed as a possibility a few weeks ago on the Q1 conference call, the FDA's Endocrinologic and Metabolic Drugs Advisory Committee will review Arena Pharmaceuticals (NASDAQ:ARNA)'s weight-loss drug candidate lorcaserin at its already scheduled Sept. 16 meeting. We rate this news as good.

In the small-cap world, it is always especially reassuring when outside agencies behave as management expects them to. While lorcaserin's cardiovascular safety has been extensively studied and independently reviewed, we still were never in the camp that believed that this might give lorcaserin some sort of free pass to FDA approval with no further review. The PDUFA (approval decision) date for lorcaserin is in late October.

The New Drug Application (NDA) for Orexigen's (NASDAQ:OREX) competing weight-loss drug candidate Contrave has been accepted for review, the FDA also confirmed on Tuesday, June 1. Contrave's PDUFA date will probably be in early 2011, but Contrave could still also be included in the September committee meeting. OREX management has said they are preparing for an FDA advisory meeting for Contrave, although they have not received word yet that there will definitely be one. Finally, this acceptance confirms our belief that OREX's restated clinical trial data should not affect its filing schedule.

Now to Vivus (NASDAQ:VVUS) and its weight-loss candidate Qnexa. As has happened around this time every year for several years now, VVUS CEO Lee Wilson's preplanned stock sales have ruffled a few feathers among investors. However, I think this concern is overblown. Without delving into the particulars of his personal life, Mr. Wilson is of an age where wives, ex-wives, and kids may all have a say in what he does with his wealth. This sales plan has been in place for several years and anyway, other VVUS executives are not selling. For most investors, this is another great argument for my pet strategy of holding a little of each of VVUS, OREX and ARNA instead of worrying about which of the three is best.

Finally, the big news obesity drug investors are all waiting for. On July 15, the FDA's Endocrinologic and Metabolic Drugs Advisory Panel will review VVUS's NDA submitted for Qnexa. The FDA decision is not expected until late October, so there may be time to go back to the drawing board if additional analyses of the existing data are required.

The panel's recommendations are not binding on the FDA, but are usually followed. Watch the FDA web site a few days in advance of the panel meeting for the briefing documents, which may give some hints as to the direction the panel is leaning.

Note that at close of market June 2, VVUS shares were up 4.92% in heavy trading, while ARNA was up 5.9% in above-average trading. As of May 14, VVUS short interest represented 3.5 days to cover, while ARNA short interest represented about 10 days to cover. While VVUS has passed the $1B market cap mark, ARNA is still definitely a small-cap stock, with market cap close to $330M and relatively small float of just under $100M.

Arguably, good news for VVUS could be good for all the weight-loss candidates, if the FDA shows itself more receptive to this class of drug than it has been in the past -- while bad news for VVUS could help its two rivals in the space, particularly ARNA, since lorcaserin is a novel agent with a completely different mechanism of action than Qnexa. Those who like to look for short squeezes would do well to watch ARNA over the coming weeks.

Disclosure: Long OREX, VVUS, ARNA