Seeking Alpha
What is your profession? ×
Growth, value, special situations, momentum
Profile| Send Message|
( followers)


FDA news is two months away.

Orexigen is just above 52-week lows.

Risk vs. reward is tempting.

Orexigen (NASDAQ:OREX) is trading just 10% above 52-week lows at just over $5 per share as the week closes out. The company has been an interesting third play in the anti-obesity space despite the fact that, as yet, Contrave (the Orexigen anti-obesity drug) is not approved anywhere.

Orexigen saw a small run up over the past couple of months when the company filed application for approval in Europe and announced that it is anticipating an FDA decision in the United States this June. At that time I made the statement that I found the equity more attractive at about $5.00 than the $5.67 it was trading at. My stance was that while an FDA approval play was indeed present that investors could afford to be patient. Some readers thought I was crazy, but here we are today on the cusp of the $5 target I felt was attractive.

I happen to like the chances of Orexigen getting FDA approval in June. I also believe that the drug has a better chance in Europe that Vivus (NASDAQ:VVUS) had with Qsymia and Arena (NASDAQ:ARNA) had with Belviq. The timing here may be quite interesting.

I do not look for much from Orexigen when it reports its Q1 numbers. What I expect to see and hear is that the company is confident on the prospects of approvals, that marketing partner Takeda is getting ready to launch the drug, and that the company plans to be aggressive in the marketplace.

I do anticipate a run-up of sorts going into the June approval date and just after if approved. In my opinion the run-up will not be as bold as the one we saw with Arena and Vivus. The market better understands that the anti-obesity sector is not going to deliver an overnight blockbuster. Vivus sold about $35 million of Qsymia in 2013 and Arena sold about $28 million. These numbers would seem to demonstrate that the marketplace is simply not ready to accept an anti-obesity drug on a widespread basis.

Where things get very interesting with Orexigen is in Europe. If Orexigen can succeed where Arena and Vivus failed, the company will get a head start in markets that are untapped by the competition.

In my opinion Orexigen is fast approaching what I would call a compelling short-term speculation play. If potential U.S. approval is just two months away, and the equity is near 52-week lows, the ingredients are there to deliver a healthy short-term return. At that point, an investor can assess the launch and the status in Europe and take profits or let it ride.

The 52-week high on Orexigen is $7.84. That is about $2.70 per share higher than the current price. If we establish $4.60 as the downside risk and $7.84 as the upside potential, we can see a very respectable risk vs. reward ratio. Risk is about $0.50 and reward is $2.70. Even if the pop only brought Orexigen up to $6.50, the reward is still a return of over 25%.

For those that were patient back in January and considering an entry point, it may be here. If you can stomach a risk of 10%, then the current price at $5.13 is good enough. If you like to play the absolute bottom, you run the risk of the equity turning back up without you. Biotech stocks have been beat up lately, so there is a lot of opportunity. I like the Orexigen play simply because FDA news tends to boost an equity. As far as the overall anti-obesity space goes, it would appear that slow and steady is the word of the day.

Disclosure: The author is long ARNA. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have no position in Orexigen or Vivus