Orexigen (NASDAQ:OREX) announced this morning that an FDA decision on approval of the anti-obesity drug Contrave would have to wait until September 11, 2014. The three-month delay is said to be centered on negotiations between the agency and the company on post marketing obligations for the drug.
Investors did not receive the news well and the stock has dipped over 15% in pre-market. This presents an interesting conundrum to consider. Ultimately, approval does indeed seem to be in the cards, and that would not, in theory, change the valuation model. If nothing else, the dip this morning indicates that active traders, betting on an approval were in the equity for the trade.
Two months ago, I labeled Orexigen as a buying opportunity with the stock near $5. At that point, I anticipated minimal downside risk but an upward potential leading into the approval date of $7.84. The equity never did get to $7.84, but did appreciate nicely. That same dynamic could simply now be delayed. Yesterday, I stated that I anticipated a run to continue upon approval followed by the equity settling down a bit, or a sharp sell-off with rejection. I recommended that investors may want to consider a judicious placement of stops. What we got was a delay with a sharp pre-market sell-off. Unfortunately, stops do not come into play in pre-market action, but for those that did grab the equity at the lows, a 15% gain is preserved. What investors need to do now is assess how the equity will fare over the summer.
Orexigen was due to receive about $100 million with approval and launch of the product. The cash position of the company is decent, but the revenue will have to wait. If an agreement is reached with the FDA, (I believe it will be) we will see an approval in September and a launch happening in late 2014. During a conference call this morning, management indicated that the delay was related to post marketing studies and not what may or may not be included on the label. Thus, data from the cardiovascular Light Study is not likely a label inclusion.
For the overall anti-obesity space, this news presents interesting facets as well. For Arena Pharmaceuticals (NASDAQ:ARNA) and its marketing partner Eisai (OTCPK:ESALY) the news allows the re-launch of Belviq to go unfettered through the Summer and early Fall. Orexigen's Contrave has recently enjoyed a spotlight and Orexigen's partner Takeda had planned to launch Contrave with 900 sales reps calling on doctors, potentially with free sample in hand. For Vivus (NASDAQ:VVUS), which has struggled to demonstrate month over month sales growth for Qsymia in 2014, the additional time could be welcomed. Vivus does have an erectile dysfunction drug, Stendra, on the market, which seems to be gaining meaningful traction.
The downside for the sector on this delay is that it puts off the entrant of a third player to apply pressure on insurance companies, lawmakers, and doctors to look at obesity treatment in a new and fresh light. Despite overwhelming evidence that obesity carries and brings about additional health risks, there are still many that feel a pill is not a solution. Doctors that consult to Consumer Reports were negative on both Qsymia and Belviq. That magazine published articles about both drugs currently on the market when they launched. It would have been interesting to see their take on Contrave.
All in all, it is now time to monitor the stock price of Orexigen, reset the game clock, and look for yet another run-up a few months from now. Traders will steer this equity for a week or so. It is my suspicion that the equity could test down by that $5 range again in the next 6 weeks or so and begin a new run up into what should be an FDA approval in September. Orexigen is anticipating some action in July from Europe with the 180-Day questions. We should get a little flavor on chances in Europe at that point. Stay Tuned!
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. I have no position in Orexigen, Vivus, or Eisai
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