Orexigen Therapeutics: A Safe Short on Likely Drug Rejection

Jan.27.11 | About: Orexigen Therapeutics, (OREX)

With the near 50% fall in MannKind (NASDAQ:MNKD) just last week on FDA asking for more data, Orexigen Therapeutics (NASDAQ:OREX) is likely to suffer the same fate. Decision is scheduled for Jan. 30th, but don’t wait since MNKD’s decision was scheduled for the 26th but got the FDA request on the 19th, and in response plunged. If you can, this might be one “safe” short play.

On December 8th, shares more than doubled in value, setting a two-year high of $11.15 after the panel recommended approval for its drug candidate Contrave. As noted here, “advisers last month recommended the FDA approve the drug and then require a follow-up safety study.” However, I can’t see the FDA doing this. How could they approve a drug before a safety study? That doesn’t sound logical to me.

It is not unusual that the FDA doesn’t follow the panel’s advice. We saw this happen in the past. And this past year’s FDA has been one of the stingiest ever.

Orexigen develops the obesity drug Contrave. The drug itself has many positives such as causing more weight loss and a lower increase in blood pressure or heart rate than obesity drug Meridia, which was approved in 1997 but pulled from the market last year on increased risk of heart attack and stroke. However, over a one-year trial, about half of the patients lost only 5% of their weight, a number that may not be significant enough to guarantee approval. And Contrave also has concerning cardiac issues. Plus, the incident that one death did occur in trials is a huge red flag.

Short interest is 26%, a little on the high side. Insiders have been selling lately. Do they know something we don’t?

click to enlarge

Click to enlargeSource: MSN Money

Given the fact that the drug had already surged on positive FDA panal vote, the stock can loose just as much if it gets a delay. In the end, the drug may get approved, since it clearly has benefits, but it won’t happen on January 31st or anytime soon. And on a swing play; one can also buy shares after the plunge, since the drug still has promise.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.