Arena: Bears Have It All Wrong

Jun.25.12 | About: Arena Pharmaceuticals, (ARNA)

When was the last time a clinical stage pharmaceutical company created as much controversy, and heated debate as Arena (NASDAQ:ARNA)? For that matter any company? Facebook certainly was controversial, but it did not elicit anger and ugly language. More importantly, Facebook did not have choirs singing or preachers yelling at a pulpit for or against its product. Arena has thousands of preachers and detractors yelling at their respective pulpits and at each other. Although I own Arena, my debates for the most part have been with close friends. I have stayed away from the firestorm because I knew better - until now.

This coming Wednesday is D-day for Locaserine - Arena's only real drug. D-day means different things to different people. For the bears, it means decision date. For the bulls, it means "double of the share price" day. I am a member of the latter. I believe in Locaserine. I believe it will be the biggest drug to get approval this year. I believe it will be the first billion dollar weight loss drug. I also believe once and for all the bulls will bury the bears.

The most common argument that the bears have been making against Locaserine is that it is not effective enough. A writer - not named Adam Feuerstein - at wrote today that "My primary concern is the drug's modest effect size. In Arena's Phase III studies, named BLOOM and BLOSSOM, lorcaserin recipients lost only 3.7% and 3.0% of their body weight, respectively, after adjusting for the placebo group." That is true. He is a smart man, but a shortsighted one as well. First of all, he says it himself, "placebo adjusted group." That means that when not adjusted for a placebo, Locaserine's effectiveness was significantly higher. Placebo adjusted simply means that Locaserine was more effective than the placebo. When dismissing the adjustment, Locaserine on average reduced body weight by nearly 6%. More importantly for about a quarter of trial participants, Locaserine helped them lose more than 10%.

The placebo group is not useful in this case because as a patient you don't care how you lose weight as long as you do. More importantly, if Locaserine had the added benefit of being more effective as a result of the placebo effect - awesome. We are not talking about cancer here. We're talking about going down a dress size or two or three.

The same writer says, "I doubt Lorcaserin will be the mega-blockbuster that bulls expect. History is on my side - no obesity drug has ever even come close to reaching $1 billion in US sales." He is right again. However, his reasoning for the conclusion is that no obesity drug has ever achieved a $1 billion in sales therefore no obesity drug will ever achieve $1 billion in sales. Yes folks, that is his logic. I don't know how old Mr. Sadeghi-Nejad is but that seems to be childish thinking at best and a whole lot of other things at worst. First of all, virtually every obesity drug that has ever been introduced to the market has had awful side effects. This is why obesity drugs have never achieved blockbuster sales. However unlike all of these other drugs, Locaserine has virtually no side effects. It will be the safest weight loss drug to ever come to market. So, now patients don't have to weigh the side effects of the drug with its potential benefit. With Locaserine, it's pretty much all gravy - no pun intended.

Furthermore there are many bears, including the aforementioned writer, who continue to say, "Well, it's not really a cure for our nation's obesity crisis." In fact Mr. Sadeghi-Nejad says, "I'm not a huge fan of obesity drugs. Despite the astonishing scale of the obesity epidemic in the U.S., I think the best long-term solution is a systematic overhaul of our society's interaction with food and exercise, not a pill that can't even maintain a modest effect for the vast majority of patients that take it." First of all, who cares what he believes. This is not a moral debate. We can also dramatically reduce the rate of cancer by outlawing smoking, fully converting to green energy, eliminating fats and sugars from our foods, and so on and so forth. But we're not going to do any of those things soon (hopefully someday). Therefore until we achieve Mr. Sadeghi-Nejad's notion of utopia, there will be a market for Locaserine (among many other drugs). Moreover, no one in their right mind believes that Locaserine or any other drug will solve the obesity crisis. Qnexa is likely the most effective drug that will be available and it reduces body weight by an average of about 10%. For a 5'4" 200 pound woman, none or all the drugs together can bring her down to a healthy body weight. These obesity drugs are effectively for the woman (80% of obesity patients in the trial were women) who wants to lose those extra 10 to 15 pounds and slim down one or two dress sizes. For this very large population of vain women, these drugs will be very useful. And again, Locaserine can do this without the awful side effects of its competitors.

Lastly when bears fail to achieve reasonable argument, they say "well the FDA is likely to delay approval by three months as it did with Qnexa." Where is the evidence for this? First with Qnexa, the FDA elected to extend the PDUFA date by three months in order to review the Risk Evaluation and Mitigation Strategies (REMS) that Vivus (NASDAQ:VVUS) had to submit in order to get a favorable ad-com panel vote. In fact, Vivus had to include some pretty onerous REMS such as limiting the use of Qnexa to patients outside their reproductive years (i.e., women age 16 to 45 - A.K.A Qnexa's primary customer). The FDA needed more time to review the REMS and ensure Vivus can adequately reduce the possibility of birth defects. Locaserine did not submit any new document or REMS subsequent to the advisory panel meeting. More importantly, the FDA's briefing document for the ad-com panel essentially equated to the FDA begging the panel to vote in favor of Locaserine. Second, the FDA extended the PDUFA date for Qnexa eight days before the original PDUFA date. We are now only two days away from Locaserine's PDUFA date. In other words, we crossed a reasonable threshold. Given all this, it is highly likely that Locaserine will get approval this coming Wednesday.

All reasonable accounts and discussions notwithstanding, potential and existing Arena investors really need to know one thing: the bears have been consistently wrong almost every time they have opened their mouths to bash Locaserine. On the flip side, the bulls have been proven right repeatedly. Locaserine will be the best weight loss drug on the market. More importantly unlike Qnexa and Orexigen's (NASDAQ:OREX) Contrave, Locaserine is a novel drug that has not been tested in combination with other drugs such as phentermine. Once approved, Arena can quickly move to see if there are additional weight loss benefits for Locaserine users when the drug is combined with others, including phentermine. If the combination does improve efficacy, not only would this improve Locaserine's existing market value, but it would also extend Arena's patent for at least another 10 years. So, are you a bear or bull?

Disclosure: I am long ARNA.