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Yesterday, the FDA approved Arena Pharmaceutical's (NASDAQ:ARNA) weight loss pill Lorcaserin, making it the first obesity medication cleared for sale in the US in 13 years. The stock rose on the news by 29%. What's strange is its possible competitor, Orexigen Therapeutics (NASDAQ:OREX), rose 21% on the news - almost as much.

Orexigen's drug, Contrave, didn't get approved by the FDA in early 2011 because of cardiovascular safety issues. Contrave causes an increase in blood pressure and heart rate, which is especially dangerous for obese people. Now, Orexigen is conducting a cardiovascular outcomes trial for Contrave, The Light Study, listed on ClinicalTrials.gov. Contrave won't be ready to resubmit for approval until 2014.

The bullish thesis for a 21% rise in OREX yesterday is that since Lorcaserin was approved it shows that the FDA is more lenient now in approving obesity drugs. Therefore, there's a higher chance that Contrave will get approved in 2014. There's a lot of talk about the FDA getting pressured by the US government to approve weight loss drugs since obesity is a widespread problem that increases healthcare costs for everyone. Lorcaserin's approval apparently confirms this talk. In my opinion there are a couple flaws in this bullish logic.

1. Vivus' (NASDAQ:VVUS) obesity drug, Qnexa, has a PDUFA date of July 17. Lorcaserin's approval is also bad news for Vivus, since it will take away some of its thunder. Since Lorcaserin was approved, there's a good chance Qnexa will also be approved. As Adam Feuerstein from thestreet.com shows, the FDA panel sounded more positive on Qnexa than Lorcaserin.

With those drugs on the market, the pressure on the FDA to approve obesity drugs will lighten up. The FDA will no longer be in a hurry to approve Contrave in 2014 because obese people will already have two different drugs on the market to choose from. Also, a lot of changes can happen in two years, including the way the US government and the FDA think about certain drugs.

2. The 21% rise in OREX upon Lorcaserin's approval shows some insecurity on the side of OREX shareholders for Contrave. If Contrave was a great drug and sure to get approved, wouldn't they want Lorcaserin to fail FDA approval? We don't know the odds of Contrave being approved because it hasn't finished its cardiovascular trials yet. But even if it does get approved, it might not end up being nearly as profitable as people think.

By 2014, Lorcaserin and probably Qnexa will already have established full penetration into the weight loss drug space. Contrave might get ignored by doctors because they will already be prescribing one or both of the other two drugs to their obese patients. Contrave may especially be shunned if doctors are concerned about the rise in heart rate it causes. Doctors are always worried about their patients being in possible danger and the risk of being sued. Research shows Qnexa also causes an increased heart rate in some patients, but not to the extent that Contrave does. Lorcaserin actually decreases a patient's heart rate.

Conclusion

The days leading up to and the day of Lorcaserin's approval has caused a lot of excitement among investors towards obesity drugs. Once the excitement starts to settle down, OREX should fall. OREX was trading in the low $3 range earlier this month. I expect it to drift back down there when investors realize the risk vs reward tradeoff doesn't merit this share price level.

Source: Why The FDA's Approval Of Lorcaserin Is Bad News For Orexigen Therapeutics