Arena Pharmaceuticals' Belviq Approval May Not Match The Hype

Jun.29.12 | About: Arena Pharmaceuticals, (ARNA)

Arena Pharmaceuticals (NASDAQ:ARNA) had its Belviq obesity drug approved on Wednesday. Shares rallied to close up over 28%, and Belviq is the first weight-loss drug approved by the Food & Drug Administration in 13 years. We do not cover the firm, but we think there are a few major risks investors should be aware of before establishing a position in the biotech firm.

For one, Belviq is no wonder drug. With diet and exercise, it was proven to aid in weight-loss of 5% or more of body mass in one year. Perhaps the drug, which helps alleviate hunger, does aid in the process, but we certainly did not see miracle results. 5% or more equates to a 400lb person losing approximately 20lbs, or a 200lb person losing 10lbs. While it may be a start for many, those results certainly are not life-changing.

Additionally, Belviq faces several forms of competition. Though the FDA must approve drugs, it does not have to approve dietary supplements. Weight-loss supplements include Hydroxycut, ErgoGenix and over 200 other fat burners on alone. These supplements may lack clinical results, but they all have plenty of reviews and will likely cost less than Belviq and, more importantly, they do not require a prescription, making the addressable market significantly larger. If seems suspicious, note that it does have one of the largest online presences of any supplement seller. Even GNC (NYSE:GNC) has over 100 thermo-genic fat burners alone.

The last risk, in our view, is execution. Plenty of drug companies have double, tripled, quadrupled and more in value, but several including Human Genome Sciences (HGSI) and Dendreon (NASDAQ:DNDN) are over 50% off their all-time highs because execution proved harder than expected. Another company, Savient (OTC:SVNT), has fallen from over $22 in 2010, to just $0.60 today. Being able to successfully market a drug and having widespread adoption can sometimes be as difficult or more difficult than getting the drug approved. Nothing guarantees that doctors will universally prescribe Belviq over diet and exercise.

In all, we think it's important that investors remember that an FDA approval is no assurance of commercial success. We're very cautious about establishing a position in the company in our Best Ideas portfolio simply because its drug receives approval. We'd like to see some market traction first.

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