Safety Data on Arena's Weight Loss Drug Could Pave Way for Good Partnership

On March 17th, Arena Pharmaceuticals (ARNA) reported that they will continue with phase III trials after an independent review of unblinded data showed no cardiac safety concerns for the weight loss drug Lorcaserin. This was a rather important result for Arena because there had been concerns that it may have similar heart valve problems that plagued fen-phen, which targeted the same receptor.

I have written in the past about the differences in the selectivity in these drugs, which theoretically is enough to avoid the cardiac side effects. However, data released last week is the proof that the FDA needs to assure this product is safe. This also proves they have great scientists and good judgment.

These results should also pave the way for a potentially lucrative partnership for Arena. The product is at least two years away from the market but it has blockbuster written all over it. Given the current challenges of product development at big pharmaceutical companies, I believe finding a partner and good terms may be easy. There is also a good chance that the company may get bought out because its valuations make the purchase more appealing to a big pharma partner.

I had originally recommended this stock at $17.39 in 2006. I had assumed Lorcaserin, then in phase II, would have a quicker path to market. Today at $6.94, and with successful safety results, ARNA is a great value. I anticipate a deal announced sometime this year (I also said the same thing in 2006, so this advice may not be worth much!). However, I resisted recommending to average down on this stock until safety data was out. Now that a lot of the risk is out, I recommend to average down or open a new position at these levels.

But don't expect a quick return on this investment. The biotech index has been getting hammered recently. I don't think this is due to fundamentals of biotech stocks. In fact Genentech (DNA), Genzyme(GENZ), Biogen Idec (BIIB) and a host of other stocks have reported decent earnings reports and good guidance for 2008. My guess is that this is a byproduct of hedge fund managers chasing commodities such as oil, wheat and gold for a quick return and selling all other assets to raise cash for their gambles. These are the same guys who were betting on the real estate bubble and the dot.com bubble in the past. Do you see a trend yet? Once the commodity bubble bursts, money should return to fundamentally sound sectors such as the biotech.

Disclosure: The author does not have a position in ARNA at the time of publication of this article.

Comments

[Random Walk]

Perception of valvulopathy risk will always be there. The efficacy of the drug is not that impressive. Many alternatives to lorcaserin exist now, and many more will exist in the future. Tough time with third-party payers. Also, still in Phase III studies. Given all these things, there are probably more compelling biotech investments out there.

[kevintx]

Lorcaserin is looking strong here. Other obesity drug candidates are having a hard time e.g. Merck's. Evolving standards for psychological side effects are raising the bar. Existing drug options are lacking. Increasing prevalence of obesity has been a stable long term trend.
ARNA is also trading rather cheaply here, has a sizable cash reserve, and has other drugs in the pipeline. I'll stick with it.

[bryguy]

I agree 100% arena is a steal at these prices andif you can wait for your returns I beleive they will more than pay for your patience. I am willing to wait

[Subita]

While lorcaserin's partnership will definitley drive the stock up, I think most cos will still wait for some more time (18 m data) and release of full data. However the value of the other pipeline products is not realised yet in the stock price currently and ARNA is a long term investment opportunity.

[Random Walk]

Obesity surgery is getting better. So many drugs in development for obesity. The possibility of valvulopathy, however remote, would deter anyone from taking this pill given the alternatives. This drug will be in regulatory limbo given concerns about its widespread use.

[CliffA42]

You can't lose at this price. The speculators and shorts alone will double it. All the market needs is a whisper and it flys! Just make sure you get out on the fly!

[JTucc]

A. Reza Saadat, Thanks for your insight. I have a long position in Arena. May I ask...what do you think might be the effects on stockholders of a buyout?