I think I have heard about diet pills for my entire life. The pills of choice 50 years ago were amphetamines. Obviously not a wise way to lose weight. I never had a real weight problem until perhaps I retired and began slowing down. Now at 63 I can stand to lose a few pounds. Well, ok, maybe more than a few.
I exercise reluctantly, with a personal trainer who makes sure I actually work out, but I really hate it. Actually I would not do it at all if my family didn't insist. Too much honesty right? Well, now that we have some drugs approved by the FDA for weight loss, maybe I won't have to go on a diet and still lose weight!
Arena Pharmaceuticals (NASDAQ:ARNA) has had a drug approved by the FDA recently, and the stock has soared.
After the FDA approved Arena's new diet drug, Belviq, the stock surged from about $2.00 a share to over $12.00. It has backed off to around $8.50 after it was announced that there would be a six month waiting period prior to the actual release of the drug on the market.
It needed to address several issues that the FDA had placed on it, but will not affect the product launch eventually. The new drug is scheduled for launch in early 2013.
Just in time for all of those New Year resolutions, right? To many investors, it might look like a dream investment. Unfortunately that dream might just be a nightmare for investors looking to make a killing.
Let's Look At Some Facts
- Arena has a market cap of about $1.9 billion.
- The company total revenue last quarter was under $30 million.
- Profits came in under $5 million.
- Price to book value is an astounding 18.20.
- Actual book value is less than $.50/share.
- The company has -$63 million in operating cash so they are using debt to keep going.
- Even insiders have shied away from owning shares at less than .70% of outstanding shares.
It seems to me that this company might need a miracle drug. Could that be Belviq? It just might. After all, projected sales of over $1 billion could put $500 million right on the bottom line with just average margins for a drug of this type.
Take a pill, lose weight, and hardly a side affect to consider. Seems like this could very well be the miracle that Arena needs. $1 billion in sales for one drug is 5 times the revenues that the entire company has generated. Speculators can smell the money already.
To be candid, plenty of traders have made plenty of money on this stock already, but I contend that the smart money has already left the building.
Arena Could Be On A Crash Diet Soon
Ok, so let's fast forward 6 months from now. Belviq hits the market and sales are brisk. The first quarter results begin to come in and Arena is finally making money. The problem is that folks are not losing weight!
The company itself has said that people should stop taking the drug if they fail to lose 5% of total body weight after 12 weeks of therapeutic use;
"The drug's label will recommend that people stop taking the pill if they don't lose 5 percent of their body weight after 12 weeks of treatment, as those patients are unlikely to achieve meaningful weight loss even with continuing treatment."
Hmm, seems to me that even Arena is not certain that the drug will work very well. The FDA is also stating that the drug should be used in conjunction with diet and exercise!
"The obesity pill Belviq (lorcaserin) has been approved by the U.S. Food and Drug Administration to be used in conjunction with diet and exercise as a weight management treatment option."
Well that is NOT what we signed up for right? If I went on a diet and kept on with my exercise regimen I would be ticked off if I didn't lose 5% of my weight in 12 weeks anyway! Imagine if I had to pay through the nose to find out that result!
5% of a person who weighs 200 pounds is 10 pounds. Losing 10 pounds in 12 weeks is doable for far more folks who diet and exercise than I would imagine, wouldn't you? Why pay for a drug that doesn't even promise that it will take those pounds off just by itself?
Personally, I think the FDA wanted to approve a diet drug as long as it didn't cause an immediate heart attack or something. It has been a very long time since the last one was approved, and that one was lousy anyway (Xenical)! I know because I tried it, and I can tell you that it was awful.
So what is Arena saying that this drug will actually do?
"Lorcaserin works to control appetite. It makes the brain think the stomach is fuller, sooner. The FDA approved Belviq as "an addition to a reduced-calorie diet and exercise." States the FDA and Arena.
Ok, but take a look at this:
According Mary Hartley, RD for DietsinReview.com, "In two clinical trials, lorcaserin helped patients lose 5.8 percent of their body weight after a year. That's about 10 pounds for a 180-pound person. Big deal."
5.8% weight loss in one year? Give me a break! How many folks that you know would fork over potentially thousands of dollars for a drug that hardly does more than a placebo?
"Lorcaserin is just another sad attempt by the FDA to thwart the obesity epidemic," says pharmacist Dr. Sarah G. Khan. "From studies like the Diabetes Prevention Program - where patients were given metformin, placebo or put in an intensive coaching program with education and given nutrition and exercise - we know that lifestyle modifications provide the most success in long-term weight loss and maintenance. The FDA's initial rejection of both Qnexa and Belviq shows that they had the right idea the first time. Drugs are not going to solve this problem. We know what will -- now we need a plan to execute it," notes Khan."
Ok so the drug hardly works. What about side affects? I thought that this article stated it the best;
I can't see how this drug couldn't create lifestyle-altering side effects in most people. Serotonin affects our appetite, but it's also equally important in affecting our mood, aggressive behavior and impulse control, memory and learning, cardiovascular function, muscle contraction and temperature regulation. It would be wishful thinking to hope that only appetite would be tweaked when taking Belviq, but it's highly likely that there would be a chain reaction affecting other parts of the user's life as well.
Migraines and depression are two side effects that user's might have to contend with. When taking Belviq, it's recommended that the user eat a healthy diet and exercise regularly. I don't know very many people that high tail it to the gym for a good workout when they're blue, much less dealing with the pain of a migraine. Memory loss is another interesting less serious side effect. Apparently cognitive function isn't all that important.
A more serious complication called serotonin syndrome, a life threatening condition in which the body produces too much serotonin, also places users at an increased health risk. Then there's heart tissue damage. It's not yet known if Belviq can actually cause heart damage, but the FDA warns those with existing heart conditions to use Belviq with caution. In fact, the FDA has required Arena to perform six post marketing trials to assess whether or not long term heart tissue damage occurs in users. Essentially users become guinea pigs by default.
The bottom line is that the stock has soared because this drug was FDA approved. Now that it is approved, folks need to keep taking it. From what I have just outlined, how long do you think it will take before people stop paying for a drug that does little to help the obesity problem.
I will place my faith in physicians that will not prescribe the drug in the first place. If they do prescribe it, it will be after Arena gives out enough free samples for the patients to actually see if it works.
That will not put dollars on the bottom line in my opinion. I think Arena will be back under $3.00/share, sooner than the drug helps you lose 10 pounds.