Arena Pharmaceuticals: A Stock For Aggressive Investors

| About: Arena Pharmaceuticals, (ARNA)
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As obesity rates in the United States and other parts of world continue to rise, many biotech and pharmaceutical companies strive to provide medications to curb this epidemic and save lives. Unfortunately, since the medications available today (prescription and over-the-counter) only help ease the biological causes for obesity, not emotional and psychological causes, many in the scientific and medical communities are skeptical as to whether these drugs actually provide long-term weight loss effects.

With that, Arena Pharmaceuticals (ARNA) is about to reenter the anti-obesity drug market with a revamped version of its obesity fighting drug, Lorcaserin. In 2010, Arena failed to gain FDA approval for the drug due to lack of sufficient evidence that the drug worked effectively to help patients manage their weight. Also, in several lab studies, rats developed unexplained tumors while on the medication. Lorcaserin supposedly increases serotonin levels in the brain to make patients feel full after eating. An FDA panel has agreed to review the drug again this coming May.

Along with possible FDA approval this time around, the company announced the acceptance of its marketing application by European Union regulators to begin selling Lorcaserin overseas. The application must undergo review by the European Medicines Agency, which will take place sometime soon. Once approved by the agency, Arena will be able to freely market Lorcaserin throughout most of Europe.

With news of potential approval not only from the European Union but also the FDA, Arena stock has risen steadily in a surprisingly short amount of time. Within one year, stock prices have gone from $1.21 to $3.47. The stock is currently holding at around $3.00. For investors, there's no telling how high the stock will rise once drug approvals are granted.

It has been estimated that by 2025, half of men and one-third of women in the UK will be considered obese. In the United States, it is estimated that by 2020, 70% will be considered obese. For pharmaceutical companies and investors, the growing number of obese people may mean hefty profits - unless the medications prove ineffective or overly dangerous when taken for a prolonged period of time. This is a double-edged sword investors need to be concerned with when investing in companies that manufacture these types of drugs.

With many other weight loss options including weight-loss therapy and an abundance of exercise and diet literature, workshops, gyms, and media for people to choose from, in addition to weight-loss surgery options, weight loss drugs may be a last resort for many people because of the many potentially dangerous side effects. From an investment prospective, it's important to consider investments in companies that provide alternative weight loss and management options. People spend billions each year on weight-loss equipment, diet plans and other things to help them lose weight and live healthier lifestyles.

Companies that develop and manufacture anti-obesity drugs typically see good returns at first and then witness a steady decline. For example, GlaxoSmithKline (GSK), manufacturers of the anti-obesity drugs Xenical (prescription) and Alli (over-the-counter), has had trouble in recent years due to potential side effects that include liver damage and kidney stones as well as lesser effects such as fatigue, headaches and complete loss of appetite. In fact, the company has been trying since 2011 to unload these drugs, but so far, has been unsuccessful. Sales of Alli have dropped steadily from a high of $147 million in 2007 down to just $84 million as of the middle of 2010.

The lesson to be learned here is that while an anti-obesity drug may do well in the marketplace at first, over time, it may lose its luster. Xenical, first introduced in 1999, has been prescribed to almost 40 million people, but has been on the decline for quite some time now. Another anti-obesity drug, Fen-phen, banned by the FDA in 1997 because of increased concerns about patient health, was considered at one point, a 'miracle drug.'

Abbott Laboratories (ABT), manufacturers of the now recalled weight loss drug Meridia, an appetite suppressant containing sibutramine (recalled in 2010), faced similar scrutiny when the drug was blamed for increasing the risks of heart attack and stroke in those taking it. Instead of dealing with an FDA ban, the company chose to remove it from the market.

Yet another example of a company withdrawing an anti-obesity drug due to potentially harmful side effects is Sanofi (SNY). In 2009, the company decided to stop selling Acomplia, which contained rimonabant. The drug, an appetite suppressant, was linked to psychological side effects including suicidal thoughts.

When investing in companies that manufacture anti-obesity drugs, it's important to realize that investment gains may only last a short while. Investors need to remain cautious of drugs touted as the 'next big miracle in weight loss' because in most cases, these drugs will not last long on the market. And if they do, the competition will quickly release new, better drugs, and cause a decrease in sales.

For now, the future remains uncertain for Arena's anti-obesity drug Lorcaserin. Even if the drug is approved in Europe and the U.S., investors should still remain cautious about investing in this and other drugs that promise to help people lose weight. It is important to make sure to invest in companies that have other marketable products to help it sustain steady cash flow and stock prices.

Investing in a company whose only products are those manufactured to control and maintain weight loss may be too risky in the long run. As past evidence has shown, most of these drugs are quickly forgotten about and quietly taken off the market - this is due to harmful side effects, stiff competition from other companies or simply because the drugs fail to work in the first place.

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