Arena Pharmaceuticals: Rising Star Or Falling Knife?

| About: Arena Pharmaceuticals, (ARNA)
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Unlike its rival, Vivus (NASDAQ:VVUS), the FDA has not announced a delay of a decision on Lorcaserin being developed by Arena Pharmaceuticals (NASDAQ:ARNA), which leaves the tentative date at June 27, 2012 for a decision on approval.

Most of the available information is clear. What the FDA will do with it remains uncertain. For starters, the vote was 18 - 4 for approval at the advisory meeting. Great, but Contrave, being developed by Orexigen (NASDAQ:OREX), had a positive advisory panel vote and was not approved. Yes, the climate and attitude for obesity drug approval may be changing due to external pressures, but how much? The drug is not very effective, meeting one categorical endpoint but not another. It did meet perhaps the more significant categorical endpoint according to information in the May 10, 2012 FDA briefing document, "at least 5% of weight loss at week 52, the guidance states that the observed percentage of responders should be at least 35% and at least double the percentage in the placebo-treated group. These criteria are met in all three studies." However, issues with safety, at least regarding tumors, are likely minor.

There still remains some concern about the potential for cardiovascular problems and raising blood pressure in diabetics. This could be balanced a bit by the observation that there was a reduction in HbA1C levels in diabetic patients treated with lorcaserin compared to placebo, which one would hope is viewed as very important by the FDA. Lorcaserin is relatively selective for the 5HT2C receptors, which makes a repeat of the Fen-Phen disaster remote. Fenfluramine activated a different serotonin (5HT) receptor. That does not allay all concerns that the drug could cause heart problems, but that could be addressed with a post-market study (or disapproval pending a larger study addressing cardiovascular safety).

But a decision on a statistically significant, but perhaps not that clinically significant, drug is likely going to be made sooner rather than later. Market potential should still be kept in mind. If approval were assumed, can Arena's stock price be predicted based on realistic growth prospects? Sales for Meridia in 2009, before it was withdrawn from the market, were above 300 million dollars. Whether lorcaserin can fare better is difficult to predict. But based on lorcaserin's relatively low efficacy and keeping in mind that obesity drugs are plagued by patients quitting the drugs, rapid growth to a billion dollars in annual sales quickly seems remote. On the other hand, if lorcaserin is approved and sales did rise quickly above 300 million, Arena is clearly undervalued at its current price.

Safety concerns are probably less significant for lorcaserin than Qnexa being developed by rival Vivus. One of the drugs in that cocktail, topiramate, is already approved for another indication and carries a warning for birth defects (cleft palate). Obviously, a significant potential patient population for obesity drugs is women of child bearing age, so that is an issue. Qnexa, on the other hand, works, which means patients would be more likely to keep taking the drug.

So is Arena a rising star or falling knife? Perhaps neither, maybe it is just fairly valued at around 5-8 dollars per share and perhaps that is why a secondary offering was priced at $5.50 per share. Competent management may be the best reason to buy Arena Pharmaceuticals.

Disclosure: I am long ARNA. I do not have positions in VVUS or OREX.