How to Keep From Losing Your Shirt

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Don't worry, investors. The Food and Drug Administration's early warning yesterday that there might be a link between liver damage and weight-loss drugs Xenical (from Roche) and alli (from GlaxoSmithKline (NYSE: GSK)) won't sink sales of the drugs.

Nope -- previously known side effects of the drugs have already done that. Weight loss is a potential gold mine, a multibillion-dollar opportunity, but neither Xenical nor its little brother alli has amounted to much so far, bringing in just $473 million and $139 million respectively last year. (Xenical and alli have the same active ingredient, but alli is a smaller dose and available over the counter.) Both drugs work by inhibiting the uptake of fat in the gut, meaning they have warnings about oily spotting and other issues that shouldn't be discussed in polite company.

Even if these were blockbusters, I'm not sure the early warning from the FDA would sink the drugs. The communication didn't draw a direct connection, and only 32 cases of liver issues have been reported over nearly a decade since Xenical was put on the market. Still it's a reminder that side-effect issues have plagued weight-loss drugs. Pfizer (NYSE: PFE), Merck (NYSE: MRK), and sanofi-aventis (NYSE: SNY) all ended research on weight-loss drugs because of side effects. And let's not forget about Wyeth's (NYSE: WYE) fen-phen.

The fear of side effects has probably kept small drug-makers such as Arena Pharmaceuticals (Nasdaq: ARNA) from landing marketing partnerships with big pharma. Unlike in oncology, where the larger companies have been snapping up compounds and whole companies, big pharma seems to be willing to take a wait-and-see approach with obesity drugs. It'll cost more if the drugs turn out to work, but they don't have to take on the risk of failure, either.

Considering the history of diet drugs, I'd say that's an enormously smart move.