How High Can Arena Pharmaceuticals Fly?

Shares of Arena Pharmaceuticals (Nasdaq: ARNA  ) hit a 52-week high on Wednesday. Let's take a look at how it got there and see whether clear skies are still in the forecast.

How it got here
Last year was the year of hepatitis C drug hopefuls; this year it's all about obesity drugs. With Vivus (Nasdaq: VVUS  ) claiming that obesity-related symptoms cost $150 billion each year to treat, can you blame investors for being excited?

Arena Pharmaceuticals' share price has more than doubled a mere month after the company's lead obesity drug, lorcaserin, received a vote of 18-4 in favor of approving the drug given known efficacy and side effects from the Food and Drug Administration's advisory panel. Understandably, the FDA is under no obligation to follow its advisory panel, but it's often a good indicator of whether a drug will be approved or not. Arena holds the rights to the drug worldwide, except for the U.S., where collaborating partner Eisai (OTC: ESALY) holds the marketing rights, pending approval.

The move by the FDA's advisory panel further escalates the battle among Arena's obesity drug contenders: Qnexa from Vivus, Contrave from Orexigen Pharmaceuticals (Nasdaq: OREX  ) , and the only FDA-approved obesity drug, Xenical, from Roche (OTC: RHHBY), which has side effects that have kept it from being a big success. Being the first to gain approval could mean garnering significant market share in a market where the FDA hasn't approved a new treatment in more than a decade.

The primary deterrents to Arena's share price heading higher would be a delay in its new-drug application, which could give Qnexa a chance to add significant market share and the need for further testing to determine the overall safety profile of lorcaserin. These potential delays likely won't hurt Arena over the long term, but they could seriously derail the current rally.

How it stacks up
Let's see how Arena Pharmaceuticals stacks up next to its peers.

ARNA Chart

ARNA data by YCharts

It's been a bumpy couple of years for Arena and Orexigen, while Vivus is leaving its peers in the dust.

Normally here I would compare the financial metrics of each company, but as these are clinical-stage biotech companies, that would be rather pointless. Instead, let's dig a bit deeper into each obesity drug candidate.

Orexigen's underperformance can most easily be defined as the length of time it will take to get Contrave to market. Even though its current clinical trials have been hopeful, Contrave is likely two to three years at the earliest away from hitting the market. By then, the need for an additional obesity drug may be a moot point.

Vivus' Qnexa received a resounding nod of approval (20-to-2) from the FDA's advisory panel that practically cleared its way for approval in late February. However, things never go as planned in the biotech sector. Potential safety complications, including increased heart rate and birth defects, are threatening to hold back what seems like the near-guaranteed approval of this effective weight-loss drug. Let's not forget that in 2010, Qnexa was voted down 10-to-6 by the same advisory panel.

Arena's lorcaserin is also facing cardiac safety issues like those currently plaguing Qnexa. Lorcaserin was rejected in 2010 in part because of an elevated incidences of cancer in rats; however, the FDA seems satisfied that the drug doesn't present a cancer risk to humans.

What's next
Now for the $64,000 question: What's next for Arena Pharmaceuticals? That's going to depend on whether the weight-loss results are strong enough and the side effects moot enough to get lorcaserin past the FDA with only post-approval studies on safety required.

Our very own CAPS community gives the company a two-star rating (out of five), with 90.6% of members expecting it to outperform. Personally, I've yet to make a CAPScall on Arena, and you'll need to wait even longer before I make that selection.

I do expect lorcaserin to gain approval from the FDA, but I expect challenges to remain. For one thing, I wouldn't be surprised to see an FDA delay helping Qnexa beat lorcaserin to market. While a delay shouldn't impact the long term success of lorcaserin, it could impact the stock price of Arena in the short term. Two (and here's the big one), I'm worried about those post-approval safety studies. The FDA has brow-beaten diabetes-drug makers into submission with safety testing and that could be the same fate of the obesity drug industry. When the FDA makes its ruling on lorcaserin we'll have a better idea of where it stands on the issue of drug safety, and maybe then I can make a CAPScall one way or the other. Until then, it's just too risky.

Arena Pharmaceuticals clearly has a pipeline that's changing lives. If you'd like the inside scoop on a stock our Motley Fool Rule Breakers team feels could offer the next revolutionary product, click here for your free access to our latest report.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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Read/Post Comments (3) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 14, 2012, at 1:33 PM, portefeuille wrote:

    There are 900/500/170 ARNA/OREX/VVUS shares in my "fund" with break-even of around 7.71/-26.89/-241.79 USD.

    Thus that position is in the green by around 900 * ($8.02 - $7.71) + 500 * ($3.82 - (-$26.89)) + 170 * ($25.32 - (-$241.79)) = $61042.70.

    the fund.

    http://caps.fool.com/Blogs/fund-trades/735522.

    http://twitter.com/portefeuillefun.

  • Report this Comment On June 14, 2012, at 11:10 PM, tylerbowes1 wrote:

    I know you are a big math guy, but can you briefly explain the negative values of your break-even points? Thanks in advance.

  • Report this Comment On June 14, 2012, at 11:38 PM, portefeuille wrote:

    break-even here means cost per share. and cost is cash paid for buys minus cash received for sells. this may not be a standard definition.

    thus

    value of VVUS shares ≈ 170 * $25.32 = $4304.40

    cost of VVUS shares ≈ 170 * (-$241.79) = -$41104.30

    -> VVUS gain = value - cost ≈ $4304.40 - (-$41104.30) = $45408.70.

    No mathematics involved, just a definition. If it looks strange you might try thinking about it this way.

    The VVUS share price would have to reach around -$241.79 for the fund's VVUS position to "break even". As the price is always ≥ 0 that will not happen.

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