2 Dates Investors Need to Circle

Investors need to get out their calendars and a pen because the health care industry is about to be rocked by two huge decisions this week. One of them is about as sweeping and high-profile as they come, while the other features the market's best-performing stock, a small biotech with a new drug that treats this nation's biggest health problem.

Wednesday, June 27
Arena Pharmaceuticals
(Nasdaq: ARNA  ) has essentially gone vertical since receiving a surprisingly strong 18-4 FDA advisory panel recommendation that its obesity drug lorcaserin be approved. Shares have quadrupled over the past two months but have taken a breather these last two trading sessions as investors book profits. However, this story could radically change in 24 hours, as a massive binary event, the company's June 27 PDUFA date looms large.

If approved, Arena will have the first true weightloss drug on the market since Meridia was pulled because of safety concerns in 2010. It leapfrogged competitor VIVUS (Nasdaq: VVUS  ) when the FDA asked for a risk evaluation and mitigation strategy for its drug Qnexa. However, I see both VIVUS and Orexigen (Nasdaq: OREX  ) jumping if lorcaserin is given the green light, with an indication the FDA has softened its stance on the space.

Approval will obviously be good for Arena, but I am not sure how much shares will pop. If it did jump, Arena would be in line with VIVUS in terms of market cap, and both companies' values are tied directly to their obesity drugs. Investors still see Qnexa as more likely to be approved, largely because its birth defect issues can be mitigated by not giving the drug to women who can become pregnant.

If the FDA goes against its advisory committee, which it is known to do, shares of Arena will plummet substantially. Lorcaserin is Arena's only late-stage drug, and a rejection will be devastating. It may have to run additional trials prior to instead of post-approval, like Orexigen had to do with its rejected obesity drug Contrave. Because of this risk, I urge investors not to gamble on this risky binary event.

Thursday, June 28
This is the big one. The Supreme Court has teased us for two weeks on the impending decision regarding the constitutionality of the Affordable Care Act. The health care reform legislation, colloquially known as "Obamacare," will receive one of three fates:

  1. Entire law is upheld.
  2. Individual mandate is struck down.
  3. Entire law is struck down.

If the entire law is upheld, that is essentially the status quo, although certain key provisions have yet to be implemented. If the entire law is struck down, then we go back to our system pre-2010, and given bitter congressional partisanship, future reform is unlikely in the near term. Before oral arguments, conventional wisdom among court observers was that the entire law would be upheld; however, hostility toward the individual mandate and discussions on its severability have many thinking it is the most vulnerable piece of the legislation.

If the individual mandate is struck down, but the rest of the ACA is kept, expect the insurance industry lobby to go crazy trying to water down the remainder of the bill. The insurers need healthy individuals joining the pool to offset the risks that come from accepting customers with pre-existing conditions. Insurers like UnitedHealth have talked about extending some popular parts of the law, like allowing children to stay on their parents' insurance until age 26, but of course those early 20-somethings are exactly the type of customer the industry was hoping to capture with the mandate.

There will be a variety of winners and losers if the entire law is struck down. The biggest winner would be medical device companies like Intuitive Surgical (Nasdaq: ISRG  ) that will avoid paying a 2.3% tax on revenue, not income, to help fund the legislation. Meanwhile, if expansion of Medicaid to cover 18 million that can't afford insurance doesn't happen, than specialty providers like Molina Healthcare will miss out on a huge opportunity. Pharmacy benefits companies like Express Scripts (Nasdaq: ESRX  ) would also see an uptick in customers and generic drug usage, where the company sees strong margins.

Whatever the court decides on Thursday, expect the debate to continue through the 2012 elections. Even if the ACA is upheld as constitutional in its entirety, Republicans have made repealing the health care legislation one of their top priorities. Fortunately, The Motley Fool's free report, "These Stocks Could Skyrocket After the 2012 Presidential Election," highlights four unique ways to profit from the election -- if you buy the right stocks before the next president's term begins. Get your free copy, available for a limited time only, by clicking here.

Fool contributor David Williamson holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Intuitive Surgical. Motley Fool newsletter services have recommended buying shares of Intuitive Surgical, Express Scripts Holding, and UnitedHealth Group. Motley Fool newsletter services have recommended creating a diagonal call position in UnitedHealth Group. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (5) | Recommend This Article (14)

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 26, 2012, at 2:16 PM, MarkH2O wrote:

    Hahahaha... what is the hidden message the author is trying to portray?- If approved, he does not know how much the stock will pop. But if declined then it will plummet susbstantially. This makes perfect sense, but to include that even if it was approved Lorcaserin would still have to compete with Qnexa because it will definitely get approved? What is up with the argument that Qnexa birth issues can mitigated by not allowing women who has potential to give birth the obesity drug.... does that mean only infertile and old aged women are considered for qxena if approved?

  • Report this Comment On June 26, 2012, at 2:51 PM, mincasa wrote:

    Waste of time and effort this late in the game . Why do you think a raid took place on Friday?? Somebody huge is playing a very dirty game, FDA could be envolved here also. Also, why do you think that insider VVUS selling is on the increase since June 18th. Do your self a favor, and speak to your buddy FOOL Reza, he can teach you some lessons on ARNA.

  • Report this Comment On June 26, 2012, at 3:38 PM, TMFKris wrote:

    Women of child-bearing age are prime targets of the weight-loss industry.

  • Report this Comment On June 27, 2012, at 8:39 AM, ravens9111 wrote:

    It's risky for any developmental biotech just before FDA decision day. ARNA has the best chance to get approved out of the group. Although Qnexa may be the most effective, it is also has the potentially harmful side effects. ARNA is effective, but the safest of them all. Although the FDA decision could go either way, I would be very surprised if it is not approved. There is a big need for a weigh loss drug to help obese and diabetics. Does the potential health benefit for these groups outweigh the potential risks? I think so. These groups cost the healthcare industry BILLIONS of dollars. It's time for new options to be available to help these people get their health under control. If approved, ARNA "should" double overnight. I would also anticipate that big pharma would be in the market to buy them out as they need acquisitions to fuel future growth.

  • Report this Comment On June 27, 2012, at 1:05 PM, ravens9111 wrote:

    APPROVED!!!!!

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1924807, ~/Articles/ArticleHandler.aspx, 8/27/2014 11:37:20 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement