Is This Arena Pharmaceuticals' Biggest Risk?

Could this historical trend for fat-fighting pills sink Arena Pharmaceuticals?

Jun 20, 2014 at 6:00PM

Human beings have an innate ability to overemphasize the positives of an object of desire, while underbilling their potential negatives. In short, we naturally create delusions about our world and the objects within them.

This issue is particularly problematic when it comes to investing because we all-too-often forget to consider the downside risks when buying a stock. That's why contrarian investors like Warren Buffett and Charlie Munger frequently advocate conservative investing styles that focus simply on "not losing money" rather than trying to hit home runs. 

Arena Pharmaceuticals (NASDAQ:ARNA) is a mid-cap biotech with a strong retail following due to the blockbuster potential of its fat-fighting pill Belviq. Because the obesity pandemic is running amok and doctors are actively seeking new treatments, it's easy to understand the optimism surrounding Belviq.

That being said, Belviq and its peer Qsymia -- manufactured by VIVUS (NASDAQ:VVUS) -- haven't exactly set the world on fire sales-wise, with both drugs significantly underperforming the expectations of retail investors thus far.

Consequently, Arena shares have now fallen close to 30% since the drug's commercial launch last year. While sluggish sales have undoubtedly been a key factor in this downturn, I think investors are underappreciating this significant risk in the stock's performance.

ARNA Chart

ARNA data by YCharts

Why haven't doctors shown much enthusiasm for this new generation of obesity fighters?
If we look purely at the overall size of the obesity market within the U.S., and even narrow it down to just severely obese patients, it's hard to understand how these two drugs haven't become blockbusters in short order. Although over a third of Americans are presently obese, this number is expected to exceed 50% by 2030 without some form of intervention.  

It's no secret that obesity is strongly associated with co-morbidities, such as type 2 diabetes and heart disease. With these deleterious impacts on human health and the economy, you would presume that doctors would be aptly motivated to employ these new pharmacotherapies. So, what gives?

As most investors are probably aware, obesity medications have a long history of serious side effects such as depression, heart attack, and even death. So doctors obviously have to weigh these potential side effects against the benefits of losing a modest amount of weight. 

While the number of doctors writing prescriptions for both drugs has steadily increased, I suspect most doctors are playing it safe for the time being. After all, we are only now getting a real world look at the safety profile of these drugs, which is the real test at the end of the day. 

What about Belviq specifically?
Belviq's safety profile was vetted heavily during its regulatory review, largely because the drug targets the serotonin 2C receptor but it also stimulates the 2A and 2B receptors. In plain English, the 2B receptor was also targeted by the widely used obesity drug fen-phen in the 1990's -- and fen-phen was pulled from the market due to safety issues. As the story goes, fen-phen was pulled from the market in 1997 because it was associated with increased risks of heart valve disease and pulmonary hypertension.

Arena specifically designed Belviq to show a higher affinity for the 2C receptor in hopes of avoiding these harmful side effects. And per the clinical data, the drug's safety profile was deemed acceptable by the Food and Drug Administration, although they are requiring a postmarketing study to collect data on cardiovascular events in the real world.  

Foolish wrap-up
Belviq is clearly Arena's crown jewel so far and is being actively developed for other indications such as smoking cessation. As such, the postmarketing data on Belviq's real world safety profile is absolutely critical to the stock's performance moving forward.

Remember, there were several other drugs that were approved based on their clinical trial data but were subsequently pulled from the market following unexpected adverse events when they began to be used in uncontrolled settings.

It's also important to remember how seriously the FDA takes safety for new drugs, especially obesity medications. Orexigen had to initiate a large cardiovascular outcomes trial simply to resubmit its NDA for Contrave.

And the European Medicines Agency doesn't appear to be interested in approving either Belviq or Qsymia until their manufacturers produce more safety data. Overall, I think this is the key reason why we haven't seen a faster market adoption for Belviq and is a pivotal risk factor to keep an eye on moving forward.  

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George Budwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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