Are Investors Wrong About Orexigen Therapeutics?

Short-sellers are moving into Orexigen Therapeutics ahead of the company's PDUFA date for its flagship obesity drug. Here's why.

Jun 26, 2014 at 5:30PM

A rising short interest can be a good sign that its time to sell a stock. By the same token, short-sellers are wrong on occasion, leading to large upward movements in share price due to a so-called "short squeeze." 

Shares of antiobesity drugmaker Orexigen Therapeutics (NASDAQ:OREX) are up over 8% this year, as the company inches closer to a pivotal regulatory review for its drug Contrave currently slated for Sept. 11. Even so, short-sellers have started to push into the stock with gusto of late, accumulating over 18% of the float at last count. With that in mind, let's consider three reasons why shorts believe Orexigen is ripe for a reversal. 

OREX Chart

OREX data by YCharts

Reason No. 1
Fellow antiobesity drugmakers Arena Pharmaceuticals (NASDAQ:ARNA) and VIVUS (NASDAQ:VVUS) saw their share prices peak around the time of their drugs gained approval from the Food and Drug Administration. Nonetheless, we have seen a steady and hefty decline in each company's share price post approval.

Specifically, Arena shares have dropped approximately 50% from their highs following Belviq's approval as a treatment for chronic obesity, and VIVUS' shares have fallen a whopping 82% since Qsymia's approval. Put simply, I think shorts are betting that history repeats itself in Orexigen's case, if Contrave is approved come September.  

Reason No. 2
Contrave's ability to generate enough top line growth to support Orexigen's current market cap of $709 million is questionable. The reason Arena and VIVUS's share prices have cratered is because their drugs have been commercial disappointments. Despite each drug costing $100s of millions to develop and bring to market, we aren't seeing anywhere close to blockbuster-level sales, and the future doesn't look bright for either drug.

What's key to understand is that Orexigen partnered with Takeda Pharmaceutical to market the drug in North America. Per the terms of the agreement, Orexigen is eligible to receive up to $1 billion in potential milestone payments.

In doing so, however, Orexigen gave away the bulk of Contrave's revenues, with the company only in line to receive double-digit royalties on net sales. This issue probably won't matter much if Contrave is able to hit the agreed upon sales milestones required to trigger additional payments, but then again, the obesity space hasn't exactly been the easiest market to launch a new drug into of late. In short, Orexigen may never see the majority of these milestone payments and will have to settle for a fraction of the drug's net sales in a highly competitive (and so far not terribly lucrative, at least for Arena and VIVUS) market. 

Reason No. 3
Orexigen shares dropped over 20% two weeks ago when the FDA decided to push back Contrave's PDUFA date by three months. What's interesting is that the agency said that the reason for the delay is because they needed more time to discuss the package insert and post-marketing requirements.  In other words, it certainly sounds like Contrave is solidly on the path to approval.

At the same time, investors need to remember that the drug is currently being evaluated for potential cardiovascular risks in an 8,900 patient study. Although the FDA agreed to review Contrave based on interim results from this study, I think the agency is going to keep a close eye on the drug's safety profile given the turbulent history of obesity medications in general. As such, the FDA will likely put Contrave on a short leash and any hint of an increased risk for heart attack could cause the agency to pull it from the market. 

Foolish wrap-up
On paper, the obesity market would appear to be one of the most lucrative drug spaces in existence. Yet doctors have clearly taken a cautious approach with this new generation of medications after getting badly burned by their predecessors. And this battle between market opportunity versus real world sales has led to high levels of volatility among Arena, Orexigen and VIVUS. While Orexigen appears to be closely following in Arena and VIVUS' footsteps from a preapproval trading perspective, you might want to consider the long-term opportunities of investing in this space. And so far, that opportunity hasn't lived up to expectations.   

Leaked: This coming blockbuster will make every biotech jealous
The best biotech investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns you will need The Motley Fool’s new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.


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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers