Lack of Side Effects Doesn't Fatten Arena

My timing is rather impeccable. In a review of obesity drugs on Friday, I said that Arena (Nasdaq: ARNA) should release safety data for its phase 3 drug soon, and then yesterday investors got to breathe a sigh of relief.

Arena's lead drug, lorcaserin, targets the same receptor as one of the components in the infamous diet drug fen-phen, made by American Home Products (now Wyeth (NYSE: WYE)). There was some worry that Arena's drug might cause the same heart-valve problems that fen-phen did, but that appears to be put to rest with the one-year safety results.

Apparently, investors weren't that worried about the safety data; the stock spiked a little on Monday after investors heard the good news, but has since retreated to Friday's levels.

Like fellow development-stage drugmakers Exelixis (Nasdaq: EXEL) and Array BioPharma (Nasdaq: ARRY), Arena has been beaten down over the past few months because investors aren't interested in owning companies that are years away from having their first drug on the market. Arena still has to complete the second year of this two-year study before it can file its marketing application with the FDA. Then it'll likely have a 10-month wait -- possibly longer in today's FDA environment -- to get a decision from the FDA.

The good news is that Arena appears to have enough cash to get it to the point where it can file a marketing application in 2009. Hopefully, the market will be in better shape by then and it can do a dilutive financing to fund the drug launch. Alternatively, it could out-license lorcaserin to reduce its cash-burn. If Merck (NYSE: MRK) reports poor results for its obesity drug, Taranabant, later this month, I bet that it would be very interested in licensing lorcaserin.