Watch stocks you care about
The single, easiest way to keep track of all the stocks that matter...
Your own personalized stock watchlist!
It's a 100% FREE Motley Fool service...
Anyone who's read my articles about the three obesity drugs up for review -- VIVUS' (Nasdaq: VVUS ) Qnexa, Arena Pharmaceuticals' (Nasdaq: ARNA ) lorcaserin, and Orexigen Therapeutics' (Nasdaq: OREX ) Contrave -- knows that I'm not excited about any of the three. Each has its own issues that make betting on an approval risky.
Witness shares in Arena falling as much as 42% this morning before recovering somewhat. The drop came after the Food and Drug Administration released briefing documents ahead of the agency's advisory panel that's scheduled to meet on Thursday.
But I'm not here to gloat. Instead, I'm coming to the rescue of the Arena bulls. I just don't see anything in the advisory committee documents that justifies that kind of decline.
The FDA plans to pose five questions to its panel of experts -- one on efficacy and four on safety -- before asking them to vote on their recommendation over whether to approve the drug. Let's break them down and see if we can figure out why the shares are down.
- Does the drug work? Yes, but just barely. This is the biggest argument against not approving the drug, but it's not new news.
- Does the drug cause valvular heart disease? Lorcaserin is related to the drug in Wyeth's fen-phen, so this question isn't surprising. Arena ran large studies to try and prove that lorcaserin doesn't cause heart problems, but it's a lot easier to prove that a drug does something than to verify that it doesn't.
- The drug causes cancer in rats. What about humans? This issue is new -- to me at least -- so maybe it's what's causing the decline. But reading through the documents, it seems to be a minor issue. The tumors in rats showed up with levels much higher than those that humans would be taking, and there wasn't any evidence of lorcaserin causing cancer in the clinical trials.
- Does the drug cause psychiatric adverse events? It's no surprise that the FDA is asking about this; sanofi-aventis (NYSE: SNY ) ran into this problem with Acomplia, and Pfizer (NYSE: PFE ) and Merck (NYSE: MRK ) dropped their obesity programs for the same reason, but I don't think it'll bring down lorcaserin.
- Does the drug cause disorders of attention, memory, and other cognitive disorders? Lorcaserin binds to receptors in the brain to keep people from eating. Like the previous question, this is more an issue of what could happen than a major issue related to any side effects seen in the clinical trials.
How will the advisory committee vote tomorrow? I have no idea. Given VIVUS' no vote, it's safe to assume the panel is risk adverse. A bet on lorcaserin is risky, but we already knew that; maybe today's documents were a final wake-up call for investors?
If you were looking to make that risky bet, after today's decline, there more upside and less downside risk today than there was yesterday.
True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. What are your thoughts on why Arena's shares fell so much today?