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Obesity Drug Companies Are (Still) Risky

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Orexigen (Nasdaq: OREX  ) was down as much as 14% today after the Food and Drug Administration released its opinion of Orexigen's obesity drug Contrave ahead of the Food and Drug Administration advisory panel on Tuesday.

Will investors ever learn? You'd think after the FDA shot down VIVUS' (Nasdaq: VVUS  ) Qnexa and Arena Pharmaceuticals' (Nasdaq: ARNA  ) lorcaserin investors would have figured out that obesity drugs are risky.

I didn't even see anything in the documents that was a big surprise. There's nothing like Arena's preclinical rat data to decrease the chances of an approval. Those chances were low going into the document release, and they're still low. Then again, Orexigen was down only 14% and has bounced back from the lows today; Arena got cut nearly in half after the FDA released documents ahead of its FDA advisory panel.

Contrave has marginal efficacy and four different safety issues -- psychiatric adverse events, seizures, serum creatinine, and cardiovascular -- which is going to make it difficult to get over the high bar that the FDA has set for obesity drugs.

Of the four, potential cardiovascular problems will likely be the biggest sticking point. The FDA plans to ask a separate voting question over whether the effects on blood pressure and pulse should be addressed pre- or post-approval. A preapproval requirement would be a death sentence for Contrave considering how large the clinical trial would likely have to be.

But if the drug never makes it to market because it isn't economically feasible to run a large trial isn't the FDA's primary concern. The agency may not be willing to have a rehash of Abbott Labs' (NYSE: ABT  ) Meridia, which was pulled from the market over cardiovascular issues.

I think it's likely that the panel of outside experts follows the path of the earlier drugs and recommends against approving Contrave. But with a market cap of about $240 million and more than $90 million net cash in the bank, Orexigen has a lot more room to the upside than downside.

Only investors with a spot for a risky investment in their portfolio should even consider it, though. The rest of us are better off watching from the sidelines and perhaps adding Orexigen to our watchlist if the company is somehow able to pull off the win that its peers couldn't.

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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.

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