Up 100% With Room to Fly

After VIVUS's (Nasdaq: VVUS  ) Qnexa and Arena Pharmaceuticals' (Nasdaq: ARNA  ) lorcaserin went down swinging, it seemed like Orexigen's (Nasdaq: OREX  ) obesity drug Contrave was doomed to end the inning. Instead, the company got a solid base hit yesterday, with a 13-to-7 positive recommendation from a Food and Drug Administration advisory panel.

Whether Contrave actually scores any success remains to be seen. The FDA itself has the final say on whether the drug will gain approval, and the agency has ruled what appeared to be home runs at the advisory-board level as foul balls after further review.

The panel also voted 11-8 that the company should do a post-marketing safety study to ensure that the cardiovascular side effects don't outweigh the benefits. My take from the panelists' explanations of their votes was that many of the 11 wanted a preapproval study, but felt that moving the fence and requiring such a large study prior to approval would discourage the development of Contrave and other obesity drugs.

While I applaud their gumption and think they're right, I'm not convinced that the FDA shares their thinking. The agency's top concern these days is safety, and it appears that the FDA could care less if that makes it hard to get a drug approved. Witness the new requirement that Amylin Pharmaceuticals (Nasdaq: AMLN  ) and Eli Lilly (NYSE: LLY  ) now have to run a thorough QT study on their diabetes drug Bydureon, even though that didn't seem to be a requirement the first time the FDA reviewed the drug.

Orexigen more than doubled today, but it's still only a $450 million company. There's still plenty of upside from here if Contrave is actually approved, because investors aren't completely convinced of what the FDA will do. For instance, on the options exchanges, the April $10 calls and puts are both trading at around $3 each, implying a huge amount of uncertainty and potential volatility in the next four months.

If you wanted to set up an options straddle to try to profit whichever way the FDA decision went, you'd have to spend about $6, or 60% of the current value! In other words, making the straddle purchase would require the stock to get back down below $4 or above $16 before you would profit. Clearly, investors think both are possible.

The Contrave ball is still up in the air, but where it'll land is anyone's guess.

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


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  • Report this Comment On December 08, 2010, at 3:48 PM, JAVEROA wrote:

    Can you tell me something very simple:

    How much do you believe a 240 pound person would pay over one year to lose maximum of 5%?

    That is 12 pounds over a year, 1 pound a month or simply put 15 GRAMS a day!!!!!!!!!!!!!

    Don't you think people, even the laziest of us all, would be willing to eat one less french fry to achieve that instead of paying for a drug that is hardly efficient and may very well give you high blood pressure and what not???????????

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