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Biotech investors salivate over the thought of an instant double. The overnight riches when a binary event breaks just right is the lure of the sector. VIVUS (Nasdaq: VVUS ) investors have now tasted that sweet tang of success -- the hopeful obesity-drug maker is up an astounding 99% after hours.
Why? An FDA advisory panel overwhelmingly recommended approval of its obesity drug Qnexa by a 20-2 vote. This is a huge improvement over 2010's 10-6 vote against approval. Efficacy was never the issue for VIVUS, nor for its two obesity drug competitors Arena (Nasdaq: ARNA ) and Orexigen (Nasdaq: OREX ) . All three received rejections from the FDA, with VIVUS the first to resubmit. And all three had potential cardiac issues -- Orexigen's the most serious, in the eyes of the FDA -- but Arena also had to deal with cancer issues and VIVUS with a birth defect. Recently though the FDA appeared to be softening its stance toward a medicinal alternative to diet and exercise.
Qnexa contains phentermine(the "phen" in fen-phen, likely the cause of the elevated heart rate seen in some patients), but the birth defect -- oral clefts -- was courtesy of another ingredient: topiramate, the active ingredient in Johnson & Johnson's epilepsy drug Topamax. The FDA and VIVUS agreed to narrow the label down to women who can't become pregnant and men, before loosening the requirement to women "who are not nor intend to become pregnant." With a reduced side effect profile, one FDA advisory panel member confidently declared the "potential benefits of this medication seem to trump the side effects."
Shares of Arena and Orexigen also popped 17% each after hours, likely assuming the FDA has lightened up on the obesity fighters. I think that is potentially foolhardy. Qnexa's garnering of the advisory panel's overwhelming support doesn't mean the FDA will agree. It also doesn't mean the other two drugs' more-serious side effects, ones that can't be mitigated by removing a segment of the population, have nothing but clear skies ahead.
These drugs do have potentially serious side effects, while diet and exercise don't, so the FDA is going to be cautious. Do not confuse this with triglyceride fighter Amarin (Nasdaq: AMRN ) , which got the FDA's sign-off on a trial design its drug AMR-101 aced with flying colors. The FDA didn't even schedule an advisory panel, leaving most investors confident of approval. But the fact that advisory panel believes Qnexa, the most effective of the three, is worth the risks, doesn't mean that different panels will be so generous to Arena and Orexigen. And even if they are, the FDA still has final say. As always.
The best approach
Instead of rolling the dice and hoping the FDA's newfound niceness holds all the way through approval, why not invest in a healthcare stock poised for massive growth thanks to its disruptive product already on the market. Motley Fool co-founder David Gardner believes in this small-cap company's ability to radically change how patients are treated and invites you to download The Motley Fool's special report, "Discover the Next Rule-Breaking Multibagger," free for a limited time only.