3 Companies Experiencing the Post-Approval Blues

Food and Drug Administration approvals are supposed to be a happy time. Revenue coming in after a long-fought research and development battle should put smiles on investors' faces, encouraging them to snap up shares left and right.

Tell that to these three companies sitting well below their post-approval highs.

Company

Drug

Decline From 52-Week High

Arena Pharmaceuticals (Nasdaq: ARNA  ) Belviq (39%)
VIVUS (Nasdaq: VVUS  ) Qsymia (25%)
Amarin (Nasdaq: AMRN  ) Vascepa (24%)

Source: Yahoo! Finance. Declines calculated based on close on Aug. 14, 2012.

Expectations
Part of the problem for all three companies is that the approvals were widely expected. Outside advisors widely backed Belviq and Qsymia during their advisory committee meetings. And the FDA didn't even bother with an advisory committee meeting for Vascepa; two clean phase 3 trials will do that.

Arena hit its 52-week high the day it was approved, closed well below that, and hasn't gotten close since.

Ditto for VIVUS. A slight jump right after the approval, followed by a slow burn back down.

Amarin's 52-week high was actually set a week before the approval was handed down. Investors jumped in until they started freaking out over concerns that expectations had outpaced the risk. The worry about potential generic competitors has kept it down post-approval.

This "sell the news" is nothing new in biotech. The massive jumps we typically see -- think InterMune (Nasdaq: ITMN  ) doubling on approval in the EU or Avanir Pharmaceuticals' (Nasdaq: AVNR  ) increase after the FDA approved Nuedexta -- occur when FDA decisions or clinical trial results go against investor sentiment. Going with the crowd generally isn't the way to make big money in biotech.

Launch already!
None of the three drugs were ready for launch when they were approved, which may be contributing to the rundowns. It doesn't seem like a good move to give investors time to second-guess their investment without revenue coming in.

Arena and marketing partner Eisai have the best excuse: The Drug Enforcement Agency won't let them sell Belviq yet. There's potential for abuse, so the FDA recommended the drug be given a schedule by the DEA. If the DEA follows the recommendation of a Schedule IV, Arena will have to do some paperwork to track where the drug is going, but it isn't that big of deal from a marketing perspective; sleeping pills often have the same Schedule IV designation. Expect a launch around the end of the year.

VIVUS also has a Schedule IV designation, but it was inherited from one of its components, so the biotech doesn't have to wait for the DEA. The company is launching the drug on its own, so it had to nail down manufacturing and distribution. Because of a risk of birth defects, Qsymia will only be sold through mail-order pharmacies, which VIVUS had to line up. All that takes time to set up, and the company is shooting for a fourth-quarter launch.

Amarin isn't even sure it's going to launch Vascepa. It might sell the company or license out the drug to a partner. Waiting for an FDA approval to make the deal should result in a higher price since the risk of an FDA rejection -- however slight it might have been -- has been removed. Amarin still has the question of whether Vascepa will get a five-year exclusivity, which will likely have to be cleared up before any big pharma will step up. Still, Amarin is pushing on, preparing to launch on its own early next year while it continues in discussions with potential partners/acquirers.

Good buy?
If going against the sentiment is a way to make money, then all three should be on your radar. Just keep in mind that the majority is often right.

Of the three, Amarin looks like the best choice to me. Risk-averse investors should wait until after the generic exclusivity is cleared up before jumping in since it could go down further, but after that, the path forward looks clear whether it launches on its own or gets bought out.

The two obesity-drug makers are entering a huge market, but it's one that's never been fully tapped; no obesity drug has ever been a blockbuster. Investors are right to be cautious about them until sales numbers start coming in.

For a closer look at one obesity-drug maker, don’t miss The Motley Fool's new premium report on Arena Pharmaceuticals. This report outlines key opportunities and risks facing the company, plus the must-watch areas for investors. Get your copy now!

Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 16, 2012, at 10:41 AM, WCoastGuynCA wrote:

    The one stock to buy here for its "pre-approval" run-up is Mannkind, MNKD. There are any number of realistic positive scenarios that could triple the current share price in a few trading sessions.

    Take the time to check it out before it gaps higher.

  • Report this Comment On August 17, 2012, at 2:04 PM, seantim wrote:

    Brian, I find it interesting that you are the fourth post with a negative tone towards Avanir on Motley Fool since 8/11/12 and the third in two days. That's quite a bit of attention to a $3.00 stock with weak prospects according to you and the other 3 writers. But it does have 70% institutional ownership so I guess it does merit some attention.

    While yours was simply a glancing blow, why not just stick with the 3 stocks you claim to be addressing in your introduction? Probably just a coincidence.

    Anyway, I hope that you come back and post an update for the audience in the next 18-24 months when AVNR's stock price is in the $8-$10 dollar range (or higher). You should really consider buying some AVNR before EU approval.

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