UBS downgrades Arena Pharmaceuticals, shares slide

UBS Investment Research downgraded shares of Arena Pharmaceuticals Inc. Wednesday, saying the San Diego-based biotechnology company is fairly valued, based on the potential risk for a negative outcome in its obesity drug program.

UBS analyst Jeff Elliott downgraded shares to "Neutral" from "Buy", saying their current $6-range represents a good risk-reward profile in regards to the company's experimental weight loss drug lorcaserin, which is now in late-stage development.

"Although we remain positive on the expected outcome of the Bloom and Blossom (lorcaserin) trials, until final data is available the potential for negative efficacy and safety results cannot be eliminated," he said in a note to investors.

Also, the Food and Drug Administration has been taking a more conservative approach to approving new treatments, Elliott added. Results from the Bloom study are expected in March.

The analyst did lift his price target to $7 from $6. But the downgrade sent the stock tumbling 86 cents, or 12.5 percent, to $6.01 in afternoon trading. Shares have traded between $2.70 and $7.75 over the last 52 weeks.

Arena's lorcaserin is one of several obesity drugs under development that will likely receive FDA scrutiny over effectiveness and safety. La Jolla, Calif.-based Orexigen Therapeutics Inc.'s Contrave is currently in late-stage development, and Mountain View, Calif.-based Vivus Inc. also has a late-stage obesity drug.

Each drug has to meet FDA benchmarks for weight loss, while proving to be safe. The slightest differences in study data for each developer could play a key role in which drugs gain approval and which drugs sell the best on the market.