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
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.