Stock Alert: Be Cautious Buying this Stock

Posted by Ian Cooper - Friday, October 29th, 2010

Obesity stocks and the FDA get along as well as Israel and Iran...

They just don't see eye to eye.

While I'd like to see an obesity stock get approved, the FDA isn't so fast to approve.

As we said about Arena Pharmaceuticals (ARNA), pre-FDA news, before taking 300% gains in Optons Trading Pit:

Weight loss may not be the most exciting topic right now...

But a lot of money is going to be made in the coming years on obesity drug stocks.

We all know Americans will do anything to lose weight. This isn't new. Back in the 1920s, people were consuming weight-loss elixers that contained desiccated thyroid extract that’d speed up your body and probably give you heart disease in the process. 

Others were swallowing arsenic, or even a derivative of benzene and a carcinogenic agent used in WWI explosives.

People wanted the weight off, and were willing to shed pounds any way they could. 

The Fen-Phen cocktail and the Redux pill were all the rage until both were recalled on links to heart and lung problems...

Abbott’s Meridia and Roche’s Xenical didn’t do well because of side effects.

Acomplia wasn’t sold because of psychiatric side effects; Alli is being suspected of causing liver injury. 

Even Vivus’ snooze-fest with the FDA turned out a 10-to-6 vote against Qnexa over safety concerns and unknown long-term effects of depression, effects on the heart, and birth defects. 

You can bet there’s a real backdrop of negativity and unease with these drugs. 

And if just one company could get the FDA on board, it could easily revolutionize a multi-billion dollar industry — helping millions of Americans lose weight and lining the pockets of those investors smart enough to buy stock before it's a household name.

Today, I'm going to tell you about one such company.

Arena Pharmaceuticals (NASDAQ: ARNA)

Leading up to ARNA’s September 16th meeting before an FDA review panel, we expect the momentum crowd to amp demand for the stock.

Heck, on Friday — after Vivus was crushed by a big fat "no" vote from the FDA — ARNA was up more than 80 cents on volume of 25 million, even as the Dow crashed!

We know that half of the dieters that took Lorcaserin for a year lost at least 5% of their body weight, as compared to the 20% on the placebo. 

Another one in five on Lorcaserin lost 10% or more of their body weight, as compared to the one out of 14 placebo users. And those that continued the drug for two years were better able to maintain weight loss than those that switched to the placebo after one year.

The New England Journal of Medicine reported that the drug produced slight improvements in blood pressure, heart rate, cholesterol, and insulin resistance. 

And Dr. Arne Astrup, an obesity expert at the University of Copenhagen, believes "the justification for using lorcaserin to manage obesity is not greater efficacy than currently available drugs, but rather an apparently much better safety and adverse-event profile and very clear-cut beneficial effects on risk factors for type 2 diabetes and cardiovascular disease.”

We know that Eisai, a U.S. pharmaceutical subsidiary of Tokyo-based Eisai Company, will pay $50 million for the rights to sell Lorcaserin in the United States... Eisai will throw in another $160 million, based on approval milestones and development, and a $1.16 billion, one-time payment based on annual sales is also on the table.

And we know that Lorcaserin works on the serotonin receptor — the same appetite controller that was targeted by fenfluramine (which was taken off the market), and is safer and more “selective because its specifically targets the serotonin receptor associated with hunger while having no impact on the heart,” according to the manufacturer.

Qnexa, on the other hand, was rejected because it contains phentermine — one of the two drugs in Fen-Phen, which has links to heart damage and topiramate, which has been associated with attention and memory problems, depression, suicidal thoughts, and birth defects in lab animals. 

The FDA had further concerns about heart rate and possible side effects if a mother became pregnant while using the drug.

What’s not to love here?

Arena doesn’t have the same safety issues that Vivus has.

And Arena has greater data (larger sample size of population and longer duration of study).

But you still have to play this stock safe, as the FDA is a fickle bunch.

While we could see $10 to $15 on a green light, we’re still likely to sell half going into September 16, 2010… and hedge for downside protection.

It’s just comforting that some big names are with us.

JP Morgan expects greater attention to quickly shift to Arena, and notes the great need and desire for obesity drug, as outlined by the FDA panel:

While we are still not moved by the modest efficacy, we have long been comforted by Lorcaserin’s seemingly benign safety and impressed by ARNA’s recent execution (partnership, publication). Importantly, in the context of today’s panel discussion, we believe the drug is relatively well positioned with two years of controlled safety data, no clear adverse safety signal, and a robust clinical trial design.

Moreover, the preapproval partnership with Eisai and publication in the prestigious New England Journal of Medicine both provide a degree of validation (not to mention a boost to management credibility).

To be clear, we still have some issues with ARNA, including the high warrant coverage. Nevertheless, we believe the knee-jerk reaction to sell ARNA upon the Qnexa vote (off ~9% and much more from the day’s highs) was overdone. Indeed, based on what we heard today, we believe Lorcaserin has the best shot at regulatory success. Our new YE10 PT of $6 (was $5) is based on a 65% probability of approval.

Piper Jaffray is buying Arena, given the clean safety profile and efficacy of Lorcaserin. Even Cowen & Company are on board!

But if you want to profit from the “lead up” to the FDA panel decision, you must buy now.

Very few things have an impact on biotech stocks the way that the FDA has.

And that's why we commonly refer to upcoming FDA decisions — the very reference that contains all pending FDA decisions on the newest cutting-edge and biotech innovations...

Leave yourself plenty of time to trade prior to FDA decision. We're talking about two to three months in advance here.

While these decisions are among the biggest factors, know this: The FDA's unpredictable nature won't always lead to a sure-fire winner.

While it doesn't always matter what the FDA says; what does matter is being in the know, and being in the right place at the right time.

Most of us who use the FDA calendar and Phase III trial dates know one thing: The price of a biotech and pharmaceutical company will go up as the date in questions draws closer.

And if you want to maximize your potential return, have any pending dates in hand at least one to three months in advance. (I should note that in some instances, you can buy a stock days in advance using conference dates.)

Because as an FDA decision date, Phase III result date, or conference nears and people expect to hear good news, crowds of speculators and traders start coming in to buy the stock, sending the stock up.

This happens over and over again with many biotechs and pharmaceuticals. The key is having the information in as far in advance as you can...

In the case of our recent Dendreon (DNDN) trade, which produced 65% and 71% gains, we were able to profit within a day or two of a presentation at the ASCO Genitourinary Cancers Symposium. Buying ahead of this conference, where speculators anticipated an explosive upside move, resulted in quick gains.

The key to maximizing your Arena gains is to buy now.

Look, we’ve been watching shares of Arena Pharmaceuticals since mid-2007 — and for good reason.

Right now, 70 million Americans are trying to lose weight, and they're spending billions to do so.

Imagine if a $471 million company like Arena was to tap that market...

It'd never see the single-digits again.

Buy shares of Arena (NASDAQ: ARNA) today. Profit as the momentum crowd jumps in. America isn't getting any thinner...

Besides, it’s plays like these that make trading options even better.

Here's more from Notable Calls:

"Vivus (NASDAQ:VVUS) is going to hurt the shorts today after receiving a CRL in Qnexa, its weight loss drug.

- J.P. Morgan is upgrading VVUS to Overweight from Neutral with a $13 target (prev. $6) saying all things considered they believe this is a relatively benign CRL, although perhaps not as good as it could have been. The letter’s language around cardiovascular (CV) risk is the one component in particular that gives us some pause and will likely be what the bears try to hang their hats on. Nevertheless, their interpretation of the letter is that it provides a manageable path to approval in 2011, which should be enough to drive meaningful appreciation in VVUS shares over the next several quarters. As such, they are upgrading VVUS to OW and raising our 2011 PT to $13. Importantly, with the worst case scenario (significant new pre-approval trials) off the table—at least temporarily—we suspect downside could potentially be limited from current levels.

CRL overview: 5 issues in focus. According to the company’s press release, the CRL touches on five issues, including 1) clinical, 2) labeling, 3) REMS, 4) a safety update, and 5) drug scheduling. In our view, the clinical component—focusing on teratogenic (birth defect) and CV (heart rate) risk—is the only one that matters as far as getting Qnexa over the goal line. While the FDA apparently left the letter somewhat vague and open-ended (at least that’s how the PR reads), firm is encouraged that no new clinical trials are required at this time and that Vivus believes it can submit its response in ~6 wks. They await more detail on Friday morning’s call, but in the meantime, they work through the key issues below.

CV risk is still a hurdle, but JPM thinks Qnexa can clear it. As indicated, their most significant concern in the CRL is the language around the implications of increased heart rate and the need for evidence that it “does not increase the risk of major adverse CV events. Vivus intends to provide several new analyses exonerating Qnexa. JPM suspects these have to do with the recent disclosure that across the entire 4,323 pt development program for Qnexa (incl 2-year SEQUEL data), serious CV and neurovascular AE rates in pts taking the drug were similar to placebo with a relative risk of 0.59 (95% CI: 0.33-1.06). That’s a 41% relative risk reduction in favor of Qnexa. Moreover, firm's comfort with Qnexa’s CV profile is reinforced by the product’s demonstrated favorable effects across a range of key cardiometabolic risk factors including waist circumference, systolic and diastolic blood pressure, total cholesterol, LDL, HDL, triglycerides, HbA1c, fasting plasma glucose, and fasting insulin. These benefits are also accompanied by statistically significant improvements in inflammatory biomarkers such as CRP, adiponectin, and fibrinogen.

- Canaccord reits Buy rating on VVUs and raises its target to $15 (from $10). Firm views the letter as benign; it asks for more data and analyses but no new studies. They believe that VVUS’ resubmission in about six weeks will pave the way for approval around mid-year 2011.

Investment highlights
The CRL asks for more information on birth defect risk, cardiovascular effects, and the full data from the two-year SEQUEL study. There will also be more discussion about labeling and REMS.

Firm thinks FDA is showing that it listened to the July ad com’s concerns and providing a path to approval for VVUS.

VVUS believes that it can assemble the necessary preclinical and clinical data (including a final study report of SEQUEL) to enable resubmission in approximately six weeks. Assuming a Class 2 designation, this should set up approval in mid-2011.

They will be listening for more color from VVUS’ 8:30 am EDT conference call.

Notablecalls: My only question is - this' going to $8.00 today? or higher?

- Arena (ARNA) didn't go down on way more negative CRL. Also, ARNA's news came out ahead of Vivus', which probably lowered the expectations even more.

- VVUS has a 20% short interest & a tight float.

- Vivus believes they can submit their responds in 6 weeks, which is a surprise. Given this ultra-short time frame it seems (seems!) they have the CV/birth defect data to assuage FDA."

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