by James Brumley | June 19, 2012 12:10 pm
Do you have June 27 marked on your calendar? You might want to, because whether or not you’re a speculator, the fireworks are sure to be interesting that day. See, that’s the day the long journey for Arena Pharmaceuticals (NASDAQ:ARNA) and its weight-loss drug lorcaserin will come to an end — one way or another — since that’s the day the FDA will make a final (probably) ruling on the long-beleaguered drug.
If it does win approval, it will be the first prescription weight-loss drug to hit the market in more than a decade. That’s a big “if,” though, and before any more buyers plow into the stock between now and then, they might want to digest a couple of possibilities.
Most investors are at least vaguely familiar with Arena Pharmaceuticals and lorcaserin. What most investors might not recollect is that this isn’t the first time, or even the second time, Arena has danced with the FDA.
The drug was rejected by the FDA in 2010 because of cancers witnessed in animals exposed to lorcaserin. However, the advisory panel that pre-screens drugs before sending them on to the administration for a final ruling actually recommended earlier in 2012 that the FDA not approve the drug based on potential heart valve problems.
Clearly both concerns have been abated enough in the meantime, clinically as well as psychologically.
Still, the fact the FDA is willing to revisit the drug — not to mention the fact the advisory panel recommended approval this time around — doesn’t mean it’s a slam dunk. The administration has been known to turn left just when the rest of the nation was expecting it to turn right. On the other hand, the FDA has dropped several indirect hints that it wants to, and perhaps even needs to, put a drug like Lorcaserin on the market.
Not that it’s the same as an FDA spokesperson saying, “I’ll make sure this drug is approved,” but the administration is well aware that obesity and related illnesses are now a big problem … even bigger than cancer. Both the head of Health and Human Services, Kathleen Sebelius, and the Commissioner of the FDA, Margaret Hamburg, have become highly vocal in the war on obesity, and not even just for health-concern reasons — the financial demand stemming from overweight Americans is getting bigger, too. Domestically, obesity ultimately consumes $147 billion worth of health care spending per year, while treating cancer “only” requires $100 billion per year.
The FDA also knows the obesity problem is growing. If it continues as is, the annual cost of care could reach $200 billion within five years, and could reach $550 billion by 2030. Yes, better diets and more exercise are the better solution, but the FDA now is at the tipping point where the risks of not making an effective diet pill available is perceived as roughly the same risk inherent with weight-loss drugs themselves.
Point being, the administration is psychologically primed for a reasonable solution to a problem that’s not going away on its own.
With all that in mind, there still are a couple of burning question investors might have about playing with the stock now: Will it be approved, and how high will Arena shares go if the FDA gives it the green light? This is where it gets tricky for investors.
Given the clear and growing need, as well as the fact that lorcaserin is up for review again (despite the risks mentioned that surfaced during its first review), it’s tough to imagine the FDA will find anything else wrong with it this time around … especially after the advisory panel’s relative optimism on the drug. Realistically, the drug probably has an 80% chance of being approved.
As for how far an approval might push the stock, have you ever heard the phrase “Buy the rumor, sell the news?”
As counterintuitive as it might seem, the value of Arena Pharmaceuticals shares might already have priced in the approval of lorcaserin (it’s up almost 300% since late April), leaving the stock nowhere else to go once any good news is released. Oh, we’ll possibly see a knee-jerk bullish bump with an approval. By and large, though, the market already has seen the writing on the wall, and any such bump likely will last less than a day. If anything, that strength will be support for folks to start booking profits into.
The bottom line is that the time to buy ARNA was either in early May before the advisory panel voted favorably on the drug, or will be after the dust settles — and the stock pulls back — after any approval. To step in right on the heels of good news likely will mean you’re stepping in at the height of the feeding frenzy, and a peak in the stock’s price.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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