Orexigen Therapeutics, Inc. (NASDAQ:OREX) stock fell as much as 15% on Wednesday after the biopharmaceutical company announced the discontinuation of a study testing the cardiovascular effects of using Contrave, Orexigen’s obesity drug.
Investors should know that OREX didn’t discontinue the study because of any damning data. It was actually the premature release data from the unfinished study back in March that was the center of controversy.
While it’s relieving to know that there’s no proven cardiovascular danger posed by Contrave, OREX stock owners should still take Tuesday’s news as a glaring red flag.
After all, Contrave is still in the early stages of commercial sales. The drug was approved by the Food and Drug Administration last September on the condition that Orexigen conduct a long-term cardiovascular study.
How the discontinued Contrave study will affect sales is unknown … but it sure ain’t a bullish sign for OREX stock.
Existing Competition, Increasing Costs
What we know with certainty is that the OREX stock price will be hampered by the additional costs that the Contrave study will incur. The cancelled trial, known as the “Light” study, was expected to conclude in 2017, but now must start over from the beginning. The new one is expected to finish up in 2022, adding five years of costs associated with the trial’s implementation to Orexigen’s future income statements.
So why exactly did OREX have to cancel the trial, and what does that mean for shareholders?
Simply put, Orexigen disclosed results from the first 25% of its study to the public after they appeared to indicate Contrave actually reduced the chances of cardiac problems. Orexigen filed for and was subsequently issued a patent on Contrave’s indication for preventing cardiac events.
Dr. Steven Nissen was lead researcher for the trial, and he wasn’t pleased that OREX released those interim results. According to The Wall Street Journal:
“The patent filing included details of the continuing study. According to Dr. Nissen, release of the interim data was strictly forbidden. Under the terms of the study, management wasn’t supposed to have seen the data.
“Orexigen shares jumped 32% following the interim update.
“The FDA said it wasn’t the first time Orexigen had inappropriately disclosed Light study data and the latest terminated study followed an earlier-terminated Light trial.”
To make matters worse, the next 25% of the trial didn’t conclusively show any beneficial cardiovascular effects.
See a pattern here? Orexigen’s perpetual mismanagement of its own trial data should be enough to deter investors in-and-of itself. Add to that the fact that Contrave faces significant competition from similar products by Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) and VIVUS, Inc. (NASDAQ:VVUS) and you’ve got yourself one cruddy investment thesis.
OREX stock, like many small healthcare companies today, doesn’t even turn a profit yet; analysts don’t expect that to change in 2015 or 2016.
As horrendous as OREX stock looks on paper, you can’t say the diet drug is totally off-mark. After all, the Contrave study is the main reason I’m “underweight” Orexigen stock.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at email@example.com.