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Arena Pharmaceuticals Miracle Diet Pill Gets FDA Approval

By Jim Fink on June 28, 2012

As a person whose body mass index (BMI) has routinely been measured above 30 – the threshold definition of “obese” – I was glad to read that on June 27th the Food and Drug Administration (FDA) had approved a new diet pill for the first time in the last 13 years. Shareholders in Arena Pharmaceuticals (NasdaqGS: ARNA), the developer of the “Belviq” drug, have been amply rewarded; the stock is up almost six-fold since March:

Source: Bloomberg

According to Janet Woodcock, M.D., director of the FDA’s Center for Drug Evaluation and Research:

The approval of this drug, used responsibly in combination with a healthy diet and lifestyle, provides a treatment option for Americans who are obese or are overweight and have at least one weight-related comorbid condition.

A comorbid condition is something like high blood pressure, high cholesterol, or type 2 diabetes. Since I fortunately don’t suffer from any of these conditions (yet), the approval doesn’t directly apply to me, but it is within a doctor’s discretion to prescribe drugs “off label” for conditions other than what the FDA approved the drug for, so I still have a shot. The drug was approved because patients who took it for 1-2 years combined with diet and exercise lost between 3.0 and 3.7 percent more of their starting body weight than those who took a placebo with diet and exercise. About half of the patients (47%) taking the drug lost at least 5 percent of their body weight.

If these percentages don’t thrill you, I agree, they are pretty insignificant. The difference between a 220-pound man losing 4.4 pounds (2%) with a placebo and 11.8 pounds (5.35%) with Belviq isn’t going to change anyone’s quality of life. But slightly effective is better than nothing and deserves FDA approval. The twice-a-day treatment costs $4 per day ($1,460 per year) – which isn’t cheap, especially if health insurers refuse to cover it because its weight-loss effect is so muted.

Arena’s stock has performed so well because the market opportunity is immense. According to the Centers for Disease Control and Prevention, more than one-third of adults in the United States are obese (i.e., more than 78 million people). By 2030, the obese percentage in the U.S. is forecast to rise even higher to 42 percent. Worldwide, 500 million people are obese. Based on these sad demographic trends, analysts expect that annual sales of Belviq could reach $2 billion by 2020.  Even after the stock’s huge run-up, Arena’s current enterprise value is only $2.08 billion, which amounts to about 2.1 times projected 2020 sales. Since biotech stocks trade on average for 4.3 times sales and buyouts are done at 20 times sales, one can quickly see how easily Arena’s stock price could double or triple over the next eight years if sales projections are anywhere near accurate.

So why is the stock down 10% today? I can think of a few reasons:

  1. Buy the rumor, sell the news. A little profit taking is understandable after a 600% run-up!
  2.  FDA approval does not mean the drug can immediately be marketed. A 4-6 month review by the Drug Enforcement Agency (DEA) must be completed before selling can begin.
  3. Belviq may cause health problems, including cancer, heart valve damage (remember Fen-Phen?) and serotonin syndrome, which is an overdose of a neurotransmitter in the brain that can cause hallucinations, rapid heart beat, and anxiety).
  4. Competing diet drugs may soon be approved, which would reduce Arena’s sales potential.

One potential loser from the Belviq approval is Weight Watchers (NYSE: WTW). Why count calorie points when you can just pop a pill? Weight Watchers initially sold off on the FDA news, but rebounded today when investors remembered that Belviq only works in conjunction with diet and exercise, and is not meant as a stand-alone therapy.

Next up on the FDA’s diet-pill approval calendar is VIVUS (NasdaqGS: VVUS), which has a diet pill named “Qnexa.” An FDA decision is expected by July 17th. An FDA advisory panel voted in favor of Qnexa approval back in February by a lop-sided vote of 20-2.  In contrast, a similar advisory panel vote on Belviq was only in favor by a narrower margin of 18-4. Studies show that Qnexa could be up to two times more effective than Belviq, helping patients lose 10% more of starting body weight than placebo. Bottom line: approval of Qnexa is highly likely, which may mean that Arena’s stock price has topped out in the short term.

A third diet pill called “Contrave” is the brain child of Orexigen Therapeutics (NasdaqGM: OREX), but it is not up for FDA approval until 2014. The delay has not stopped traders from bidding up Orexigen’s stock price by 20% today (June 28th) and by almost four-fold since the beginning of 2012.

With the news out on Arena, the obvious short-term play going forward is VIVUS because of the upcoming FDA vote on July 17th. The stock probably has little downside before the FDA vote but huge downside potential after the vote. One way to gamble is to take advantage of the speculative fury – and expensive option prices – by selling a VIVUS July put option with a strike price in the low $20s. Implied volatility of July options is an astronomical 160%, which means option traders expect the stock price to rise 160% or fall 100% over the next year (asymmetry caused by the fact that a stock can’t fall below zero). With July option expiration on Friday July 20th, holding this short put all the way to expiration could be dangerous to your health. “Buying to close” the short put prior to the expected July 17th FDA vote date is safer, but there are no guarantees. Since each put option represents 100 shares of stock, only sell as many put options as you would feel comfortable having converted into 100-share blocks of stock. Caveat emptor!  

I’m hungry. Where is that Nutella?

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  1. avatar
    mostlysnark Reply June 29, 2012 at 11:52 AM EDT

    “The drug was approved because patients who took it for 1-2 years combined with diet and exercise lost between 3.0 and 3.7 percent more weight than those who took a placebo with diet and exercise. About half of the patients (47%) taking the drug lost at least 5 percent of their body weight.

    If these percentages don’t thrill you, I agree, they are pretty insignificant. The difference between losing 10.00 pounds and 10.30 pounds isn’t going to change anyone’s quality of life. But slightly effective is better than nothing and deserves FDA approval.”

    This is the most half-hearted attempt at reporting Lorcaserin I’ve seen thus far. First off, patients taking Lorcaserin lost on average 3.33% more than the placebo in baseline bodyweight. ie paitents on the placebo lost 2.5% of their baseline body weight while paitents taking Lorcasrin lost 5.83% of their baseline body weight. A difference of 3.33%.

    Now let’s do this fun activity called “basic mathematics” to fix your hypothetical above. You say someone on the palcebo lost 10lbs, that means they initally weighed 400lbs. That same hypothetical person would have lost 5.83% of their bodyweight had they taken Lorcaserin. Which would have been 23.32lbs of weightloss. A difference of 13.32lbs, or 133% greater weight loss than placebo.

    Oh, you think I’m done laying down these cold hard facts? Well think again my pseudo-journalist friend!

    From the phase III trials they learned that there were two distinct groups of patients, so-called “responders” and “non-responders”. Responders were condsidered paitents who lost atleast 4.5% of baseline bodyweight by week 12 Non-responders were those that didn’t. Responders went on to lose on average of 10.22% of baseline bodyweight at week 52. Non-responders only lost 2.46%. Responders made up more than 20% of the paitents taking lorcaserin. Check out slide 54 of the adcomm presentation for the corresponding graph:

    And not to forget the other meaningful effects of Lorcaserin, including lowering heart hate, lowering blood pressure, lowering HDL (bad cholesterol) leaving LDL (good cholesterol) unchanged, and lowering HbA1c, fasting glucose and insulin use in diabetics. Did I mentioned that paitents taking Lorcaserin had a 35% greater chance not be diagnosed with new onset type II diabetes in the 52 weeks of the two trials?

  2. avatar
    Jack Callo Reply June 29, 2012 at 9:41 AM EDT

    JIM FINK ,
    If you want to write something meaningful for investors you should do proper research about the drug that got FDA approval. Incorrect analysis of the drugeffects and it’s safety, just looks plain stupid. Like an automechanic talking about stamcelltherapy. Whole piece is garbage, done in less then 20 mins.
    Careful, listening to some ”expert analysts” give more heartproblems and give a higher risk of cancer then the working of lorqess imo.

  3. avatar
    GEO JAD Reply June 28, 2012 at 10:59 PM EDT